MBA/MSc

RATIO ANALYSIS
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Many organizations present reports of one kind or another for public consumption. Even government departments publish financial statements. Such public information is a useful starting point for analysis. It presents an overview of the organization in question and can provide a useful reference point for comparison when the focus of attention is another organisation. A glance at financial statements or share prices will tell you that absolute numbers have little meaning in themselves. For each number there is a need for a yardstick. When comparing organizations of different sizes one is forced to remove size as a confounding factor, for example by calculating ratios. As a learning exercise, print out these notes double spaced and write in the formulae for the various ratios and additional notes from the textbook. Dimensions of Assessment There are numerous dimensions upon which organizations can be compared. Some useful ones are: Financial Performance Capital Structure Solvency Productivity To form an overview of a commercial company there is a range of data sources available, (also see separate document): Financial Times Company Accounts/ companies own websites Websites such as uk.finance.yahoo.com Bloomberg Datastream Fame

Financial Performance Measures

Yields Growth rates Return on Capital Margins Turnover ratios

Yields Compare with

(PY) Dividend per share Previous Years Dividend yield rates (i) Earnings per share Price Earnings Ratio Similar companies (SC), Interest SC PY

Rates of Growth
(RPI) Sales Growth Earnings Growth Profit Growth PY, SC, I, Inflation ditto

ditto

Returns on Capital
RPI Return on Capital Employed Return on Equity ditto SC, I,

Margins
Net Profit Ratio Gross Profit Ratio Expense Ratios SC SC

SC

Turnover Ratios
Fixed Asset Turnover SC

Stock Turnover (or holding period) Debtors Turnover (or holding period) Creditors Turnover CAPITAL STRUCTURE Capital Gearing (Debt/Equity or Debt/ Debt + Equity) Income Gearing (Interest cover)

SOLVENCY
Current Ratio Quick Assets Ratio Cash Flow to Total Debt PRODUCTIVITY RATIOS Sales/Employee Profit/ Employee Fixed Assets/ Employee

The Gearing Effect Net Assets Borrowing at 10% Equity Suppose ROCE = 10% EBIT Interest Earnings Return on Equity Suppose ROCE = 15% EBIT Interest Earnings Return on Equity Suppose ROCE = 5% EBIT Interest Earnings Return on Equity

A 1000 1000

B 1000 500 500

C 1000 900 100

100 100 10%

100 50 50 10%

100 90 10 10%

150 150 15%

150 50 100 20%

150 90 40 40%

50 50 5%

50 50 0 0%

50 90 -40 -40%