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Handout Analysis(1)

The document outlines key financial ratios used for analyzing and interpreting integrated reports, focusing on profitability, leverage, risks, asset management, productivity, and investor market ratios. It defines various ratios such as gross profit margin, return on assets, and current ratio, emphasizing their importance in evaluating a company's financial health. Additionally, it discusses the Du Pont analysis model, which aims to maximize shareholder wealth through effective capital structure and operational efficiency.

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sarvin.moh1998
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9 views4 pages

Handout Analysis(1)

The document outlines key financial ratios used for analyzing and interpreting integrated reports, focusing on profitability, leverage, risks, asset management, productivity, and investor market ratios. It defines various ratios such as gross profit margin, return on assets, and current ratio, emphasizing their importance in evaluating a company's financial health. Additionally, it discusses the Du Pont analysis model, which aims to maximize shareholder wealth through effective capital structure and operational efficiency.

Uploaded by

sarvin.moh1998
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ANALYSIS AND INTERPRETATION OF INTEGRATED REPORTS –

KEY RATIOS
PROFITABILITY
Ratio Defined as
Gross profit margin Gross profit
Sales

Trading profit margin Trading profit


(retail industry indicator) Sales

EBIT EBITDA
or alt: EBITDA margin
Net operating profit Sales Sales
margin

Net profit margin Net profit (after finance charges and tax)
Sales

Return on assets (ROA)


- Total assets EBIT + Inv Inc EBI afterT + Inv Inc
OR
(ROTA) Total assets Total assets

- Net assets (RONA) EBIT + Inv Inc


Total assets - non - interest bearing CL
OR
EBIafterT + Inv Inc
Total assets - non - interest bearing CL

- Invested capital EBIT + Inv Inc# or EBIafterT + Inv Inc#


(ROIC) Invested capital *
* Total assets less non-interest bearing CL
less cash (vs cash and cash equivalents)
Adjust investment income for interest
received on cash

Cash realisation Cash available from operations per share


EPS
ROIC ÷ WACC ROIC
WACC
Return on equity Earnings
Ordinary Equity
Return on operating EBIT before investment income
assets Total assets - non operating assets

Return on non- Investment income


operating assets Investments + loans granted
Remember that the profitability of segments also needs evaluation in addition to
performing an analysis using the ratios above.

LEVERAGE EFFECT

Bringing together the profitability of the company and its capital structure:

Ratio Defined as
Leverage effect of debt Profit after tax
Total shareholders equity
÷
What if there are
prefs in issue?

Leverage effect of Earnings attributable to ordinary s/holders


preference shares Total ordinary shareholders equity
÷

Profit after tax (PAT) before pref dividends


Total shareholders equity

The objective is to achieve positive leverage or gearing – in other words the


leverage effect, which is a factor, should have a value > 1.

RISKS

LIQUIDITY RISK (SHORT-TERM)

Ratio Defined as
Current ratio Current assets : Current liabilities

Acid test (Quick) ratio Current asset – inventory : CL

Net interest bearing Net interest bearing debt


debt: EBITDA EBITDA

CASH FLOW RATIOS

Ratio Defined as
Cash flow : total debt Cash flow from operations before divs paid
Total debt

The above measure is a % - the inverse will indicate the number of years that it will
take, on the assumption that the cash flow from operating activities remains
constant at these levels, for the existing debt to be repaid. The longer the period
or the lower the %, the greater the likelihood of financial distress.
FINANCIAL RISK (CAPITAL STRUCTURE – LONG TERM)

Ratio Defined as
Debt ratio Total debt
Total funding or total assets

Debt : Equity (total) Debt (total)


Alt: interest-bearing debt or non-debt
Equity

Capital gearing ratio

Interest or finance EBIT


charge cover Finance charges

EBIT + depreciati on + amortisati on


EBITDA cover ratio Finance charges

Cash available from op activities before IT


Cash finance charge Cash finance charges
cover

ASSET MANAGEMENT (or Efficiency ratios)

Ratio Defined as
Asset turnover Sales
Operating assets

Fixed asset turnover Sales


PPE

Net working capital Sales


turnover Inventory + receivable s - payables

Cost of sales
Inventory turnover alternatively
Inventory
Inventory
Inventory days on hand x period
Cost of sales

Receivable s
Receivables collection x period
Credit sales

Payables
Payables payment x period
Credit purchases
period
PRODUCTIVITY RATIOS
Important in the retail sector:
•
Sales per employee,
•
Sales per store
•
Sales per m2

INVESTOR MARKET RATIOS

Ratio Defined as
Dividend cover (inverse Earnings (total or ps)
= dividend payout ratio) Dividend (total or ps)

Dividend
Dividend yield Market price

Earnings
Earnings yield Market price

Market price
Price earnings ratio
Earnings

EBITDA multiple Enterprise value


EBITDA

DU PONT ANALYSIS

This model focuses on the maximisation of wealth from a shareholder perspective


and hence the ultimate ratio calculated is the Return on Equity.

Ratios
Earnings
ROE =
Ordinary equity

Equals

Net profit Sales Total assets


ROA = x x *
Sales Total assets Ordinary Eq

*FLM = financial leverage multiplier

Return on equity is therefore dependent on the capital structure, the profitability


of the enterprise and the effectiveness of the operations.

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