1. 1 Basic principles of Accounting & Financial Analysis
Roger Claessens, Prof. UBI
2. Accounting&Financialanalysis 1 The need for financial
reporting 2 The balance sheet 3 The basic rules of accounting 4 The
profit and loss account 5 The structure of a balance sheet 6
Financial flows 7 Key financial ratios 8 Different balance sheets
Basic principles of accounting & financial analysis
3. A learning Curve Step by StepA learning Curve Step by
StepStepbystep Knowledge in accounting Time
4. Theneedforfinancialreporting 1 Sources of information 2
Management reports 3 Financial and legal requirements Basic
principles of accounting & financial analysis 2 3
5. What are indicators that things are going, or not going, as
they should? FinancialReporting Financial reporting
6. Sources of financial informationFinancialReporting Why do we
need financial information? What could be the sources of financial
information? What might be the difference between management
accounts and statutory accounts, and who needs them?
9. The need for financial reportingFinancialReporting The
speedometerThe speedometer = information that allows for control :
daily recording of activities the financial situation the financial
activities the situation versus budget Performance improvement
depends on the use and reliability of financial information:
10. Management requires control Control requires knowing what
is happening Knowing what is happening requires reporting
Management reportsManagement reports PERFORMANCE MANAGEMENT CONTROL
REPORTING FinancialReporting
11. Financial and legal requirementsFinancialReporting
Statutory Annual After audit Legally defined Accurate Public record
Management Monthly Promptly after the end of the period Suited to
individual needs Estimate / Provisions Internal Use
12. The four functions of management : Manage1 MEMO : MOPC 2
Organise 3 Plan 4 CONTROL FinancialReporting The need for financial
reporting
13. What type of information do managers need ? We really need
various types of information: Financial : % Gross Margin / Invested
capital Commercial : Total credit cards sold Activities : Total
calls made FinancialReporting
14. The annual accounts do not provide real time information,
we need information reports which allow for timely controls and
allow for: The comparison of results versus budget Fast actions in
order to improve performance The assurance that the company is on
the right track! FinancialReporting What type of information do
managers need ?
15. The three sources of financial information There are 3
sources of financial information: The balance sheet shows what the
company has and what it owes The Profit and Loss Account or Income
statement shows what the company earns or looses (results) The cash
flow report the source and application of funds
Basicprinciplesofaccounting
16. The three sources of financial information The car dealer
as a base for many examples. Why? Simple process : purchase - show
room (stock) sales No production, we do not take into account the
other activities, such as maintenance.
Basicprinciplesofaccounting
17. The need for financial reportingFinancialReporting A?A?
A?A? A?A? A?A? A?A? ProfitProfit A?A? Profit Leaks
18. The concept of a balance sheetExercise1 What I HAVE What I
OWE
19. Exercise1 What I HAVE What I OWE House Car Furniture
Equipment Savings Petty Cash Mortgage Car loan Equipment loan
Invoices Overdraft The concept of a balance sheet
20. Exercise1 What I HAVE What I OWE House 100 Car 10 Furniture
30 Equipment 20 Savings 10 Petty Cash 5 Adding up 175 Mortgage 65
Car loan 5 Equipment loan 10 Invoices 5 Overdraft 10 Adding up 95
The concept of a balance sheet
21. Exercise1 What I HAVE What I OWE House 100 Car 10 Furniture
30 Equipment 20 Savings 10 Petty Cash 5 Total 175 Net worth 80
Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5 Overdraft 10
Total 175 The concept of a balance sheet
22. Exercise1 What I HAVE What I OWE House at purchase price 70
Car 10 Furniture 30 Equipment 20 Savings 10 Cash 5 Total 145 Net
worth 50 Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5
Overdraft 10 The difference is a matter of evaluation of the assets
The concept of a balance sheet Total 145
23. Exercise1 What I HAVE What I OWE House at expected sales
price 120 Car 10 Furniture 30 Equipment 20 Savings 10 Cash 5 Net
Worth 100 Mortgage 65 Car loan 5 Equipment loan 10 Invoices 5
Overdraft 10 The difference is a matter of evaluation of the assets
The concept of a balance sheet Total 195 Total 195
24. Exercise1 Asset Valuation What I OWE How do we value an
asset? The simple answer is the original cost LESS the depreciation
BUT the alternative is : realisable value replacement value useable
or economic value (i.e. cost,which would be incurred in any event)
The concept of a balance sheet
25. Exercise1 What I HAVE What I OWE All this does not tell us
much about our income or expenses during a given period of time
This would be shown in other reports, i.e. The Profit and Loss
report or Income statement & The Cash flow report The concept
of a balance sheet
26. Accounting&Financialanalysis 1 The need for financial
reporting 2 The balance sheet 3 The basic rules of accounting 4 The
profit and loss account 5 The structure of a balance sheet 6
Financial flows 7 Key financial ratios 8 Different balance sheets
Basic principles of accounting & financial analysis
27. Accounting&Financialanalysis The concept of a balance
sheet The key elements of a balance sheet Facts of a balance sheet
and management decisions Basic principles of accounting &
financial analysis 1 2 3
28. The concept of a balance sheet Assets = Have Liabilities =
Owe LONG TERM ASSETS SHORT TERM ASSETS OWN FUNDS Assets Liabilities
to third parties LONG TERM DEBT SHORT TERM DEBT
Thebalancesheet
29. Can we draw a conclusion as to the viability of a company
by looking at its balance sheet on any given time? Would a balance
sheet be sufficient? Why do we pay so much attention to balance
sheets? Are there rules for a balance sheet structure?
Thebalancesheet The concept of a balance sheet
30. answers a. The balance sheet is a picture at any given
moment of the company : The balance sheet is subject to
interpretation The balance is only meaningful after analysis: -
over various periods - in line with balance sheets of the
competition - in function of sector - in function of the economic
cycle The balance sheet shows the financial health of a company and
its capacity to borrow in order to finance its assets!
Thebalancesheet The concept of a balance sheet
31. Fixed assets Current assets Equity & Reserves LT debt
Current debt Workingcapital The key elements of a balance sheet
Fixed assets Current assets Equity & Res LT debt Current debt
Our car dealer A bank
32. Fixed Assets Current Assets Equity & Reserves LT Debt
ST Debt The trend of a balance sheet 115105100 Year 1 Year 2 Year 3
100 85 75 Thetrendofabalance Ratio 1 .81 .65 Debt Equity
34. OWN FUNDS Equity (F) Reserves (D) Revaluations (D) Advance
owners (D) EQUITY = FACT The amount invested by the shareholder
RESERVES = DECISION The retained earnings REVALUATIONS Based on
expertise The shareholders can decide to finance their company in
current account (or subordinate loans) Balance block 1
Factsanddecisions Facts (F) and decisions (D) F = a fact D = a mgt
decision
36. Most are facts, others such as provisions are the result of
an assessment or future charges (accruals) OPS DEBT (F) Suppliers
(F) Provisions (D) ST Bank debt (F) Balance block 3
Factsanddecisions Facts (F) and decisions (D)
37. The intangible assets are subject to amortisation The
amount is a decision INTANGIBLES FIXED Goodwill (D) Balance block 4
Factsanddecisions Facts (F) and decisions (D)
38. A building is put on the books at a purchase value and is
amortised over a period of time in function of the rhythm of annual
amortisation. The method of amortisation is a matter of decision
TANGIBLES FIXED Land (F) Buildings (F & D) Equipment (F &D)
Balance block 4 Factsanddecisions Facts (F) and decisions (D)
39. STOCK is based on purchase price or net sales price -When
the sales price is deemed lower than the purchase price a stock
depreciation needs to be recorded : depreciation for stock with a
low rotation - It is a decision CURRENT ASSETS Stock (D) Balance
block 5 Factsanddecisions Facts (F) and decisions (D)
40. DEBTORS = FACT However the principle of prudence entails
two corrections for: -past due debtors -uncollectable = Management
decision CURRENT ASSETS Debtors - past due (D) Cash (F) -
investments (D) - banks (F) - cash account (F) Balance block 5
Factsanddecisions Facts (F) and decisions (D)
41. The effect of an over-evaluation of current assets (with
unchanged liabilities) The balance sheet but in fact
Factsanddecisions The effect of a management decision
42. The over- or understatement of profits Brand accounting
Changes in valuation methods Changes in depreciation policy Off
balance sheet finance Capitalisation of R & D
Factsanddecisions
43. Accounts over a long period, plus notes to the accounts,
are likely to provide the best basis for the analysis of the
financial position of a company Accounting and financial analysis
have their own vocabulary Key elements allow for ratio-analysis
Summary Key points to rememberSummary Key points to
rememberThebalancesheet
44. Accounting&Financialanalysis 1 The need for financial
reporting 2 The balance sheet 3 The basic rules of accounting 4 The
profit and loss account 5 The structure of a balance sheet 6
Financial flows 7 Key financial ratios 8 Different balance sheets
Basic principles of accounting & financial analysis
45. Accounting&Financialanalysis Double entry accounting
Depreciation versus amortisation Cash and non-cash transactions The
four principles of accounting Basic principles of accounting 1 2 3
4
46. A balance sheet must balance What would the opening balance
sheet look like? HAVE = Assets OWE = Liabilities
Basicprinciplesofaccounting
47. Example : The balance sheet of a newly founded company
Assets Liabilities Current Asset Equity A balance sheet must
balanceBasicprinciplesofaccounting
52. The P & L Account or Revenue Account P & L
Basicprinciplesofaccounting
53. The dual entry conceptBasicprinciplesofaccounting ASSET
Accounts Increase Decrease LIABILITY Accounts Increase Decrease
Charge Revenue P & L Accounts
54. EQUIPMENT SUPPLIERS ASSETS LIABILITIES EQUITY The company
purchases equipment for 50 (without VAT) CASH The double entry
conceptBasicprinciplesofaccounting
55. ASSETS LIABILITIES EQUITY (1) (1) SUPPLIERSCASH EQUIPEMENT
Basicprinciplesofaccounting The double entry concept The company
purchases equipment for 50 (without VAT)
56. ASSETS LIABILITIES EQUITY (1) (1)(2) (2) SUPPLIERSCASH
EQUIPMENT The double entry concept The company purchases equipment
for 50 (without VAT) Basicprinciplesofaccounting
57. EQUITY The company re-sells the equipment for 60 ! (without
VAT) CASH PROFIT & LOSS DEBTORS ASSETS LIABILITIES EQUIPEMENT
The double entry conceptBasicprinciplesofaccounting
58. EQUITY DEBTORS ASSETS LIABILITIES (3) (3) (3) CASH PROFIT
& LOSS EQUIPMENT The double entry concept The company re-sells
the equipment for 60 ! (without VAT)
Basicprinciplesofaccounting
59. EQUITY DEBTORS ASSETS LIABILITIES (3) (3) (3) (4) (4) CASH
PROFIT & LOSS EQUIPMENT The double entry concept The company
resells the equipment for 60 ! (without VAT)
Basicprinciplesofaccounting
60. EQUIPMENT SUPPLIERS ASSETS LIABILITIES EQUITY The company
purchases equipment for 50 (inclusive of VAT at a rate of 25 % )
CASH The double entry conceptBasicprinciplesofaccounting
61. ASSETS LIABILITIES EQUITY (1) (1) SUPPLIERS CASH EQUIPEMENT
The double entry concept The company purchases equipment for 50
(inclusive of VAT at a rate of 25%) VAT RECEIVABLE (1)
Basicprinciplesofaccounting (2) (2)
62. ASSETS LIABILITIES EQUITY (1) (1) SALESCASH DEBTORS The
double entry concept The company invoices a customer for a fee in
the amount of 50 (inclusive of VAT at a rate of 25%)
Basicprinciplesofaccounting VAT PAYABLE (1)
63. ASSETS LIABILITIES EQUITY (1) (1) SALESCASH DEBTORS The
double entry concept The company invoices a customer for a fee in
the amount of 50 (inclusive of VAT at a rate of 25%)
Basicprinciplesofaccounting VAT PAYABLE (1) (2) (2)
64. ASSETS LIABILITIES EQUITY (1) (1) SALESCASH DEBTORS The
double entry concept The company invoices a customer for a fee in
the amount of 50 (inclusive of VAT at a rate of 25%)
Basicprinciplesofaccounting VAT PAYABLE (1) (2) (2) (3) (3)
65. EQUITY We take a depreciation of an asset into account for
10 P & L Account EQUIPMENT Cash and non cash entries ASSETS
LIABILITIES CASH Basicprinciplesofaccounting
66. EQUITY P & L Account EQUIPMENT Cash and non cash
entries ASSETS LIABILITIES CASH Basicprinciplesofaccounting We take
a depreciation of an asset into account for 10
67. Depreciation A decrease in value of current assets stock -
spare parts - accessories - debtors Amortisation A decrease in
value of fixed assets (long term assets) fixed assets - land and
buildings - plant and equipment - renovation costs Depreciation and
AmortisationBasicprinciplesofaccounting
68. The influence of a depreciation is a decrease in current
assets & the equity and reserves (debts remain unchanged)
Basicprinciplesofaccounting Depreciation and Amortisation
69. The influence of an amortisation is a decrease in fixed
assets AND the equity and reserves (debts remain unchanged)
Basicprinciplesofaccounting Depreciation and Amortisation
70. Methods of amortisation A fixed asset with a value of
100.000 at 10 % per year A fixed asset with a value of 100.000 at
20% per year LINEAR Amortisation 10000 10000 10000 10000 10000
10000 10000 10000 10000 10000 Residual Value 90000 80000 70000
60000 50000 40000 30000 20000 10000 0 DIGRESSIVE Amortisation 20000
16000 12800 10240 10000 10000 10000 10000 960 0 Residual Value
80000 64000 51200 40960 30960 20960 10960 960 0 0 Amortisation
71. Amortisation 0 10000 20000 30000 40000 50000 60000 70000
80000 90000 1 2 3 4 5 6 7 8 9 10 Linear Digressive Accounting Value
Time Basicprinciplesofaccounting
72. Cash and non cash transactionsFinancialReporting When
Profit and Cash Differ Difference P&L expense, no cash outflow
Cash outflow, no P&L expense P&L income, no cash inflow
Cash inflow, no P&L income Example Depreciation Payment of
Creditor Sale on credit Debtors settle account
73. The four principles of accounting Accruals: Each change
needs to be recorded during the relevant period Consistency: The
same logic needs to be followed over the periods of accounting
Going Concern: Accounting on the basis of a functioning company, in
opposition to a gone basis Prudence The financial situation has to
be accurately and factually represented MEMO : ACGP
FinancialReporting
74. The significance of financial management Financial
management allows for the optimisation of the use of working
capital It is a matter of management of the business cycle! STOCKS
SALES DEBTOR S TREASURY SUPPLIERS PURCHASE Financialmanagement
75. Activity Ratios The management of stock of spare parts One
of the management issues is the stock rotation, in this case we use
two ratios: The definition of the two ratios 1. Stock turn Annual
sales of spare parts at cost Stock spare parts 2. Stock turn in
days 365 Stock turn The utility of the ratio This ratio indicates
how often the stocks rotates on an annual basis or alternatively
how many days stock days the company has Financialmanagement
76. The utility of the management of the working capital Turn
over parts 500.000 Gross margin 150.000 Stock 70.000 Stock rotation
500.000-150.000 70.000 5 times p.a. Stock in days 70.000 x 365
350.000 73 days Other computing method 365 5 = 73 days
Financialmanagement Activity Ratios
77. The purpose of the spare parts management by means of
Ratios Factors influencing the stock: - The need to match inventory
with customer requests - The express order surcharge - Obsolescence
- The discounts on spare parts Financialmanagement Activity
Ratios
78. Outstanding debtors in days Outstanding debtors x 365
Turnover with VAT Outstanding suppliers in days Outstanding
suppliers x 365 Purchases with VAT Financialmanagement Activity
Ratios The purpose of the debtors and suppliers management by means
of Ratios
79. Summary & key pointsSummary & key points The source
of working capital allows for a stable base of financing The
management of the working capital allows for the management of the
activities cycle The management of the rotation of stock, debtors
and suppliers will lead to improved results The activity ratios
allow for a trend analysis! Financialmanagement
80. Accounting&Financialanalysis 1 The need for financial
reporting 2 The balance sheet 3 The basic rules of accounting 4 The
profit and loss account 5 The structure of a balance sheet 6
Financial flows 7 Key financial ratios 8 Different balance sheets
Basic principles of accounting & financial analysis
81. TheP&LAccount Expenses and profits Key elements of a P
& L Direct and variable expenses The concept of profit centres
Basic principles of accounting 1 2 3 4
82. Expenses and profits A turnover generates expenses: Fixed
expenses are the result of the activity of the company. For
example: Salaries Rental Training Advertising
TheP&LAccount
83. The benefits of profits Profits: reward shareholders with
dividends reward shareholders with capital growth pay interest on
loans provide protection for future business provide funding for
additional fixed assets provide funding for additional working
capital provide customer confidence protect the employment of the
employees TheP&LAccount
84. Profits do not necessarily mean cash! There is often a time
lag between earnings and cash inflows. Indeed : Stock may be
purchased on payment conditions and may be sold and replaced before
paying the supplier Stock may be sold, the earnings accounted for,
but the payment is made at a much later date A spare part has been
sold but had been paid to the supplier already a long time ago
TheP&LAccount The benefits of profits
85. P & L N-1 EURO N Turnover (1) Purchased goods -
Inventory = Cost of goods sold (2) Gross margin (3)=(1)-(2) + Other
business related income = Income from operations (4) - Goods and
services (5) = Added Value (6)=(4)-(5) - Personnel expense - Other
operational expenses = Gross operating income + Financial revenues
+ Exceptional results = Gross total revenue (EBITDA) - Amort.,
provisions, depreciations = EBIT - Financial expenses - Taxes = NET
PROFIT ExceptionalExceptional OperationsOperations
InvestmentsInvestments FinancingFinancing Key elements of a P &
LTheP&LAccount
86. N-1 EURO N Net Result + Amortisation and provisions = Cash
Flow - Paid dividends (Shareholders) - Repayment LT debt = Net
self-financing margin cash flowTheP&LAccount
87. The charges to the P & L Net Result TheP&LAccount
Other operation al income Gross margin Added Value Gross ops profit
Profit before taxes Goods & services Personnel -expense Other
ops expenses Amortisa tion EBIT Financial expenses Taxes Result of
Operations Financial Income & exceptional Gross Profit Other
income
88. Fixed and variable expenses There are two types of
expenses: The fixed expenses these expenses are incurred
irrespective of the activities or production process Variable
expenses fluctuate in function of the volume of production
TheP&LAccount
89. The break-even point There will be a point where production
covers both fixed and variable cost This crucial point is called
break-even and is the point as of which profit is being earned
TheP&LAccount
90. Break-even VOLUME Total costs Fixed costs Variable costs
TheP&LAccount
91. Break-even VOLUME Gross margin Total costs Fixed costs
BREAK-EVEN Variable costs LOSS PROFIT TheP&LAccount
92. The concept of a profit centreTheP&LAccount SalesSales
Gross ProfitGross Profit Variable ExpensesVariable Expenses Direct
ExpensesDirect Expenses Department ProfitDepartment Profit
SalesSales Gross ProfitGross Profit Direct ExpensesDirect Expenses
Department ProfitDepartment Profit SalesSales Gross ProfitGross
Profit Direct ExpensesDirect Expenses Department ProfitDepartment
Profit Sales Service Parts Total Departmental ProfitTotal
Departmental Profit Indirect ExpensesIndirect Expenses Operating
ProfitOperating Profit Other Income (Expenses)Other Income
(Expenses) Total Company Net ProfitTotal Company Net Profit
93. Reflects the structure of the organisation Allows for a
specific reporting per profit centre Allows for educated decisions
Adequate measures for performance improvement Allows for a better
allocation of resources Could inhibit an overall approach Could
encourage independence Could encourage internal competition Could
encourage the pursuit of department proper goals ADVANTAGES
DISADVANTAGES The P & L per profit centreTheP&LAccount
94. BALANCE Fixed assets Assets Current assets Reserves LT Debt
ST Debt P & L Amortisation Turn over Depreciation Profit
Financial charges Financial charges The link between the balance
sheet and the profit and loss account
Basicprinciplesofaccounting
95. Accounting&Financialanalysis 1 The need for financial
reporting 2 The balance sheet 3 The basic rules of accounting 4 The
profit and loss account 5 The structure of a balance sheet 6
Financial flows 7 Key financial ratios 8 Different balance sheets
Basic principles of accounting & financial analysis
96. The key elements of a balance sheet Fixed Assets Land &
Buildings Plant & Equipment Fixtures & Fittings Company
Vehicles Intangible assets Current Assets Stocks Debtors Work in
Progress Prepayments Cash Equity & Reserves Share Capital
Revenue Reserves Capital Reserves Long Term Liabilities Long Term
Loans Mortgages Thebalancesheet Current Liabilities Bank Overdraft
Creditors (inc Tax & VAT) Accruals Short Term Loans
97. Norms There are certain basic principles such as: LT Assets
> LT Liabilities ST Assets > ST Liabilities LT Liabilities
should finance: - 100% LT assets - the permanent ST Assets LT ASSET
S N.W. LT DEBT ST ASSETS ST DEBT Thebalancesheet Long term The
concept of a balance sheet
98. Assets Permanent Non Permanent Liquidity Fixed assets
Operating assets Treasury Stocks Debtors Cash Thebalancesheet
Current assets
99. Liabilities Permanent Temporary Operating Liabilities
Treasury Suppliers ST Bank facilities Permanent liabilities LT debt
Share capital Thebalancesheet Current liabilities Disposal
100. (2) Use of Working capital (3) Treasury (1)Source of
Working capital Working capital management Fixed assets Source of
working capital Shares & Reserves LT debt Stock Debtors ST debt
Use of working capital ST Bank debt Cash Treasury
Workingcapitalmanagement
101. The structure of a balance sheet Fixed assets Own funds LT
debt Inventory Debtors Use of working capital ST Debt
Workingcapitalmanagement
102. Treasury Source of Working Capital Use of Working Capital
Maximise Minimise The goal is to have a positive treasury
Workingcapitalmanagement Financial management
103. The definition of the working capital The origin of the
working capital = the difference between equity & l.t. debt and
l.t.assets The use of working capital = is the difference between
current assets and current liabilities Treasury = the difference
between the origin of working capital and the use of working
capital Theworkingcapital
104. The Net Worth The difference between assets and
liabilities towards third parties : Ownership interest (permanent
capital) Capital + retained earnings (losses) The difference
between ownership and liabilities is of great practical importance.
Normally claims which belong to the owners will only be paid
directly to them if the organisation ceases trading.
Theworkingcapital
105. SummaryThestructureofabalancesheet 1. Quite a large number
of elements of the balance sheet are subject to judgement. 2. The
source of working capital and the use of working capital relate to
each other and determine the level of the treasury 3. Net worth
(equity and reserves) can be over- or undertstated.
106. Accounting&Financialanalysis 1 The need for financial
reporting 2 The balance sheet 3 The basic rules of accounting 4 The
profit and loss account 5 Financial flows 6 The structure of a
balance sheet 7 Key financial ratios 8 Different balance sheets
Basic principles of accounting
107. Accounting&Financialanalysis Basic principles of
accounting The financing of assets Liquidity The financial flows 1
2 3
108. Business Growth Business growth can take three basic
forms: Increased profitability on current volume Increased volume
on current profitability Increased profitability on increased
volume
Accounting&FinancialanalysisAccounting&Financialanalysis
109. To cover the effects of inflation and/or growth we need
extra funds to: The Need For Extra Funding Carry more stock Support
more debtors Update/add to fixed assets Pay more staff
Accounting&Financialanalysis
110. ... but where will it come from? Growth Will Require More
of This... Accounting&Financialanalysis
111. Sources of Funding Internal Share Capital Reserves
External Long Term Loans Stocking Loans Bank Overdrafts Working
Capital Loan Venture Capital Accounting&Financialanalysis
112. The financial flows underline the significance of the
profitability of the operations and the financial management of the
company The company should generate enough cash to: Finance the
investments : repayment of loans and the financial charges Finance
the use of working capital Pay out dividends and taxes :
Shareholders dividends State taxes Financialflows The financial
flows
113. Accounting&Financialanalysis 1 The need for financial
reporting 2 The balance sheet 3 The basic rules of accounting 4 The
profit and loss account 5 The structure of a balance sheet 6
Financial flows 7 Key financial ratios 8 Different balance sheets
Basic principles of accounting & financial analysis
114. Accounting&Financialanalysis Key ratios The link
between the ratios Trend analysis Performance measurement Basic
principles of accounting & financial analysis 1 2 3 4
115. Accounting&Financialanalysis Basic principles of
accounting & financial analysis The analysis of a company
financial statements is indertaken for the purpose of extracting
information related to: The companys activities Profitability
Efficiency Degree of risk
116. Accounting&Financialanalysis Basic principles of
accounting & financial analysis This is achieved by using
ratios relating to key financial variables
117. Financial ratios Numerator Denominator Denominator + The
concept of a ratio A ratio is a fraction
Accounting&Financialanalysis
118. Financial ratios The concept of a ratio A ratio is a
fraction Accounting&Financialanalysis +
119. The financial ratios Examples of key performance ratios
Profitability ratios Return on capital Return on sales Efficiency
ratios Sales / Fixed assets Stock / Total assets Risk ratios
Current ratio Debt to equity Stock market Price to earnings Asset
value per share Accounting&Financialanalysis
120. Keyratios Return on capital employed The definition of the
ratio Operating profit Capital employed The meaning of the ratio
Capital employed is defined as fixed assets plus current assets
Gives an indication of the profitability of the company = A high
profitability could be the result of a high mark-up on goods sold
and/or an efficient usage of assets
121. Keyratios Return on sales The definition of the ratio
Operating profit Sales The meaning of the ratio Gives an indication
of the profitability of the company = A high profitability could be
the result of an efficient production or distribution process
122. Keyratios Sales on fixed assets The definition of the
ratio Sales Fixed Assets The meaning of the ratio Provides an
assessment on the efficiency of management in using the companys
assets
123. Keyratios Stock on total assets The definition of the
ratio Stock Total Assets The meaning of the ratio The ratio assess
the degree of stability in the stock figure throughout the
years.
124. Keyratios Current ratio The definition of the ratio
Current Assets Current Liabilities The meaning of the ratio Assess
short-term liquidity and examines the ability of the company to
meet its short-term commitments.
125. Keyratios Debt to equity The definition of the ratio
Long-term debt Shareholders equity The meaning of the ratio This
ratio is used to assess the companys ability to meet both interest
and principal repayments on loans as they fall due.
126. Keyratios Price to earnings ratio (P/E) The definition of
the ratio Current market Price Earnings per share The meaning of
the ratio This ratio gives the number of years earnings represented
by the current price The P/E ratio is a mixture of current price
reflecting expectations about the future and historic profit for
the most recent accounting period.
127. Keyratios Asset value per share The definition of the
ratio Net assets attributable to ordinary shareholders Number of
shares issued The meaning of the ratio The result of this fraction
is often compared with the market value to see to what extend the
current price is supported or backed by assets
128. The significance of trend analysis Ratio Time TREND PEERS
Keyratios
129. A series of key ratios provide us a good indication of the
structure of the balance sheet, of the profit and loss account and
about the trend of the companys performance Ratios show either
positive or negative correlations The trend analysis allows for
timely decisions and the comparison of the companys performance
versus a peer group Ratios allow for standard deviations and the
evaluation of the relative performance of the company
SummarySummaryKeyratios