Scribd
Upload
52 views

BMAN 20081 AND 20611 Financial Statement Analysis: 2020-21 Ratio Analysis - Creating A Structured Analysis

This document discusses structured ratio analysis of financial statements. It introduces a pyramid of ratios that breaks managerial performance into profitability and efficiency. Key ratios examined include return on capital employed, operating profit margin, and asset turnover. The operating cycle concept is presented as a way to assess working capital management efficiency. Proper presentation, comparison to benchmarks, and limitations of ratio analysis are also covered. The goal is to analyze ratios at a deeper second-year level while recapping first-year fundamentals.

Uploaded by

Munkbileg Munkhtsengel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
52 views

BMAN 20081 AND 20611 Financial Statement Analysis: 2020-21 Ratio Analysis - Creating A Structured Analysis

This document discusses structured ratio analysis of financial statements. It introduces a pyramid of ratios that breaks managerial performance into profitability and efficiency. Key ratios examined include return on capital employed, operating profit margin, and asset turnover. The operating cycle concept is presented as a way to assess working capital management efficiency. Proper presentation, comparison to benchmarks, and limitations of ratio analysis are also covered. The goal is to analyze ratios at a deeper second-year level while recapping first-year fundamentals.

Uploaded by

Munkbileg Munkhtsengel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 11

BMAN 20081 AND 20611

FINANCIAL STATEMENT ANALYSIS


2020-21
Ratio Analysis – creating a
structured analysis

Anne Stafford
Learning objective

• Structured analysis of ratios


• Limitations of ratio analysis
• Be aware that 2nd year approach goes further
than 1st year understanding
Structured analysis of ratios
• Ratios are based on relationships between
different elements of the organisation as
reflected in accounting numbers
– There are commonalities between inputs used in
calculating different ratios
• You can use these commonalities to help structure your
analysis
• Start with relationship between the ROCE,
operating profit margin and assets turnover
ratios
– Top level in pyramid of ratios
Pyramid of ratios

Operating profit Operating profit Sales


= X
Operating capital employed Sales Operating capital employed

• ROCE = Op. profit margin X net asset


turnover 

– So changes in overall managerial performance
can be mathematically split into changes in
profitability and efficiency
Pyramid of Ratios

ROCE

Net operating profit % Net asset turnover

Profitability ratios Efficiency ratios


Analysis of working capital
management
• The operating cycle is an important concept in
assessing the efficiency of working capital
management
– Inventory cover period, plus
– Trade receivables period, minus
– Trade payables period
• Tells us how long it takes to turn cash back into cash
• Another important indicator (directly related to the
above ratios) are short term liquidity ratios
– Current ratio
– Acid test
Presentation of ratios
• Ratios
– E.g. Current ratio
• Percentages
– E.g. Return on shareholders’ equity
• Number of times
– E.g. Net asset turnover
• Number of days
– E.g. Inventory days
• Sum of money
– E.g. Earnings per share
Comparisons of ratios
• Cannot interpret ratios in isolation
– Need a benchmark for comparison
• Bases of comparison
– Other companies
– Other years
– Budgeted or planned results
– Other divisions
– Stock market
– Policies
Limitations of ratio analysis
• Choosing an appropriate benchmark
• The effect of exceptional items
• Statements of financial position (balance sheets)
include a mix of historical costs and fair values
– And are at a point in time
• Information in financial statements is aggregated
– A finer-grained understanding might be more
appropriate
• Ratio analysis limited by the information companies
disclose
– Also need to take into account external contextual
information
Summary
• We have recapped key aspects of ratio
analysis from the 1st year AND DISCUSSED
THEM AT 2ND YEAR LEVEL
– Performance ratios (profitability and efficiency)
– Working capital management ratios
– Solvency and financial structure / gearing
– Stock market ratios
– Structured analysis of ratios using the pyramid of
ratios
– Limitations of ratio analysis
End of video on Creating a
Structured analysis
If you have questions, please post them
on the Discussion Forum “Ask Anne
Stafford” or ask me during the
synchronous lecture time

You might also like