Interpretation of Financial

Statements

1
 Example of Financial Accounts
Income Statement for year ending 30th April 2016

£M
Sales 7,650
Less: Cost of sales (5,800)
Gross Profit 1,850
Expenses (150)
Operating Profit 1,700
Loan interest (50)
Profit before tax 1,650
Taxation (600)
Profit after tax 1,050
Dividends 300
Retained profit 750

2
Statement of Financial Position as at 30th April 2016

£M
Non-Current Assets (tangible) 10,050
Current Assets
Stock 1,500
Debtors 1,200
Cash 900
3,600

Total Assets 13,650

3
 £M

Equity and Liabilities

Called up share capital 5,900
Profit and Loss account 5,000
10,900

Non-Current Liabilities 350

Current Liabilities 2,400

13,650

4
4. Financial structure
a) Gearing High levels of debt
Loans and borrowings x 100 spell risk to the
shareholders but
Capital Employed also provide
increased profit
making
opportunities
350 x 100 =
3.1% Can you explain
the above?
11250

5
b) Interest Cover
Measures how securely the
PBIT company can pay its interest

Interest Charges

1700 = 34
times
50

6
 Investor Ratios
5.
a) Dividend Yield The higher the
yield then the
Dividend x100 better the return to
shareholders – but
Market value of shares beware this may be
happening due to a
If it is assumed that nominal price of a share falling share price.
is £1.00 and current market price is Therefore, not
straightforward
£2.20
£0.0508 x 100 = 2.3%
£2.20
7
b) Earnings per share Simply indicates the
(EPS) profit per share

Profit after tax Provides an indication

of success over time
No of ordinary shares but is not comparable
to other companies
due to differing capital
structures

1050 = £0.178
5900

8
c) Price/earnings Generally indicates market
optimism – i.e. a high number
ratio indicates that the share price has
been bid to high levels and the
market thinks that the future looks
good
Share Price Will vary greatly between industry
sectors.
EPS Which sectors or types of
companies might you think would
have high ratios and which low?

£2.20 = 12.4
£0.178
9
 Seminar Questions Week 3
For this weeks seminar you are required to:
1.Summarise the learning from the slides
2.Download the McDonalds Annual Report and
familiarise yourself with the reports layout
3.Calculate the following ratios for McDonalds:
1. Return on shareholders funds
2. Gearing ratio
3. Dividend yield and interest cover
4. Price/earnings ratio and EPS

What corrective action would you consider as appropriate?

10