Financial Ratios
Overview
1.
2.
3.
4.
5.
6.
7.
Levels of information
The power of ratios
A context for using ratios
Different perspectives
Published v. Management Accounts
Classifying and exploring commonly used ratios
Practice
Levels of information
Not easily obtained
for private companies
We will cover
in detail
Ratio
Comparison The average for our
industry is 7%
Trend And grew from 3%
to 6% to 10% over
the last 3 years
That was 10% of
sales
We made €20k net
profit last year
The Power of Ratios
There is so much more to the story of a business than the absolute
values of the assets, liabilities, revenues and expenses.
The real fun and power in finance is finding the answer to questions such as…
• Will we have enough money to pay our debts?
• Do we risk losing control because we depend too much on borrowings?
• Or are we holding the business back by not borrowing for more rapid
expansion
• Are our profit margins high enough?
• Do we make use of the fixed assets we employ in the business ?
• Are we carrying too much stock?
• Do we collect money from our debtors effectively?
• Are we generating an adequate return on the shareholders’ investment ?
Adding ratio analysis to your skills will rocket-boost your ability
to contribute to decision making and problem solving.
A context for using Ratios
Planning
Profitability
Stability
Utilisation
Reviewing
Different Perspectives
Focus on different things
BANKER
MANAGER
Published v. Management Accounts
Studying “Listed” companies will
require different ratios to private
ones
We need to focus on
management as they
show all the elements of
the business model
Classifying and exploring ratios
Profitability
Will show how
the ratio is
calculated
Creditor days
Stability
Will explain the
ratio and identify the
actions that can be
taken to improve it
Asset Utilisation
Exercise 4 – Ratios
Reload the file from the “Business Model Exercise” and answer the questions
and study the
in
This exercise applies a comprehensive ratio analysis to the business model
developed in the previous segment and explores the business actions that can be
taken to improve them.
It builds on the Financial Perspective to show how ratio analysis can pinpoint
important issues relating to the three core goals of Profit; Stability and Asset
Utilisation that would not be so obvious from analysis of the absolute figures
appearing in the financial statements.
It provides the blueprint for managers to use FaBLinker to practice and explore
until they have developed an easy familiarity with what ratios reveal about a
business and the actions managers can take to improve them.
FaBAssessor
Live demo
Exercise 5 – Trend Exercise
This exercise introduces our second financial simulator which uses the same
structure as FaBLinker but extends the time frame to five years.
This is a superbly challenging exercise which projects the business model used in
the previous exercises over five years with significant changes in the assumptions
and analyses the emerging trend under sixteen key ratios. You are asked to:
• Interpret the trend
• Identify the causes
• Assess the implications and
• Indicate corrective actions (if any) required
It follows the style of the previous exercise i.e. It sets challenges and offers solutions
but this time the solutions are not clear-cut and there is the same scope for debate
as there would be in real business situations
The trend exercise is an ideal challenge to test all the knowledge and skills
developed over the four modules and a perfect situation for small group learning and
more formal tutor-led group discussion where possible.
Practice 10 – Reinforcing the Ratio calculations
Set up your own business model and go through the
ratios one at a time.
• Practice the calculation on paper or using a spread
sheet
• Read the information about the ratio in the glossary
• Explore the improvement tactics suggested in the
glossary
• Practice, practice and practice until you can
instinctively understand what each ratio is saying about
the business and the “triggers” that influence it