ANALYSIS OF FINANCIAL
STATEMENTS : CHAPTER 12
LECTURER: LISA NQALA
VARIOUS USERS OF FINANCIAL STATEMENTS
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BANK MANAGERS
TAX AUTHORITIES
EMPLOYEES
DIRECTORS AND MANAGERS
INVESTORS
MERGER AND ACQUSITION ANALYSTS
AUDITORS
RATIOS ANALYSIS MAY BE CLASSIFIED INTO
THREE AREAS
• PROFITABILITY
• LIQUIDITY
• SOLVENCY
PROFITABILITY RATIOS : EXAMPLE
2019
2018
Sale
8 750 000
5 250 000
Cost of sale
5 250 000
2 625 000
Gross profit
3 500 000
2 625 000
Total other expense
1 400 000
507 500
Profit before finance charge
2 100 000
2 117 500
Finance charge
175 000
17 500
Profit before taxation
1 925 000
2 100 000
Taxation expense
577 500
630 000
Net profit
1 34 7500
1 470 000
XYZ LIMITED STATEMENT OF FINANCIAL POSITION
2019
2018
Non-current assets
3 150 000
1 575 000
Investment at cost
1 925 000
2 275 000
Current assets
5 264 000
2 353 750
Inventory
2 652 000
656 250
Accounts receivable
2 625 000
612 500
14 000
1 085 000
ASSETS
Cash
10 339 000
6 203 750
4 747 750
3 395 000
Non-current loan
3 500 000
1 400 000
Debentures
1 050 000
1 050 000
700 000
183 750
9 997 750
6 028 750
EQUITY AND LIABILITIES
Issued share capital and reserves
Non current liabilities
Deferred taxation
Capital employed
Current liabilities
XYZ STATEMENT OF CHANGE IN EQUITY(31 December 2019)
Ordinary share
capital C 3.50
each
Preference
share capital
Retained
earnings
Total
875 000
525 000
612 500
2 012 500
1 470 000
1 470 000
Preference dividends
(52 500)
(522 500)
Ordinary dividends
(35 000)
(35 000)
1 995 000
3 395 000
1 347 500
1 347 500
Preference dividends
(61 250)
(61 250)
Ordinary dividends
(21 000)
(21 000)
Opening balance:01
Jan2018
Total comprehensive
income
Less dividends declared:
Opening balance: 01 Jan 875 000
2019
Total comprehensive
income
525 000
Less dividends declared
PROFITABILITY RATIOS
• Gross profit percentage /ratio:
Gross profit /net sales *100/1
3 500 000/8 750 000*100/1= 40% (2019)
2 625 000/5 250 000*100/1= 50% (2018)
• Net profit percentage /ratio:
Profit before finance charges and tax/net sales *100/1
2 100 000/8 750 000*100/1 =24%(2019)
2 117 500/5 250 000*100/1= 40% (2018)
PROFITABILITY RATIOS CONTINUED
• Return on investment
Net profit after interest and taxation /(capital –Drawings)*100/1
Additional information:
The investment amount (capital-drawings) = R8 500 000 for 2019 and 8 600 000 for
2018
Solution:
1 347 500/8 500 000*100/1=15,85(2019)
1 470 000/8 600 000*100/1=17,09(2018)
SOLVENCY RATIOS
• Equity ratio
Equity\( non-current + current assets)
4 747 750/10 339 000 =0,46 (2019)
3 395 000/6 203 750= 0,55(2018)
• Debt ratio
Total debts/total assets
(10 339 000-4 747 750)/10 339 000=0,54(2019)
(6 203 750- 3 395 000)/ 6 203 750=0,45(2018)
SOLVENCY RATIO CONTINUED
• Solvency ratio
Total assets/total debt
10 339 00/(10 339 000 - 4 747 750)= 1,85 (2019)
6 203 750/(6 203 750- 3 395 000)=2,21
(2018)
• Debit equity ratio
(Non-current liabilities + current liabilities)/Equity
( 10 339 000-4 747 750)/4 747 750=1,18(2019)
(6 203 750- 3 395 000)/3 395 000=0,83(2018)
LIQUIDITY RATIOS
• Current ratio
Current assets/current liabilities
5 264 000/341 250=15,4(2019)
2 353 750/175 000=13,45(2018)
• Acid test ratio
Currents assets-inventory/current liabilities
5 264 000-2 625 000/341 250=7,73(2019)
2 353 750-656 250/175 000=9,7(2018)
LIQUIDITY RATIO CONTINUED
• Working capital ratio
Working capital/total assets
• 5 264 000-341 250/10 339 000=0,48(2019)
• 2 353 750-175 000/6 203 750=0,35(2018)
• Efficiency ratios
Debt collection period
• Account receivable balance*365/credit sales made
• (2 625 000+612 500/2)/ 8 750 000*365=67,525 days(2019)
LIQUIDITY RATIO CONTINUED
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Efficient ratios
Debtors payment period
(trade payable balance*365)/credit purchase made
341 250*365/2 625 000=47,45days(2019)
175 000*365/612 500=104,29 days(2018)
Inventory on hand
Inventory balance *365/cost of sales
2 625 000*365/5 250 000=182,5 days
656 250*365/2 625 000=91,25 days
LIQUIDITY RATIOS CONTINUED
• Business cycle
Debt collection-debt payment period+ Inventory on hand
• Debtors collection =average inventory balance/cost of sales*365
• =(2 625 000+ 656 250/2 )/5 250 000*365=114,063
• Debt payment period=average debtors balance /net credit sale*365
• =(2 625 000+612 500 /2)/8 750 000*365=67,525 days
• Credit payment period=average creditors balance /credit purchase *365
=(341 250+175 00/2)/(5 250 000+2 625 000-656 250)*365=13,05 days
• Therefore business cycle =114,063+67,525-13,05=168,538