TISBETNBusiness Students’ Revision Day

Patana School 1 March 2010.

Analysis of Published Accounts

Presenter: Peter Masters (The Regent’s School)

Name: _________________

What you need to know….

• How to interpret (ie make sense of and analyse) the performance of a business

using ratios.• Alternative ways of measuring success (eg

Market Share)• You almost certainly will be asked questions

on this part of the syllabus!• It is EASY to do!!

The trap…

• Many students simply state that because a business is making a profit, it must be performing well! Not necessarily true!

• Eg Microsoft last year had sales of around $60 billion – I don’t think they would be happy at all with a profit of $10 000!!

• Stating that Microsoft is performing well would earn zero marks!!

• You must compare numbers with something else which is related to it.

The trap continued…

• Think of a class test: if you scored a grade A you may well think you are performing well. But….

• If everyone else in the class gained an A*, suddenly you don’t look so great!

• So, we can always compare performance with another (similar!) business.

• And maybe all your other tests were A*. Suddenly an A is looking quite miserable!

To sum up…

• When analysing accounts, always use ratios!• Make sure you compare your results with

other similar businesses (where possible)• And also compare with previous years / time

periods (where possible)• You must show understanding through your

comments about the ratios!

Profit and loss account for Blimey Ltd (a manufacturing business) for the year ended 31 December ($000)

20082009

Turnover 57506100

Cost of goods sold 41754750

Gross profit 15751350

Marketing and admin expenses 12501300

Net profit (before interest and tax) 325 50

Interest 175 225Taxation 100 10Profit after interest and tax 50 (185)Dividends 20 0Retained profits 30 (185)

Balance sheet for Blimey Ltd as at 31 December ($000)

2008 2009Fixed assets 1500 1400Current assetsStock 910 1220Debtors 550 650Cash 10 5Total current assets 1470 1875

Current liabilitiesCreditors 300 250Overdraft 350 475Total current liabilities 650 725

Net assets 2320 2550

Share capital 250 250Profit and loss account 320 350Loan capital 1750 1950

Capital employed 2320 2550

Profitability / Performance Ratios(Don’t get confused between ratios and margins!)

• These measure how good the business is at turning its sales into profits. There are three:

• Gross Profit Margin = Gross Profit/Sales *100• Net Profit Margin = Net Profit/Sales *100• Return on Capital Employed (ROCE) = Net

Profit / Capital Employed *100

Profitability Ratios for XYZ Ltd• Gross Profit Margin =• Calculation: 2008: 2009:

• Comments:• 1) ______________________________________________________________________________________________• 2) ______________________________________________________________________________________________• 3) ______________________________________________________________________________________________

• Net Profit Margin =• Calculation: 2008: 2009:

• Comments:• 1) ______________________________________________________________________________________________• 2) ______________________________________________________________________________________________• 3) ______________________________________________________________________________________________

• Return on Capital Employed = • Calculation: 2008: 2009:

• Comments:• 1) ______________________________________________________________________________________________• 2) ______________________________________________________________________________________________• 3) ______________________________________________________________________________________________

Liquidity Ratios

• These measure the ability of the business to pay its short term debts / liabilities.

• They are possibly the most important ratios for a business – if they cannot pay their debts, this liquidity crisis may result in the business being forced to close!

• Current Ratio: Current Assets / Current Liabilities• Acid Test Ratio: CA – Stocks / CL (note that stock is

subtracted as it is the least liquid of the current assets. This makes the acid test a tighter test of liquidity.)

Liquidity Ratios for XYZ Ltd• Current Ratio =• Calculation: 2008: 2009:

• Comments:• 1) __________________________________________________________________• 2) __________________________________________________________________• 3) __________________________________________________________________

• Acid Test = • Calculation: 2008: 2009:

• Comments:• 1) __________________________________________________________________• 2) __________________________________________________________________• 3) __________________________________________________________________

Working Capital • This is, of course, very closely related to the current ratio.• This is concerned with the difference between the business’ current assets and current

liabilities (not the ratio). This will tell us whether the business has enough liquid assets (assets easily turned into cash) after all of its short term debts have been paid, to pay for all of its day-to-day expenses.

• Students often think you look at Sales to see how much money the business has. WRONG! Remember that sales in the P&L is how much the business gained from selling its G&S over a period of time (typically a year). We want to know how much cash (and other liquid assets) the business has now. This is in the Balance Sheet under ‘Cash’.

• The calculation is therefore CA-CL. Remember, as a general rule, there should be around 1.5 to 2 times as much CA as there are CL (the current ratio rule).

• Now, calculate the working capital for Blimey Ltd in 2008 and 2009.• Answers: • Comments: • _________________________________________________________________• _________________________________________________________________

Other measures of performance

• Market Share• If Toyota sells 100 000 cars in Thailand in 2008 from total sales in

Thailand of 1 million cars, its market share is 10%. If sales fall to 90 000 in 2009 and total sales remain at 1 million cars, its share has fallen to 9%.

• WHY?? Maybe it lost market share due to the success of other companies (eg Ford) offering better cars, or maybe Toyota had quality problems and people are hesitant to buy a Toyota. It could be either internal or external factors responsible – either way, Toyota would be concerned! Most businesses want to increase market share as it is an indicator of success.

• Market share can also be calculated using the value of sales, not the number of sales (unit sales) as done above.

Some limitations of using ratios…

• The information is only useful if it is accurate and can be believed (creative accounting… - rubbish in, rubbish out)

• Just because a business performed well last year does not necessarily mean it will do so again this year

• Comparisons with other businesses are only useful if the businesses are very similar

• NOW GO AND DO AS MANY PAST PAPER QUESTIONS AS YOU CAN!!!• GOOD LUCK!!