Financial ratio analysis, exercise and worksheet
Financial ratio analysis
Is the process of collecting, calculating, analysing and interpreting results from the accounts of
companies and organisations.
A financial ratio is a relationship between two or more financial values which can be expressed in a
number of ways, e.g. percentage, times, number of weeks.
It is important 1. To apply agreed rules regarding the specification of the various components of any
ratio in a consistent manner. 2. To interpret changes in the resulting ratios against previous levels,
industry averages or simple benchmarks.
A basic analysis of financial ratios usually cover the following:
Profitability: to assess the return on the capital employed by a company.
Liquidity: to assess a company's ability to pay its way in the short-term; to meet its financial
obligations.
Gearing: measures the relationship between interest bearing debt and equity (or shareholder's fund).
Using the analysis framework above, the following ratios can be calculated:
Profitability:
Profit as a percentage of Capital employed
Profit as a percentage of Revenues
Revenues divided by Capital employed
Liquidity:
Current assets divided by Current liabilities
Liquid assets divided by Current liabilities
Cost of sales divided by Inventories
Trade receivables divided by average weekly revenues
Gearing:
Total Borrowings divided by Equity
Interest Payable as a percentage of (Profit before Tax + Interest Payable)
Financial ratio analysis – Example
Income statement for the year ended:
2011
2010
£’000
£’000
5,500
2,850
1,800
600
140
110
-40
70
-20
50
4,700
3,000
900
600
150
50
-20
30
-20
10
£’000
£’000
400
300
950
500
50
1,500
(O)
1,100
600
100
1,800
425
675
0
0
1,100
600
660
20
20
1,300
NET WORKING CAPITAL
400
500
(E)
TOTAL ASSETS LESS CURRENT LIABILITIES
800
800
(F)
(G)
EQUITY
Issued share capital
Retained earnings
130
550
680
130
500
630
(J)
LONG-TERM LOAN
120
170
800
800
(D)
(Q)
(B)
(A)
REVENUES
Cost of sales
Distribution costs
Administrative expenses
Interest Payable
PROFIT BEFORE TAXATION
Taxation
PROFIT ATTRIBUTABLE TO SHAREHOLDERS
Dividend
RETAINED PROFIT
Balance Sheet as at 31st March
NON-CURRENT ASSETS
(P)
CURRENT ASSETS
Inventories
Trade and other receivables
Cash and cash equivalent
(L)
(I)
CURRENT LIABILITIES
Trade and other payables
Bank overdraft
Taxation
Dividend
(M)
Financial ratio analysis worksheet - Profitability and Gearing
Where to
look
PROFITABILITY
(A)
Profit before taxation
IS
(B)
Interest payable
IS
(C)
Profit before tax + interest payable
(D)
Revenues
IS
(E)
Net capital employed (1)
BS
1.1
PROFIT ÷ NET CAPITAL EMPLOYED %
1.2
PROFIT ÷ REVENUES %
1.3
REVENUES ÷ NET CAPITAL EMPLOYED
A+B
GEARING
(F)
Issued share capital
BS
(G)
Retained earnings
BS
(H)
Equity (or shareholders’ fund)
F+G
(I)
Bank overdraft
BS
(J)
Long-term loans
BS
(K)
Total borrowings
I+J
3.1
TOTAL BORROWINGS ÷ EQUITY
3.2
INTEREST PAYABLE ÷ PROFIT BEFORE TAX + INTEREST %
(1)
Net capital employed = Non-current assets + Current assets - Current liabilities
Financial ratio analysis worksheet - Working capital
Where to
look
WORKING CAPITAL
(L)
Current assets
BS
(M)
Current liabilities
BS
(N)
Liquid assets (1)
BS
2.1
CURRENT ASSETS ÷ CURRENT LIABILITIES
2.2
LIQUID ASSETS ÷ CURRENT LIABILITIES
(O)
Inventories
BS
(P)
Trade and other payables
BS
(Q)
Cost of sales
IS
(R)
Average weekly revenues (2)
IS
2.3
COST OF SALES ÷ INVENTORIES
2.4
TRADE RECEIVABLES ÷ AVERAGE WEEKLY REVENUES
(1)
Liquid assets = Current assets - Inventories
(2)
Average weekly revenues = Revenues divided by number of weeks in period