Financial Statement Analysis Lecture 5 
Financial Statement Analysis
Lecture 5
Learning Objectives:
- Financial Analysis continued: Financial strength ratios (solvency & liquidity)
So far we have….
Talked about the framework of financial statement analysis
Discussed why we use ratios for analysis
Calculated and interpreted a range of profitability & asset utilisation ratios
Today we will…
Calculate and interpret more ratios!
These will relate to:
1. Management performance
(i) Profitability
(ii) Asset utilisation
2. Financial strength
(iii)Solvency
(iv)Liquidity
Solvency
Gearing
Interest cover
Gearing
Gearing = Debt / Equity
Reflects the relationship between loan finance and shareholders’ funds
Widgets Plc
2013 2012
2011
£m £m
£m
Sales 762 745 620
Cost of Sales
(267) (246) (217)
Gross Profit
495 499
403
Admin Expenses (368) (358) (300)
Operating Profit 127 141
103
Interest (37.5) (30.9) (10)
Profit Before Tax 89.5 110.1 93
Tax (31.5)(39.1)(32)
Net Profit After Tax
58
71 61
Widgets Plc
2013
2012
2011
£m
£m
£m
Non-current Assets 495
532
312
Current Assets
216.1
194
172.4
Total Assets
711.1
726
484.4
Equity
435.2
387.9
315.5
Current Liabilities
75.9
88.1
68.9
Long Term Debt
200
250
100
Gearing
Gearing = Debt / Equity
2011: Gearing = 100/315.5 = 31.70%
2012: Gearing = 250/387.9 = 64.45%
2013: Gearing = 200/435.2 = 45.96%
Interest Cover
IC = Operating profit / Net interest
Indicates the safety margin between profits and interest payments
Interest Cover
IC = Operating profit / Net interest
2011: IC = 103.3/10.0 = 10.33
2012: IC = 141.3/30.9 = 4.57
2013: IC = 127.2/37.5 = 3.39
Liquidity
Current ratio
Quick ratio (or “acid test”)
Inventory Days
Debtor Days
Creditor Days
Current ratio
CR = Current assets / current liabilities
Measures (in a crude way) the relationship between assets which will shortly mature to cash, and liabilities which will require cash settlement within one year or one operating cycle Current ratio
CR = Current assets / current liabilities
2011: CR = 172.4/68.9 =
Lecture 5
Learning Objectives:
- Financial Analysis continued: Financial strength ratios (solvency & liquidity)
So far we have….
Talked about the framework of financial statement analysis
Discussed why we use ratios for analysis
Calculated and interpreted a range of profitability & asset utilisation ratios
Today we will…
Calculate and interpret more ratios!
These will relate to:
1. Management performance
(i) Profitability
(ii) Asset utilisation
2. Financial strength
(iii)Solvency
(iv)Liquidity
Solvency
Gearing
Interest cover
Gearing
Gearing = Debt / Equity
Reflects the relationship between loan finance and shareholders’ funds
Widgets Plc
2013 2012
2011
£m £m
£m
Sales 762 745 620
Cost of Sales
(267) (246) (217)
Gross Profit
495 499
403
Admin Expenses (368) (358) (300)
Operating Profit 127 141
103
Interest (37.5) (30.9) (10)
Profit Before Tax 89.5 110.1 93
Tax (31.5)(39.1)(32)
Net Profit After Tax
58
71 61
Widgets Plc
2013
2012
2011
£m
£m
£m
Non-current Assets 495
532
312
Current Assets
216.1
194
172.4
Total Assets
711.1
726
484.4
Equity
435.2
387.9
315.5
Current Liabilities
75.9
88.1
68.9
Long Term Debt
200
250
100
Gearing
Gearing = Debt / Equity
2011: Gearing = 100/315.5 = 31.70%
2012: Gearing = 250/387.9 = 64.45%
2013: Gearing = 200/435.2 = 45.96%
Interest Cover
IC = Operating profit / Net interest
Indicates the safety margin between profits and interest payments
Interest Cover
IC = Operating profit / Net interest
2011: IC = 103.3/10.0 = 10.33
2012: IC = 141.3/30.9 = 4.57
2013: IC = 127.2/37.5 = 3.39
Liquidity
Current ratio
Quick ratio (or “acid test”)
Inventory Days
Debtor Days
Creditor Days
Current ratio
CR = Current assets / current liabilities
Measures (in a crude way) the relationship between assets which will shortly mature to cash, and liabilities which will require cash settlement within one year or one operating cycle Current ratio
CR = Current assets / current liabilities
2011: CR = 172.4/68.9 =