EVALUATING FINANCIAL PERFORMANCE
EVALUATING
FINANCIAL
PERFORMANCE
1
Prepared by: Kha Pham
CHAPTER OBJECTIVES
The principles of interpretation of financial information, especially the importance of comparisons
Why non-financial information is needed to supplement financial information
How to calculate and interpret profitability ratios, especially ROCE and its components
How to analyse a company’s borrowings in terms of gearing and interest cover
2
CHAPTER OBJECTIVES
(CONT’D)
How to calculate liquidity and working capital ratios and comment on their significance
How to calculate simple shareholders’ ratios and be aware of their significance
Share price information published in newspaper 3
I. EVALUATION OF FINANCIAL
PERFORMANCE
1. Interpretation of financial statements
Always be aware of the context of a business
Compare like with like
Findings should always be double-checked. Do not base your interpretation on the result of one fact only
To interpret effectively, the statements of more than one accounting period should be analysed to give an idea of the trend
4
I. EVALUATING (CONT’D)
2. Accounting ratios
Categories:
Profitability
and return ratios
Borrowings ratios
Liquidity and working capital ratios
Shareholders’ investment ratios
Comparisons:
External
Internal
5
II. PROFITABILITY AND
RETURN ON CAPITAL
1. Profit measures
Profit on ordinary activities before tax: increase by 52%?
Profit on ordinary activities after tax: increase by 38%?
Which one is more useful?
Profit before Interest and Tax (PBIT)
6
II. PROFITABILITY AND RETURN
ON CAPITAL (CONT’D)
2. Return
on Capital employed (ROCE)
Have to assess profits/ profit growth by relating them to the amount of finance (capital) employed in generating profits!
Capital employed = Shareholders’ fund + Non-current liabilities
= Total Assets – Current liabilities
What is the ROCE for 20X5 and 20X4?
7
ROCE (CONT’D)
Implications of ROCE:
Comparison
between
FINANCIAL
PERFORMANCE
1
Prepared by: Kha Pham
CHAPTER OBJECTIVES
The principles of interpretation of financial information, especially the importance of comparisons
Why non-financial information is needed to supplement financial information
How to calculate and interpret profitability ratios, especially ROCE and its components
How to analyse a company’s borrowings in terms of gearing and interest cover
2
CHAPTER OBJECTIVES
(CONT’D)
How to calculate liquidity and working capital ratios and comment on their significance
How to calculate simple shareholders’ ratios and be aware of their significance
Share price information published in newspaper 3
I. EVALUATION OF FINANCIAL
PERFORMANCE
1. Interpretation of financial statements
Always be aware of the context of a business
Compare like with like
Findings should always be double-checked. Do not base your interpretation on the result of one fact only
To interpret effectively, the statements of more than one accounting period should be analysed to give an idea of the trend
4
I. EVALUATING (CONT’D)
2. Accounting ratios
Categories:
Profitability
and return ratios
Borrowings ratios
Liquidity and working capital ratios
Shareholders’ investment ratios
Comparisons:
External
Internal
5
II. PROFITABILITY AND
RETURN ON CAPITAL
1. Profit measures
Profit on ordinary activities before tax: increase by 52%?
Profit on ordinary activities after tax: increase by 38%?
Which one is more useful?
Profit before Interest and Tax (PBIT)
6
II. PROFITABILITY AND RETURN
ON CAPITAL (CONT’D)
2. Return
on Capital employed (ROCE)
Have to assess profits/ profit growth by relating them to the amount of finance (capital) employed in generating profits!
Capital employed = Shareholders’ fund + Non-current liabilities
= Total Assets – Current liabilities
What is the ROCE for 20X5 and 20X4?
7
ROCE (CONT’D)
Implications of ROCE:
Comparison
between