6 ratio analysis

Financial Statements Analysis

Lecture 6 Part 1: Ratio analysis

Lecture ObjectivesBy the end of this lecture you should be able to:

Discuss the role of accounting information financial statement analysis

Conduct performance analysis based on the 5 main ratio categories

Interpret the ratios

Explain drivers of profitability and growth

Discuss the role and importance of cashflow analysis

Discuss other accounting & non-financial information in the annual reports

(i)Assessing Strategic Direction

(ii)Financial

Statement Analysis

(iii)Stock

Market Assessment

The General Framework

• Assessing strategic capability

• Taking action to add value

• Finding information on companies & their markets

• Accounting for profit

• Accounting for cash

• Comparative financial analysis

• Share price movements

•Short-term share valuation

•Long-term share valuation

Financial Statement Analysis

FSA provides business owners and other interested parties with specific techniques to analyse the information in financial statements to uncover the soundness of prior decisions for survival and growth of the business.

Financial Statement AnalysisFinancial statement analysis involves analysing the financial information provided in company’s annual report to:

Provide information about the organisation’s:

Past performance

Present condition

Future performance

Assess the organisation’s:

Earnings in terms of power, persistence, quality and growth

Solvency

Effective Financial Statement Analysis

Requires that you: Understand the nature of the industry in which the

organisation works. This is an industry factor. Understand that the overall state of the economy

may also have an impact on the performance of the organisation.

→ Financial statement analysis is more than just “crunching numbers”; it involves obtaining a broader picture of the organisation in order to evaluate appropriately how that organisation is performing.

Effective Financial Statement Analysis

To perform an effective financial statement analysis, you need to be aware of the organisation’s:

business strategy objectives annual report and other documents like

articles about the organisation in newspapers and business reviews.

These are called specific/unique organisational factors.

Uses of Accounting Information

• measure how much dividend might be paid

• provide assurance of financial strength to creditors

• provide a basis for measuring future growth for stock market analysis

• measure mgmt performance in an agency context

• provide the basis of taxation

• give employees an idea of company’s strength

• provide convenient templates for financial planning

• assist in setting performance targets

• assist in imposing restrictions on managers

Tools of Financial Statement Analysis

Financial ratio analysis is the commonly used tools for financial statement analysis

Comparative analysis Cross sectional analysis across sector Time series/Trend analysis within the company

Time series/Trend analysis with other companies or competitors

Benchmarks: Past period achievements Budgeted achievements Other business achievements

Averages of business achievements in the same area

Financial Ratio Analysis

Financial ratio analysis involves calculating and analysing ratios that use data from one, two or more financial statements.

Ratio analysis also expresses relationships between different financial statements.

Financial Ratios can be classified into 5 main categories:

Profitability ratios

Asset management or activity ratios

Liquidity or short-term solvency ratios

Gearing ratios

Investment ratios


Investment [5]

Profitability [1]

Liquidity [2]

Efficiency/activity or assets mgmt

[4]

Gearing [3]

Categories of ratios

TTuurrnnoovveerr ((ssaalleess rreevveennuuee)) 22,,000000,,000000 LLeessss:: ccoosstt ooff ssaalleess 11,,550000,,000000 GGrroossss pprrooffiitt 550000,,000000 LLeessss:: sseelllliinngg,, aaddmmiinniissttrraattiioonn && ffiinnaannccee eexxppeennsseess

440000,,000000

OOppeerraattiinngg pprrooffiitt bbeeffoorree iinntteerreesstt && ttaaxx 110000,,000000 LLeessss:: iinntteerreesstt 1166,,000000 ((NNeett)) PPrrooffiitt bbeeffoorree ttaaxx 8844,,000000 LLeessss:: iinnccoommee ttaaxx 1144,,000000 ((NNeett)) PPrrooffiitt aafftteerr ttaaxx 7700,,000000 LLeessss:: ddiivviiddeenndd 3300,,000000 RReettaaiinneedd pprrooffiitt 4400,,000000

Income Statement

Note: Average daily net credit sales = net credit sales / 365

NNoonn ccuurrrreenntt aasssseettss 11,,115500,,000000 CCuurrrreenntt aasssseettss -- SSttoocckk//iinnvveennttoorriieess -- DDeebbttoorrss//rreecceeiivvaabblleess

220000,,000000 300,000 550000,,000000

TToottaall aasssseettss 11,,665500,,000000 EEqquuiittyy ((ccaappiittaall aanndd rreesseerrvveess)) 11,,000000,,000000 NNoonn ccuurrrreenntt lliiaabbiilliittiieess LLoonngg tteerrmm llooaannss

330000,,000000

CCuurrrreenntt lliiaabbiilliittiieess CCrreeddiittoorrss//ppaayyaabblleess BBaannkk oovveerrddrraafftt

330000,,000000

5500,,000000 335500,,000000

TToottaall eeqquuiittyy aanndd lliiaabbiilliittiieess 11,,665500,,000000

Statement of financial position

Note:Market price per share = £2.50


Profitability ratios

4 elements of the profitability analysis:

Analysing on sales and trading margin (cost of sales)

◦ focus on gross profit

Analysing on the control of operating expenses (O/Hs)

◦ focus on net operating profit (EBITDA)

Analysing on the amount of interest and tax paid

o focus on net profit after interest and tax (NOPAT)

Assessing the return on assets (ROA) and return on equity (ROE).

Profitability [1]

Income Statement Ratios for Assessing Operating Management

Common-sized income statements facilitate comparisons of key line items across time and different firms.

The following ratios are helpful :

i. Gross profit margin (by function only).

ii. Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) margin.

iii. Net Operating Profit After Tax (NOPAT) margin.

Profitability [1]

Profitability RatiosProfitability

[1]

𝐺𝑟𝑜𝑠𝑠𝑝𝑟𝑜𝑓𝑖𝑡𝑚𝑎𝑟𝑔𝑖𝑛=𝐺𝑟𝑜𝑠𝑠𝑝𝑟𝑜𝑓𝑖𝑡𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

×100

¿500

2000×100=25 %

Gross Profit Margin

𝐺𝑟𝑜𝑠𝑠𝑝𝑟𝑜𝑓𝑖𝑡𝑚𝑎𝑟𝑔𝑖𝑛=𝑆𝑎𝑙𝑒𝑠−𝐶𝑜𝑠𝑡𝑜𝑓 𝑆𝑎𝑙𝑒𝑠

𝑆𝑎𝑙𝑒𝑠𝑟𝑒𝑣𝑒𝑛𝑢𝑒×100

Measures the profitability of sales, less direct costs of sales:

The gross profit margin is an indicator of:• The price premium that a firm’s product

commands in the market,• The efficiency of a firm’s procurement and/or

production process.

Profitability Ratios

Profitability [1]

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔𝑝𝑟𝑜𝑓𝑖𝑡𝑚𝑎𝑟𝑔𝑖𝑛=𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔𝑝𝑟𝑜𝑓𝑖𝑡𝑆𝑎𝑙𝑒𝑠𝑟𝑒𝑣𝑒𝑛𝑢𝑒

×100

¿100

2000×100=5 %

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡𝑚𝑎𝑟𝑔𝑖𝑛=𝑁𝑒𝑡𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑆𝑎𝑙𝑒𝑠𝑟𝑒𝑣𝑒𝑛𝑢𝑒

×100

¿70

2000×100=3.5 %

NOPAT and EBITDA Margins The EBITDA margin eliminates the significant non-cash expenses

of depreciation and amortization along with interest and taxes:


[1]

* NOPAT = Net profit + interest expense after tax [Palepu et al., p.211]

• The NOPAT margin provides a comprehensive measure of operations:

84/2000 = 4.2%

Profitability RatiosReturn on capital employed (ROCE)

Profitability [1]

¿100

1300×100=7.7 %

Return on Equity (ROE) measures overall profitability

ROE is a comprehensive measure of and is a good starting point to systematically analyze firm performance.


[1]

Alternative calculation of ROE

Net assets = Total assets minus all liabilities

Palepu et al., p. 211

Profitability RatiosAlternative calculation of ROE

Profitability [1]

Spread is the incremental effect from introducing debt into the capital structure. Positive effect of borrowing is when the operating ROA is greater than the cost of browning. That is, firms that do not earn adequate operating ROA to pay for interest cost reduce their ROE by borrowing.

Financial Leverage Analysis

Borrowing allows a firm access to capital, but increases the risk of ownership for equity holders.

Analysis of leverage can be performed on both current and non-current debts:1. Liquidity analysis relates to evaluating current

liabilities

2. Solvency analysis relates to longer term liabilities

Liquidity [2]

The following ratios attempts to measure the ability of a firm to pay its current obligations:

Liquidity or Short-Term Solvency ratiosLiquidity [2]

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑪𝒂𝒔𝒉𝑹𝒂𝒕𝒊𝒐=h𝐶𝑎𝑠 ∧𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈𝑪𝒂𝒔𝒉 𝒇𝒍𝒐𝒘 𝑹𝒂𝒕𝒊𝒐=h𝐶𝑎𝑠 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Short-term funds managementWorking capital management is important as it signals the firm’s ability to meet short term debt obligations.

Liquidity [2]

Liquidity or Short-Term Solvency ratios

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠500350

=1.43×¿

𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠−𝑝𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠−𝐵𝑎𝑛𝑘𝑜𝑣𝑒𝑟𝑑𝑟𝑎𝑓𝑡

300300

=1.0 time

Solvency AnalysisBeyond short-term survival, solvency measures the ability of a firm to meet long-term obligations.

Several useful ratios used to analyze solvency with shareholders’ equity as a denominator are:

Gearing [3]

Solvency RatiosLong term funds managementMeasures the riskiness of business in terms of debt gearing.

Gearing [3]

𝑬𝒒𝒖𝒊𝒕𝒚 𝑹𝒂𝒕𝒊𝒐=𝐸𝑞𝑢𝑖𝑡𝑦

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠×100

𝑻𝒊𝒎𝒆𝒔 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒆𝒅=𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡∧𝑡𝑎𝑥

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡×100

%

%

10016

=6 .25×¿

Solvency Analysis

Ratios that specifically address the ability to pay interest on debts are:

Gearing [3]

𝑵𝒆𝒕 𝒅𝒆𝒃𝒕𝒕𝒐𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒓𝒂𝒕𝒊𝒐=𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠− h𝐶𝑎𝑠 ∧𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠− h𝐶𝑎𝑠 ∧𝑚𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠+ h h𝑆 𝑎𝑟𝑒 𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦

𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒐𝒗𝒆𝒓𝒂𝒈𝒆(𝒆𝒂𝒓𝒏𝒊𝒏𝒈𝒃𝒂𝒔𝒊𝒔)=𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡+𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒+𝑇𝑎𝑥𝑒𝑥𝑝𝑒𝑛𝑠𝑒

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒄𝒐𝒗𝒆𝒓𝒂𝒈𝒆(𝒄𝒂𝒔𝒉 𝒇𝒍𝒐𝒘 𝒃𝒂𝒔𝒊𝒔)=h𝐶𝑎𝑠 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠+𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒+𝑇𝑎𝑥𝑒𝑠𝑝𝑎𝑖𝑑

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

Asset Management [activity ration]

Asset management is a key indicator of how effective a firm’s management is.

Asset turnover may be broken into two primary components:

1. Working capital management

2. Non-current asset management

Efficiency/activity or assets mgmt [4]

Working Capital Management

Working capital is the difference between current assets and current liabilities i.e. CA-CL

Key ratios useful to analyzing the management of working capital include:

a) Operating working capital (OWC)- distinguishes between operating current assets (i.e.

receivables, inventories and payables) and financing current assets (cash, marketable securities and notes payable)


𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟=𝑆𝑎𝑙𝑒𝑠𝑂𝑊𝐶

Working Capital Management-cont.b) Inventory management


𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟=𝐶𝑂𝑆

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠

𝐷𝑎𝑦 ′ 𝑠𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦=𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠

𝐴𝑣 .𝐶𝑂𝑆𝑝𝑒𝑟 𝑑𝑎𝑦

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟=𝑆𝑎𝑙𝑒𝑠

𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝐷𝑎𝑦 ’ 𝑠𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠=𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝐴𝑣 .𝑠𝑎𝑙𝑒𝑠𝑝𝑒𝑟 𝑑𝑎𝑦

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟=h𝑃𝑢𝑟𝑐 𝑎𝑠𝑒𝑠 [𝑜𝑟 ]𝐶𝑂𝑆𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

𝐷𝑎𝑦 ’ 𝑠𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠=𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

𝐴𝑣 . h𝑝𝑢𝑟𝑐 𝑎𝑠𝑒𝑠𝑝𝑒𝑟 𝑑𝑎𝑦

c) Debtors management

d) Creditors management

* Average daily net credit sales = net credit sales / 365

Non-current Asset (NCA) ManagementIt is concerned with utilisation of firm’s non-currents i.e. efficiency in using net fixed assets:

NCA = net property, plant & equipment (PP&E), intangibles and other assets


Example of noninterest bearing non-current liabilities: Deferred taxes

Investment Ratios

Based on the share market's perception of the company

70 960

30 960

30 70

2.5 0.073

Investment [5]

= £0.073

= £0.03

x 100 = 42.86%

= 34.25 times

No. of shares = 1,000 – 40 = 960, 40 = reserves or retained earning

Interpreting ratio analysis (see ratio results in earlier lecture)

Profitability ratios: Benchmarks Company

Gross Profit Margin Industry 25% 25%

Net Profit Margin Industry 7% 3.5%

Return on Capital Employed

Industry 12% 7.7%

Return on Equity Industry 20% 7%

Asset Management ratios:

Inventory Turnover Industry 6 times 7.5 times

Asset Turnover Industry 4 times 1.21 times

Interpreting ratio analysis

Liquidity ratios: Benchmarks Company

Current Ratio Ideal standard 2:1 1.43:1

Quick Ratio Ideal standard 1:1 1:1

Financial Structure ratios:

Debt/Equity Industry 60%

30%

TIE (Times Interest Earned )

Standard benchmark: Between 3 and 5. Below 3 risky. Above 5 very favourable

6.25

Drivers of profitability and growth

Assessing the Sustainable Growth Rate

A comprehensive measure of a firm’s ratios is the sustainable growth rate:

Sustainable growth rate measures the ability of a firm to maintain its profitability and financial policies.

Measure dividend policy

7%x (1 – 0.4286) = 4%

Cash Flow Analysis

The ratio analysis previously discussed used accrual accounting.

Cash flow analysis can provide further insights into operating, investing, and financing activities.

All companies using IFRS are required to include a statement of cash flows in their financial statements.

◦ Differences in reporting cash flow information allow for variation across firms that complicate comparisons.

◦ Analysts can make adjustments to net income to arrive at free cash flows, a commonly used metric for financial analysis.

Analyzing Cash Flow Information

Analysis of the statement of cash flows helped answer a number of questions such as:Operating activitiesHow strong is the firm’s internal cash flow generation?

How well is working capital being managed?

Investing activities

How much cash did the company invest in growth assets?

Financing activities• What type of external financing does the company rely on?

• Did the company use internally generated funds for investments?

• Did the company use internally generated funds to pay dividends?

Cash flow Analysis

Opening cash & cash equivalents £1,788mplusNet cash in £3,960mLessInvestments £5,974mPlusFinance raised £3,615mPlusForeign exchange gains £120mNet cash balance at year end £3,509m

Question

Does spending fit with story given in the narrative? Look

for special items e.g. purchase of intangibles; big increase

in borrowings

Useful cash flow metrics Cash Flow / Maturing Obligations

Operating Cash Flow (from the CFS) ÷ Current Liabilities

Cash Flow per share Operating Cash Flow (from the CFS) ÷ No of shares in issue

(Weighted Average.)

Free cash flow per share Free cash flow ÷ No of shares in issue.

Most useful BUT be warned – no regulatory definitions

Free cash flow = C – I = cash from operation – cash invested in operation

Measures cash available for discretionary expenditure on capital, projects, new stores, refurbishments, extra dividends, etc.

Free Cash FlowEBIT

+ Depreciation

+ Proceeds of disposals/ other income

- Interest payments (netted off against any receipts)

- Cash taxation figure (not necessarily P&L figure; but use it if you don’t have anything else – but check creditors)

- Dividend payments (netted off against any receipts)

= “Common sense” FREE CASH FLOW

Example using income statement

Example Free Cash Flow in Tesco

£ m 2009 2008Cash from operations 3960 3343Other income 1354 1056FX gains/losses 120 (55)Interest paid (net) (472) (282)Tax paid (456) (346)Dividends paid (net) (814) (704)Free Cash Flow (FCF) 3692 3012

It can serve as a proxy for measuring changes in earnings per share

Free cash flow: Signals a company's ability to pay debt, Pay dividends, Buy back shares and facilitate the growth of business.

Give a preliminary prediction concerning future share prices, e.g. when a firm's share price is low and FCF is on the rise, the prospects are good that earnings and share price will soon be on the rise. Thus, high free cash flow per share means that earnings per share should potentially be high as well.

Example using cash flow statement

Concluding comments on ratios

There are two primary tools in financial analysis:

Ratio analysis – to assess how various line items in financial statements relate to each other and to measure relative performance.

Cash flow analysis – to evaluate liquidity and the management of operating, investing, and financing activities as they relate to cash flow.

Both forms of analyses must be evaluated while considering whether firm performance is consistent with the strategic initiatives of management.

The Importance of Accounting Information and Analysis

• Accounting practices govern the types of disclosures made in the financial statements.

• Non-financial accounting information is equally important.

• Understanding both financial and non-financial accounting information allows the business analyst to effectively use the information disclosed to assess the value of the companies.

Other Accounting & Non Financial Information

Other Accounting & Non Financial Information

• Narrative statements• Chairman’s report • Directors report• Auditor’s report • Corporate governance report

Other reports• Value-added• Segmental report• Statement of corporate objectives• Statement of future prospects• Ethical report / CSR• Employees report

Chairman’s Statement• overall trading conditions during the period, current

climate & general outlook

• performance achieved by each activity, current

trading & future prospects

• items of special interest

• changes in the board, comments on directors and

other employees and efforts of mgmt team and

workforce

• company’s strategy and plans for the future

• political/social/economic comments about govt.,

tax, accounting standards etc.

Director’s Report• Activities and trading results• Financial review

* cash from operations & other cash inflows* types of accounting standards adopted* maturity profile* capital structure* ability to remain a going concern

• Operating review (Operating & Financial Review/ business review]

* marketing & capital expenditure* diversification, acquisition, growth* impact of factors in the environment

• Directors* interest in shares* interest of directors’ close families

Auditor’s Report

• identification of addressee

• identification of financial statements audited

• respective responsibilities of directors

and auditors

* basis & type of audit opinion

• signatures of auditors

• date of audit report

Corporate Governance Report

• Report by audit committee

• Report by remuneration committee

* remuneration policy

* share option schemes

* retirement benefits, service agreements

* long-term incentive plan

* annual incentive awards

* directors emoluments

Volkswagen Group – Annual Report 2011Value added generated by the Volkswagen Group – Appropriation of funds

Appropriation of funds in € million 2011 % 2010 %to shareholders (dividend) 1,406 2.9 1,034 3.1to employees(wages, salaries, benefits) 23,854 50.0 19,027 57.8to the state (taxes, duties) 4,525 9.5 3,105 9.5to creditors (interest expense) 3,530 7.4 3,563 10.8to the Company (reserves) 14,393 30.2 6,193 18.8Value added 47,709 100.0 32,922 100.0

Volkswagen Group – Annual Report 2011Value added generated by the Volkswagen Group – Source of funds

Source of funds in € million 2011 2010 Sales revenue 159,337 126,875 Other income 13,125 10,787 Cost of materials -104,648 -79,394 Depreciation and amortization -10,346 -10,097 Other upfront expenditures -9,759 -15,250 Value added 47,709 32,922

http://annualreport2011.volkswagenag.com/financialstatements.html?cat=n



Segmental Report

product/service Turnover Operating profitBrass Hotels & Resorts X X Brass Leisure X X Other Activities X X

XX XX

country United Kingdom X XUnited States X XRest of Europe X X

XX XX

6 ratio analysis

Economy & Finance

Transcript of 6 ratio analysis