Analysis & Interpretation of

Financial Information

USQ UNIVERSITY OF SOUTHERN QUEENSLAND

MBA - ACC5502

Accounting & Financial Management / S1 / 2013

M B G Wimalarathna

(ACA, ACMA, ACIM, SAT, ACPM)(MBA–USJ/PIM)

In simple term, Analysis of Financial Information (AFI) is a mechanism used to

re-produce financial information/data which are already prepared and

presented in a formal manner.

Further, AFI is an analytical tool which expresses already reported

Financial/Non-Financial information in relative terms.

AFI requires stakeholders (Internal, Inter-related & External) to take decisions

& form opinions on entity’s past & future performance and position.

AFI - Techniques/methods

Trend Analysis. (Analyze past & do predict)

Horizontal Analysis. (Current Vs Previous)

• Vertical Analysis. (Current Vs Current)

Ratio Analysis. (Mix of all above)

Discuss how to use in decision making? What are the key shortcomings?

When can’t use?

2 wimal

Comparable Sources/Benchmarks

To make an effective decision, particular user of AFI (for the given

period) must Compare with suitable/sound source (benchmark)

under any of the techniques discussed in above.

Commonly acceptable Sources (Benchmarks);

Previous years similar data/figures.

Forecasted/budgeted similar data/figures.

Competitors’ similar data/figures. (Apple to Apple)

Industry norms.

3 wimal

Ratio Analysis

Ratio Analysis is the most common/well known

technique used in AFI.

Key Categories,

Profitability.

Efficiency. View point of the

Liquidity. Company.

Gearing/Capital Structure.

Investors/Market Performance. (Investors’ point of

view.)

4 wimal

Profitability Ratios

Profitability ratios Primary Secondary

Primary

1. ROE. (Return On Equity) NP.atri O/SHS. x100

What? Avg. Equity

How to calculate?

2. ROA. (Return On Assets) EBIT x100

What? Avg. Assets

How to calculate?

5 wimal

What does this measure & indicate to users/Stakeholders?

Secondary

1. GP Margin. (Gross Profit) ) GP x100

What? Total Sales

How to calculate?

2. OP Margin. (Operating Profit) ) OP x100

What? Total Sales

How to calculate?

3. NP Margin. (Net Profit) ) NP x100

What? Total Sales

How to calculate?

6 wimal

Efficiency Ratios

1. Asset Turnover Ratio Total Sales

Avg. total Assets

What? (Times / x)

How to calculate?

2. Inventory/Stock Turnover Ratio

Cost of Sales

What? Avg. Stock

How to calculate?

3. Debtors Turnover Ratio

Total Credit Sales

What? Avg. Drs.

How to calculate?

7 wimal

What does this measure & indicate to users/Stakeholders?

4. Stock Residency Period - Direct/Indirect

Avg. Stock x 365/50/12

What? Cost of Sales

How to calculate?

5. Debtors Collection Period - Direct/Indirect

Avg.Debtors x365/50/12

What? Total Credit Sales

How to calculate?

6. Activity Cycle

SRP + DCP

What?

How to calculate?

• If Figures are not available, how to perform the calculation?

8 wimal

Liquidity Ratios

What does this measure & indicate to users / stakeholders?

1. Current Ratio. CA

CL

What?

How to calculate?

2. Quick Asset/Acid Test Ratio. (CA - St.)

CL

What?

How to calculate?

3. Cash Flow Ratio.

NCF. OP. act

CL

What?

How to calculate?

9 wimal

Gearing/Capital Structure Ratios

1. Debt to equity Ratio.

Total Liabilities x 100

What? Total Equity

How to calculate?

2. Debt Ratio.

Total Liabilities x 100

Total Assets

What?

How to calculate?

1

0 wimal

What does this measure & indicate to users / stakeholders?

3. Equity Ratio. Total Equity x 100 Total Assets

What?

How to calculate?

4. Interest Coverage Ratio. EBIT

F/Cost

What?

How to calculate?

5. Debt Coverage Ratio. NCL

NCF.op.act

What?

How to calculate?

11 wimal

Investors'/Market Performance Ratios

1. Net Tangible asset backing per share (OS/HE-IA)

O/SC

What?

How to calculate?

2. EPS NP. atri.OSHs

WA. O/Sc

What?

How to calculate?

3. Operating cash flow per share (NCF. op. - Pr. Divi)

WA. O/Sc

What?

How to calculate?

1

2 wimal

What does this measure & indicate to users / stakeholders?

4. Dividend per share Divi. paid + proposed

WA. O/Sc

What?

How to calculate?

5. PE Ratio MPS

EPS

What?

How to calculate?

1

3 wimal

Ratio Analysis Vs Other Techniques Why Ratio Analysis become most popular?

Is Ratio Analysis the best for AFI? Shortcomings of ratio analysis.

End Product of the AFI End Product / result of AFI under any techniques / methods used is writing a report.

Is writing a report so important?

Guidelines for effective report writing.

Format

Language

be polite

be specific

be simple (do not use Technical Jargon)

be focus

1

4 wimal

Recommended Format

• Sender / Analyzer

• Date

• Addressee (with formal approach)

• Title

• Introductory Paragraph

• Body of the report (Analysis)

• End Paragraph

• Signature of the Analyzer

15 wimal