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Ratio Analysis ...IntroductionWelcomeProfitibilityRate of ReturnLiquidityAsset usageStock, debt, creditGearingInvestorSection MapDatabase

Financial Ratio AnalysisFinancial Ratio analysis is a fascinating topic. To help you through thisextensive resource we have broken it down into several sections andsub-sections. You may move between sections using the navigation in theleft hand bar, move between each page in turn by following the links atthe bottom of each page or jump to a topic using the list below:

Welcome●

Ratio Analysis 1: Profitability●

Ratio Analysis 2: Rate of Return●

Ratio Analysis 3: Working Capital Management 1: Liquidity●

Ratio Analysis 4: Working Capital Management 1 continued: Assetusage

●

Ratio Analysis 5: Working Capital Management 2:Stock/debtors/creditors

●

Ratio Analysis 6: Gearing●

Ratio Analysis 7: Investor●

Section Map●

Financial Ratios Database●

These ratio analysis materials were prepared for Biz/ed by DuncanWilliamson: Duncan is a teacher, a freelance author and businessconsultant who prepares teaching/learning materials for accountants andstudents of accounting. Duncan maintains his own Web site athttp://www.duncanwil.co.uk. The site contains many articles, essays anddemonstrations of a wide variety of issues facing management andfinancial accountants.

Section Index | Previous | Next | Next Section | Section Map

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Biz/ed is a JISC funded service.

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You are here: Home > Company Info > Financial Ratio Analysis > Welcome


Welcome to Ratio Analysis!Financial ratio analysis is a fascinating topic to study because it can teachus so much about accounts and businesses. When we use ratio analysiswe can work out how profitable a business is, we can tell if it has enoughmoney to pay its bills and we can even tell whether its shareholdersshould be happy!

Ratio analysis can also help us to check whether a business is doing betterthis year than it was last year; and it can tell us if our business is doingbetter or worse than other businesses doing and selling the same things.

In addition to ratio analysis being part of an accounting and businessstudies syllabus, it is a very useful thing to know anyway!

The overall layout of this section is as follows: We will begin by askingthe question, What do we want ratio analysis to tell us? Then, what willwe try to do with it? This is the most important question, funnily enough!The answer to that question then means we need to make a list of all ofthe ratios we might use: we will list them and give the formula for each ofthem.

Once we have discovered all of the ratios that we can use we need toknow how to use them, who might use them and what for and how will ithelp them to answer the question we asked at the beginning?

At this stage we will have an overall picture of what ratio analysis is, whouses it and the ratios they need to be able to use it. All that's left to dothen is to use the ratios; and we will do that step- by-step, one by one.

By the end of this section we will have used every ratio several times andwe will be experts at using and understanding what they tell us.

What do we want ratio analysis to tell us?●

What do the users of accounts need to know?●

Activity 1 : Which ratio for which group●

Brief review of the accounts of Tesco plc●




Financial Ratio Analysis - Welcome to Ratio Analysis

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You are here: Home > Company Info > Financial Ratio Analysis > Profitability


ProfitabilityWe will now examine profitability

Ratio Analysis 1: ProfitabilityBasic:

Gross profit margin■

Net profit margin

Activity 2 : Carphone Warehouse profit margin■

Activity 3 : Vodafone profit margin■

Activity 4 : Advanced profitability (Additionalquestion 1)

■

Additional question 2■



■

❍

Advanced:

Activity 5 : Carphone Warehouse profitability■



❍

●




Financial Ratio Analysis - Profitability

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You are here: Home > Company Info > Financial Ratio Analysis > Rate of Return


Rate of ReturnWe will now examine Rate of Return

Ratio Analysis 2: Rate of ReturnBasic:

Return on capital employed (ROCE)

Activity 6 : Vodafone ROCE■

■

Return on total assets (ROTA)

Activity 7 : Vodafone ROTA■


■

Review of ROCE and the Pyramid of Ratios

Activity 8 : ROCE and the Pyramid■

■

❍

Advanced:

Return on fixed assets (ROFA)■

Return on working capital (ROWC)





■

Review: Inter-firm and intra-sector analysis■

❍

●




Financial Ratio Analysis - Rate of Return

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You are here: Home > Company Info > Financial Ratio Analysis > Working Capital Management 1:Liquidity


Working Capital Management 1:LiquidityWorking capital management is concerned with making sure we haveexactly the right amount of money and lines of credit available to thebusiness at all times. In part 1 of our look at working capital managementwe will look at the liquidity ratios. Cash is the life-blood of any business,no matter how large or small. If a business has no cash and no way ofgetting any cash, it will have to close down. It's that simple! Following onfrom this we can see that if a business has no idea of its liquidity andworking capital position, it could be in serious trouble.

Ratio Analysis 3: Working Capital Management 1: LiquidityLiquidity ratios❍

The Current Ratio:

Activity 9 - Vodafone Current Ratio■

The Acid Test ratio■

Activity 10 : Vodafone Acid Test■

❍

An ideal ratio?




❍

●




Financial Ratio Analysis - Working Capital Management 1: Liquidity

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You are here: Home > Company Info > Financial Ratio Analysis > Working Capital Management 1:Asset Usage


Working Capital Management 1:Asset Usage

Ratio Analysis 3: Working Capital Management 1: LiquidityBasic:

Total asset turnover

Activity 11 - Vodafone total asset turnover ratio■

■

❍

Advanced:

Split the Total Asset Turnover Ratio: fixed asset andcurrent asset turnovers

■

Fixed asset turnover■

Fixed Asset Turnover: Advanced 1

Current Asset Turnover■

Activity 12 - Vodafone Fixed and Current AssetTurnover ratios

■

■


Capital Employed Turnover■

Activity 13 - Capital Employed Turnover■

Working Capital Turnover■

Activity 14 - Vodafone Working CapitalTurnover

■

■

❍

●




Financial Ratio Analysis - Working Capital Management 1: Asset Usage

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You are here: Home > Company Info > Financial Ratio Analysis > Working Capital Management II


Working Capital Management IIRatio Analysis 5: Working Capital Management II:Stock/debtors/creditors

Introduction❍

Stock turnover

Activity 15 : Vodafone Stock Turnover■

❍

Debtors' Turnover❍

Debtors' Turnover Ratio: Advanced

Activity 16 : Vodafone debtors' turnover■

❍

Creditors' Turnover


❍

Creditors' Turnover: Advanced 1❍

Creditors' Turnover: Advanced 2

Activity 17 : Vodafone creditors' turnover ratio■




❍

●




Financial Ratio Analysis - Working Capital Management II

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You are here: Home > Company Info > Financial Ratio Analysis > Gearing


GearingRatio Analysis 6: Gearing

Gearing ratio 1❍

Gearing ratio 1

Activity 18 : Vodafone gearing■


❍

Gearing ratio 2





❍

●




Financial Ratio Analysis - Gearing

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You are here: Home > Company Info > Financial Ratio Analysis > Investor ratios


Investor ratiosRatio Analysis 7: Investor ratios

Basic:❍

Investor ratios

Earnings per share: EPS

Activity 19 : Vodafone EPS■

■

Dividends per Share: DPS

Activity 20 : DPS■

■

Dividend yield

Activity 21 : Vodafone Dividend Yield■

■

Dividend Cover

Activity 22 : Dividend Cover■

■

Price Earnings Ratio: P/E ratio

Activity 23 : Vodafone P/E ratio■

■

❍

Advanced:

Interest cover

Activity 24 : Vodafone interest cover■




■

❍

●




Financial Ratio Analysis - Investor ratios

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Financial Ratio Analysis - SectionMapFinancial Ratio analysis is a fascinating topic. To help you through thisextensive resource we have broken it down into several sections andsub-sections. You may move between sections using the navigation in theleft hand bar, move between each page in turn by following the links atthe bottom of each page:

Introduction●

WelcomeWelcome to ratio analysis!❍

What do we want ratio analysis to tell us?❍

What do the users of accounts need to know?❍

Activity 1 : Which ratio for which group❍

Brief review of the accounts of Tesco plc❍

●

Ratio Analysis 1: ProfitabilityBasic:

Gross profit margin■

Net profit margin

Activity 2 : Carphone Warehouse profit margin■

Activity 3 : Vodafone profit margin■

Activity 4 : Advanced profitability (Additionalquestion 1)

■




■

❍

Advanced:





❍

●

Ratio Analysis 2: Rate of ReturnBasic:

Return on capital employed (ROCE)■

❍

●

Financial Ratio Analysis - Section Map

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Activity 6 : Vodafone ROCE■

Return on total assets (ROTA)

Activity 7 : Vodafone ROTA■


■

Review of ROCE and the Pyramid of Ratios

Activity 8 : ROCE and the Pyramid■

■

Advanced:

Return on fixed assets (ROFA)■

Return on working capital (ROWC)





■

Review: Inter-firm and intra-sector analysis■

❍

Ratio Analysis 3: Working Capital Management 1: LiquidityLiquidity ratios❍

The Current Ratio:

Activity 9 - Vodafone Current Ratio■

The Acid Test ratio■

Activity 10 : Vodafone Acid Test■

❍

An ideal ratio?




❍

●

Ratio Analysis 4: Working Capital Management 1 continued:Asset usage

Basic:

Total asset turnover

Activity 11 - Vodafone total asset turnover ratio■

■

❍

Advanced:

Split the Total Asset Turnover Ratio: fixed asset andcurrent asset turnovers

■

Fixed asset turnover■


Current Asset Turnover■

Activity 12 - Vodafone Fixed and Current AssetTurnover ratios

■

■


Capital Employed Turnover■

Activity 13 - Capital Employed Turnover■

■

❍

●



Working Capital Turnover■

Activity 14 - Vodafone Working CapitalTurnover

■

Ratio Analysis 5: Working Capital Management II:Stock/debtors/creditors

Introduction❍

Stock turnover

Activity 15 : Vodafone Stock Turnover■

❍

Debtors' Turnover❍

Debtors' Turnover Ratio: Advanced

Activity 16 : Vodafone debtors' turnover■

❍

Creditors' Turnover


❍

Creditors' Turnover: Advanced 1❍

Creditors' Turnover: Advanced 2

Activity 17 : Vodafone creditors' turnover ratio■




❍

●

Ratio Analysis 6: GearingGearing ratio 1❍

Gearing ratio 1

Activity 18 : Vodafone gearing■


❍

Gearing ratio 2





❍

●

Ratio Analysis 7: Investor ratiosBasic:❍

Investor ratios

Earnings per share: EPS

Activity 19 : Vodafone EPS■

■

Dividends per Share: DPS

Activity 20 : DPS■

■

Dividend yield

Activity 21 : Vodafone Dividend Yield■

■

Dividend Cover

Activity 22 : Dividend Cover■

■

❍

●



Price Earnings Ratio: P/E ratio

Activity 23 : Vodafone P/E ratio■

■

Advanced:

Interest cover

Activity 24 : Vodafone interest cover■




■

❍

Financial Ratios Database●














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You are here: Home > Company Info > Financial Ratio Analysis > Rate of Return


Rate of ReturnFirst some basic Rate of Return equations:

Return on Capital Employed(ROCE) =

Profit for the Year * 100

Equity Shareholders' Funds

Return on Total Assets (ROTA) = PBIT

* 100Total Assets

The rate of return ratios are thought to be the most important ratios bysome accountants and analysts. One reason why the rate of return ratiosare so important is that they are the ratios that we use to tell if themanaging director is doing their job properly.




Financial Ratio Analysis - Rate of Return






















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You are here: Home > Company Info > Financial Ratio Analysis > Return on Capital Employed Ratio


Return on Capital Employed RatioThe Return on Capital Employed ratio (ROCE) tells us how much profit we earn from the investments theshareholders have made in their company. Think of it this way: if we had a savings account with a bank and we'dbeen paid, say, £25 interest at the end of a year; and we had saved £500, we could work out the rate of interestwe had earned:

Rate of interest =Interest earned

* 100 =25

* 100 =1

* 100 =100

= 5%Amount saved 500 20 20

So, we have earned 5% interest on our savings.

Imagine now that instead of talking about a savings account, we were talking about a company and the profit forthe year and its capital employed had been £25 and £500 respectively then the ROCE for that company would be5% too.

ROCE =Profit for the Year

* 100 =25

* 100 =1

* 100 =100

= 5%Equity Shareholders' Funds 500 20 20

Did you notice that we use the Equity Shareholders' Funds instead of Capital Employed? In fact, they aredifferent names for the same thing! We could call the ratio the Return on Shareholders' Funds (ROSF) just aseasily if we wanted; but generations of accountants and students only know it as ROCE.

In accounting, there can be different definitions of what certain terms mean. The use of the term 'capitalemployed' can mean different things. It can, for example, include bank loans and overdrafts since these are fundsemployed within the firm. Because there are different interpretations of what ROCE can mean, it is suggestedthat you use a method which you feel comfortable with but be aware that others may interpret your definition ina different way. Below is a guide to some of the interpretations that we have found on this issue.

Source and/or Definition of Return Definition of Capital Employed

Elliott & Elliott: ROCE = Net profit/capital employed Capital employed = total assets

Investor Words:Capital employed = fixed assets + currentassets - current liabilities

investopedia.com: Return = Profit before tax + interest paid

Capital employed = ordinary share capital+ reserves + preference share capital +minority interest + provisions + totalborrowings - intangible assets

Holmes & Sugden: Return = trading profit plus income frominvestment and company share of the profit of associates

TRADING capital employed = sharecapital + reserves + all borrowingsincluding lease obligations, overdraft,minority interest, provisions, associatesand investments

OVERALL capital employed = sharecapital + reserves + all borrowingsincluding lease obligations, overdraft,minority interest, provisions

DTICapital employed = total fixed assets +current assets - (current liabilities + longterm liabilities + provisions)

Johnson Matthey Annual Report & AccountsCapital employed = fixed assets + currentassets - (creditors + provisions)

Financial Ratio Analysis - Return on Capital Employed Ratio

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Let's calculate the ROCE for the Carphone Warehouse now; and here are the figures we need:

Carphone Warehouse 31 March 2001 25 March 2000

£'000 £'000

Profit for the financial period 38,159 16,327

Equity shareholders' funds 436,758 44,190

Off you go!

Did you get this?

What do we think of these results? Well, the question we have to ask is

"Could we have earned more money (profit) if we had invested in a different business or simply put our moneyin the bank?"

Well, interest rates at the bank were somewhere around 4 or 5% in 2001 so we did better than that; but there aremany businesses that have a ROCE of higher than 8 or 9%. Still, in 2000 the Carphone Warehouse had an ROCEof almost 37%: that's very good by all standards.

So what went wrong between 2000 and 2001? What happened, it didn't necessarily go wrong, was that thecapital employed increased from £44,190,000 to £436,758,000 (a 10 fold increase) BUT the profits increasedfrom £16,327 to only £38,159... they only just about doubled.

It's no surprise then that the ROCE fell so sharply as capital employed increased 5 times faster than the profitdid.

It will be interesting to see what 2002 brings for the Carphone Warehouse and their ROCE.

We will look at Vodafone's ROCE shortly, but for interest here are some other ROCE values to compare with theCarphone Warehouse:

Leisure&

Hotels

InternationalAirline

Manufacturer Retailer DiscountAirline

Refining PizzaRestaurants

AccountingSoftware

ROCE 5.56% 3.16% -12.12% -0.12% 33.63% 16.17% 16.14% 16.29%

Again, these other ROCE values demonstrate that not everyone can get the same results for the same ratio at thesame time: it depends on the industry, the management, the economy and so on.

The ROCE results in this new table relate to the Carphone Warehouse's results for the year ended 25 March 2000of 36.95%. This is a good result as it shows that the business is effectively earning around 37% on the(investment) funds that the shareholders have invested in it.

Contrast the other ROCE values with the Carphone Warehouse and we can see that only the discount airline hasa ROCE value anywhere near it. The international airline's ROCE is extremely low at just over 3%. Wouldn't theshareholders be better off selling the business and putting the money in the bank as it would earn more than that?

We should also compare these ROCE values with the profitability values. Let's just compare net profitabilitywith the ROCE.

Leisure&

Hotels




AccountingSoftware

NetProfit

7.36% 4.05% -10.48% 1.63% 10.87% 12.63% 7.55% 27.15%

ROCE 5.56% 3.16% -12.12% -0.12% 33.63% 16.17% 16.14% 16.29%

Putting the data from this table on a graph can help us to see if there is a relationship between them:



There does seem to be a relationship between the net profit margin and the ROCE: the higher the net profitmargin, the higher the ROCE. After all, the curve on this graph is not a straight line and it might even be a truecurve meaning that the relationship is more complex than we might think. Keep an eye on this relationshipwhenever you assess the profitability of a business.














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Activity 6 - Vodafone ROCEHere are the results for Vodafone for you to determine the ROCE for thetwo years:

Vodafone 31 Mar 2002 31 Mar 2001

£m £m

Profit for the financial period -16,155 -9885


Fill in this table to find the ROCE for each year:

ROCE For Vodafone

31 March2002

Profit for the yearEquity shareholders'funds

_______________

= _____%

31 March2001

Profit for the yearEquity shareholders'funds

_______________

= _____%

Did you get this?




Financial Ratio Analysis - Activity 6 - Vodafone ROCE






















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Return on Total Assets RatioThe Return on Total Assets Ratio (ROTA) has a similar meaning toROCE and the method of calculating it is the same, too.

Let's work on ROTA with the Carphone Warehouse's figures:

Return on Total Assets (ROTA) = PBIT

* 100Total Assets

Notice that we use a different profit figure for this ratio - we use profitbefore interest and tax this time. This is because we try to match theprofit we use with the total assets that operating managers use.Accountants would say that interest payments and tax payments areseparate from the ways in which the total assets are used. That is, if weare trying to measure the efficiency of our total assets, then take the profitthat they have generated before interest and taxation.

Interest and tax problems are the senior managers' concern, since theydecide how much to borrow and therefore how much interest they oughtto pay; senior managers decide on capital investment, too, and they havea big say in how much tax they pay for a year. Therefore, since operatingmanagers can't control the amounts of interest and taxation paid, theyshould not be assessed against it.

The Carphone Warehouse 31 March 2001 25 March 2000

£'000 £'000

Profit before interest and taxation 45,012 25,300

Total Fixed Assets 396,175 100,279

Total Current Assets 315,528 171,160

Off you go ... fill in the blanks in this table:

ROTA For the Carphone Warehouse

31 March 2001 Profit before Interestand TaxTotal Assets

______________

= _____%

25 March 2000 Profit before Interestand TaxTotal Assets

______________

= _____%

Did you get this?

Financial Ratio Analysis - Return on Total Assets Ratio














What do we think about those results? Well, we can see a significantdifference between ROCE and ROTA between the two years: the ROTAvalues are much more in line with each other. This is because we are nowlooking at profit before interest and tax and total assets - total assetsincreased by about three and a half times and profits almost doubled.AND, the amount of interest payments has increased by £2,581,000 in2001 and that has made a big difference to this return.

We can see perfectly with this example how we need to take out theimpact of interest and tax if we want to understand how well theoperational managers have done with their assets.

Take a look at other businesses in the database to see how they have donewith their ROTA and to see how interest and taxation has had an impacton their results.




Financial Ratio Analysis - Return on Total Assets Ratio











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You are here: Home > Company Info > Financial Ratio Analysis > Activity 7 - Vodafone ROTA


Activity 7 - Vodafone ROTALet's repeat these calculations, for Vodafone this time and see what wefind for them.

Consolidated profit and loss account 31 Mar 2002 31 Mar 2001

£m £m

Profit before interest and taxation -12,694 -6909



Fill in this table for Vodafone:

ROTA For Vodafone

31 March 2002 Profit before Interest andTaxTotal Assets

____________

= _____%

31 March 2001 Profit before Interest andTaxTotal Assets

____________

= _____%

Did you get this?

Our conclusions? Vodafone's interest and tax situations are not a majorfactor here but Vodafone's main problem is its operating costs - they eatup all and more of its operating profit. We need to keep an eye on thisbecause they can't sustain this situation for too many years.

You can now attempt an additional question or move on to the next topic.




Financial Ratio Analysis - Activity 7 - Vodafone ROTA






















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Additional Question 7Now that you've read the resources on ROCE and ROTA here are therelevant data for Marks & Spencer to enable you to calculate the returnon:

capital employed ratio.

total assets ratiob.

What do you think of the performance of Marks & Spencer over thesetwo years?

Consolidated profit and loss Marks & Spencer plc

for the year 2002 2001

£m £m

Profit for the financial period 153.0 -5.5

Equity shareholders' funds 3,080.9 4,565.8

Total Fixed Assets 3,431.5 4,177.2

Total Current Assets 3,760.7 3,516.2

Did you get this?

These results confirm what we saw when we discussed profitability forM&S: the results for 2002 are significantly better than the results for2001. We can now see that not only has M&S improved its turnover andits profit but it has also managed its capital employed and its total assetsmore efficiently, too.

However, we should stress that these rates of return ratios are not thatspectacular. Interest rates at the bank, to take a very simple view, arearound 4% so M&S hasn't done especially well in general terms: it'simproved without doubt; but it has more improvements to make

You can move on to the next topic.




Financial Ratio Analysis - Rate of Return - Additional Question 7

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You are here: Home > Company Info > Financial Ratio Analysis > Review of ROCE and the Pyramidof Ratios


Review of ROCE and the Pyramid ofRatiosReturn on Capital Employed Revisited

There is a ratio analysis approach called the du Pont Technique or the Pyramid ofRatios Technique. We are not going to look at the whole pyramid technique andthere is nothing new in it in terms of the ratios we might use; but it does contain aninteresting feature.

Here are the top two levels of the pyramid

ROCE is called the Primary Ratio because it is at the top of this pyramid.Moreover, every ratio in this pyramid feeds up into this primary ratio, along theselines:

ROCE = Profit for the year margin x Capital Employed Turnover

These relationships are very useful and we can see this better when we write theformulae out in full:

Return on Capital Employed (ROCE) = Profit for the Year

* 100Equity Shareholders' Funds

and

ROCE =Profit forthe YearMargin

=

Profit for theYear * Capital

EmployedTurnover

=Turnover

TurnoverEquity Shareholders'Funds

Financial Ratio Analysis - Review of ROCE and the Pyramid of Ratios














Notice how we use the name capital employed for the equity shareholders' funds -helpful or what? It's true though. A business's capital employed is also equal to itsnet assets.

When we put the profit margin and capital employed turnover ratios together andcancel, like we do in maths, we get the ROCE.

Put it all together and you will see what we're driving at!

Profit for the Year=

Profit for the Year*

TurnoverEquity Shareholders' Funds Turnover Equity Shareholders' Funds

When we cancel the common elements from the profit margin and capital employedturnover ratios, we get the ROCE ratio ...

Profit for the Year=

Profit for the Year*

TurnoverEquity Shareholders' Funds Turnover Equity Shareholders' Funds

Giving

ROCE =Profit for the Year

=Profit for the Year

Equity Shareholders' Funds Equity Shareholders' Funds

There, and you thought maths was a nightmare!




Financial Ratio Analysis - Review of ROCE and the Pyramid of Ratios










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 8 - ROCE and the Pyramid


Activity 8 - ROCE and the PyramidLet's put some numbers in the pyramid now to prove what we have just said.

We've already see the ROCE in action with the Carphone Warehouse and Vodafoneso why not go to the database of companies that goes with series and chooseanother company to work with? Here's a template for you:

_________________________ plcConsolidated Profit and Loss Account

£'000 £'000

Turnover

Profit for the financial period

Equity shareholders' funds

Fill in the figures in the template below and then do the arithmetic:

Now that you have the ratio values, prove to your own satisfaction that

ROCE = Profit Margin * Asset Turnover.

Additional notes are available on advanced rate of return or you can move on to theLiquidity section.




Financial Ratio Analysis - Activity 8 - ROCE and the Pyramid























Financial Ratio Analysis - Activity 8 - ROCE and the Pyramid


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You are here: Home > Company Info > Financial Ratio Analysis > Advanced Rate of Return


Advanced Rate of ReturnFirst some advanced Rate of Return equations:

Return on Fixed Assets (ROFA) = PBIT

* 100Fixed Assets

Return on Working Capital (ROWC) = PBIT

* 100Working Capital

In addition to the ROCE and ROTA ratios, there are other ratios that willhelp us to appreciate the efficiency with which the management is usingits resources. Here are two ratios that help us with this further analysis.

Remember that with the ROTA we used PBIT for our numerator (that'sthe number on the top of the formula). We use the same measure of profitfor the Return on Fixed Assets (ROFA) and the Return on WorkingCapital (ROWC). Let's have a look.




Financial Ratio Analysis - Advanced Rate of Return






















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You are here: Home > Company Info > Financial Ratio Analysis > Return on Fixed Assets


Return on Fixed AssetsWe'll use the Carphone Warehouse's results to demonstrate these newratios.

Consolidated Profit and LossAccount

31 March 2001 25 March 2000

£'000 £'000



Net current assets (liabilities) 93,180 -2,660

Fill in this table and calculate the ratio values:

ROFA For the Carphone Warehouse

31 March 2001 Profit before Interest andTaxFixed Assets

___________

= _____%

25 March 2000 Profit before Interest andTaxFixed Assets

___________

= _____%

Did you get this?

A large difference between the results for the two years; 2001'sperformance was just less than half of 2000's result. We are assessing theefficiency of fixed assets and 25% is probably respectable. However,11% is another matter and suggests a major change in efficiency betweenthe two years.

Let's look at some other figures from the accounts that should help toexplain what has happened to make this ratio fall so dramatically. Thecost of sales has increased by 64% over the year and operating costs haveincreased by 37%; turnover has increased by 59% over the year

The Carphone WarehouseConsolidated Profit and Loss

Account

31 March 2001 25 March 2000

£'000 £'000

Turnover 1,110,678 697,720

Financial Ratio Analysis - Return on Fixed Assets














Cost of sales -830,126 -505,738

Gross profit 280,552 191,982

Operating expenses -176,960 -129,359

Operating profit 66,016 41,389

Other costs/income -21,004 -16,089





Financial Ratio Analysis - Return on Fixed Assets










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You are here: Home > Company Info > Financial Ratio Analysis > Return on Working Capital


Return on Working CapitalWithout any help from us, you have all of the data (repeated below) toenable you to calculate the ROWC ratio for the Carphone Warehouse ...do that and interpret what you find.


31 March 2001 25 March 2000

£'000 £'000




ROWC For the Carphone Warehouse

31 March 2001 Profit before Interest andTaxWorking Capital

___________

= _____%

25 March 2000 Profit before Interest andTaxWorking Capital

___________

= _____%

You will find this additional information of use for your analysis:

Carphone WarehouseConsolidated Balance Sheet

31 March 2001 25 March 2000

Current assets £'000 £'000

Stock 52,437 51,842

Debtors due within one year 149,200 82,826

Short-term investments 46,374 11,144

Cash at bank and in hand 67,517 25,348


Creditors: Amounts falling duewithin one year

-222,348 -173,820


Financial Ratio Analysis - Return on Working Capital














Did you get this?

There has been a major improvement in ROWC between the two years -there is now a positive working capital balance. In 2000 there was anegative balance. Moreover, whilst current liabilities have increased by28%, other aspects of working capital have increased sufficiently to morethan offset that. The Carphone Warehouse is in a much better position in2001 than it was in 2000.

You can now attempt some additional questions or move on to Inter-firmComparisons




Financial Ratio Analysis - Return on Working Capital










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Additional Question 8In addition to the two rate of return ratios you calculated for question 7,calculate the following two ratios and comment on your findings:

return on fixed assets ratio.

return on working capital ratiob.

You are given the following additional information to help you:

for the year 2002 2001

Creditors: Amounts falling due within one year 1,750.8 1,981.6

Did you get this?

Fixed assets are being dramatically better managed by M&S now sincethat ratio has increased three-fold and the return on working capital ratiohas also improved, but this improvement is more in line with the otherrate of return ratios and general profitability, by just about doubling from2001 to 2002.

You can move on to the next question.


























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Additional Question 9Comment on the performance of Tesco plc for the five years 1998 - 2002as shown in the table that follows. Highlight anything exceptional youmight find.

Tesco plc Year endedFebruary

1998 1999 2000 2001 2002

Financial Statistics £m

Group turnover 16,452 17,158 18,796 20,988 23,653

Turnover by geographicalarea

UK 14,971 15,835 16,958 18,372 20,052

Rest of Europe 1,481 1,167 1,374 1,756 2,203

Asia 0 156 464 860 1,398

Group underlying operatingprofit

912 965 1,043 1,174 1,332

UK 875 919 993 1,100 1,213

Rest of Europe 37 48 51 70 90

Asia 0 -2 -1 4 29

Profit on ordinary activitiesbefore taxation

760 842 933 1,054 1,201

Profit for the period 532 606 674 722 830

Tesco plc Rates ofreturn

1998 1999 2000 2001 2002

Return on shareholders'funds

21.30% 21.30% 20.90% 22.70% 23.20%

Return on capitalemployed

18.70% 17.20% 16.10% 16.60% 16.10%

Did you get this?


http://www.bized.ac.uk/compfact/ratios/ror11_add9.htm (1 of 2) [25/09/2006 14:16:35]













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Additional Question 10The table below contains both financial and non-financial data for Tescoplc.

compare group statistics with UK statistics in whichever way youthink is best

●

calculate the turnover and profit per employee together with thesales per sq foot values

●

analyse your results to parts 'a' and 'b' and state the conclusions youdraw.

●

Tesco plc Yearended February

1998 1999 2000 2001 2002

Group statistics

Number of stores 781 821 845 907 979

Total sales area - 000sq ft

18,254 21,353 24,039 28,362 32,491

Full-time equivalentemployees

119,127 126,914 134,896 152,210 171,794

UK retail statistics

Number of stores 618 639 659 692 729

Total sales area - 000sq ft

15,215 15,975 16,895 17,965 18,822

Average store size(sales area - sq ft)

25,490 25,627 26,641 27,636 28,576

Full-time equivalentemployees

99,941 104,772 108,409 113,998 121,272

UK retailproductivity £

Turnover peremployee

Profit per employee

Weekly turnover persq ft

Wages per employee 15,079 15,271 15,600 16,087 16,821















Note: sq ft = square foot or square feet and there are around 11 squarefeet in a square metre

Did you get this.















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Additional Question 11Go to the database and find the data for both British Airways plc andeasyJet plc that will allow you to calculate and comment on the followingratios:

return on capital employed●

return on total assets ADVANCED

●

return on fixed assets●

return on working capital●

British Airways is an old and well-established airline and easyJet isa new discount airline. Do these ratios help you to show that?

●

Did you get this.

You can move on to the next section.



























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You are here: Home > Company Info > Financial Ratio Analysis > Inter-firm Comparisons


Inter-firm ComparisonsLet's take a look now at some of what we have talked about so far but in adifferent way. Here are the return on assets (ROA) and net profit marginvalues for several companies in the same (retailing) industry. What canwe say about these results?

Company Industry ROA Profit Margin

Marks & Spencer Retailer and FinancialServices

4.43% 3.91%

J Sainsbury Retailer and FinancialServices

5.60% 3.61%

Thorntons Retailer of Chocolates etc 8.43% 6.45%

Next Retailer of Clothing 26.14% 13.82%

Dixons Group Retailer of Electronic etcGoods

19.78% 14.41%

Yates Group Retailer of Food 9.13% 13.34%

Safeway Retailer of Food 7.24% 4.14%

Morrisons Retailer of Food 12.93% 5.87%

Tesco Retailer of Food andHousehold Goods

9.99% 5.72%

Textbooks might lead us to expect that the ROA and Profit Margins foreach company in an industry ought to be the same as each other - wedon't see that here do we?

To try to isolate some patterns, though, we should classify this table evenmore than it has been already. What we mean is, look at the food retailersas a sub-group then look at the other major classifications and see if thathelps to sort out what we are looking at.

Here's the above table reorganised ... does it help?

Averages

Company Industry ROA ProfitMargin

ROA ProfitMargin

Financial Ratio Analysis - Inter-firm Comparisons














Marks &Spencer

RetailerClothing,Food andFinancialServices

4.43% 3.91%

15.29% 8.87%

Next Retailer ofClothing

26.14% 13.82%

Thorntons Retailer ofChocolatesetc

8.43% 6.45%

DixonsGroup

Retailer ofElectronic etcGoods

19.78% 14.41%

Yates Group Retailer ofFood

9.13% 13.34%

8.98% 6.54%

Safeway Retailer ofFood

7.24% 4.14%

Morrisons Retailer ofFood

12.93% 5.87%

Tesco Retailer ofFood andHouseholdGoods

9.99% 5.72%

J Sainsbury Retailer Foodand FinancialServices

5.60% 3.61%

Average 11.52% 7.92%

Well, our sample of businesses in each sub-group is too small, apart fromthose that specialise in retailing food, where we have a sample size offive. There we can see that our average (arithmetic mean) gives areasonable view of the group.

We can see that the sub-group for Marks and Spencer and Next does notgive us such useful results, because there are only two businesses in thesample and the results for each business are significantly different fromthe other business.

The overall average for entire sector is also useful for us as it gives us abenchmark against which to assess all of the businesses within it. We canuse this kind of analysis with all of the ratios we calculate and that willgive us an excellent insight into individual businesses as well as theindustries and the sectors for which we have data.














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You are here: Home > Company Info > Financial Ratio Analysis > Liquidity ratios


Liquidity ratiosCurrent Assets: Current Liabilities

(Current Assets-Stocks): Current Liabilities

The two liquidity ratios, the current ratio and the acid test ratio, are themost important ratios in almost the whole of ratio analysis are also thesimplest to use and to learn.




Financial Ratio Analysis - Liquidity ratios






















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You are here: Home > Company Info > Financial Ratio Analysis > The Current Ratio


The Current RatioThe current ratio is also known as the working capital ratio and isnormally presented as a real ratio. That is, the working capital ratio lookslike this:

Current Assets: Current Liabilities = x: y eg 1.75: 1

The Carphone Warehouse is our business of choice, so here is theinformation to help us work out its current ratio.

Consolidated Balance Sheet 31 March 2001 25 March 2000

£'000 £'000



222,348 173,820

As we saw in the brief review of accounts section with Tesco's financialstatements, the phrase current liabilities is the same as Creditors:Amounts falling due within one year.

Here's the table to fill in. OK, so we've done this one for you!

Current Ratio For the Carphone Warehouse

31 March 2001 Current Assets: CurrentLiabilities

315,528: 222,348 1.42: 1


171,160: 173,820 0.98: 1

Maths revision. How did we get 1.42: 1 for the year ended 31 March2001? All we did was to divide the current assets by the current liabilitiesand that gives us:

current assets=

315,528= 1.42

current liabilities 222,348

so we automatically know that our ratio is 1.42: 1

The same with the year before:

current assets=

171,160= 0.98

current liabilities 173,820

so the ratio is 0.98: 1

Financial Ratio Analysis - The Current Ratio

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Financial Ratio Analysis - The Current Ratio










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 9 - Vodafone Current Ratio


Activity 9 - Vodafone Current RatioWork through the data for Vodafone and calculate their current ratio forthe two years for which you have data.

VodafoneConsolidated Balance Sheet

31 March 2002 31 March 2001

£m £m



13,455 12,377

Fill in this table and discuss what you find:

Current Ratio For Vodafone


_____: _____ ___: 1


_____: _____ ___: 1

Did you get this?

Vodafone has done almost the exact opposite of the Carphone Warehousewith its current ratio.

This additional information might help your analysis.

Current assets 2002 £m 2001 £m

Stock 513 316


Short-term investments 1,792 13,211

Cash at bank and in hand 80 68


Creditors: Amounts falling due within one year 13,455 12,377

Net current assets (liabilities) -4,017 5,805

Vodafone has liquidated, or sold, many of its short-term investments.This business has grown at a very rapid rate and has possibly used the

Financial Ratio Analysis - Activity 9 - Vodafone Current Ratio














cash from having sold its investments to finance that expansion. Overall,Vodafone has lost almost £10 billion of working capital as it has fallenfrom £5.8 billion to -£4.0. This has left Vodafone in a weak workingcapital position as its creditors are large but its cash and short-term assetsbalances are small by comparison.




Financial Ratio Analysis - Activity 9 - Vodafone Current Ratio










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You are here: Home > Company Info > Financial Ratio Analysis > The Acid Test Ratio


The Acid Test RatioThe acid test ratio is also known as the liquid or the quick ratio. The ideabehind this ratio is that stocks are sometimes a problem because they canbe difficult to sell or use. That is, even though a supermarket hasthousands of people walking through its doors every day, there are stillitems on its shelves that don't sell as quickly as the supermarket wouldlike. Similarly, there are some items that will sell very well.

Nevertheless, there are some businesses whose stocks will sell or be usedslowly and if those businesses needed to sell some of their stocks to try tocover an emergency, they would be disappointed. Engineering companiescan have their materials in stock for as much as 9 months to a year; agreengrocer should have his stocks for no longer than 4 or 5 days - a goodgreengrocer anyway.

We'll look at the stock turnover ratio in detail later but here's the acid testratio for the Carphone Warehouse.

Acid Test Ratio = (Current Assets - Stocks) : Current Liabilities

We can take the figures we need from the current ratio section and thendo the calculations. Here are the acid test ratios for the year ended 31March 2001:


Acid Test Ratio For Carphone Warehouse

31 March 2001 Current Assets - Stocks:Current Liabilities

_____: _____ ___: 1


_____: _____ ___: 1

Did you get this?

We need to put the current and acid test ratios side-by-side to help us tounderstand what is happening to the business:

Comparison Current Acid Test

2001 1.42: 1 1.18: 1

2000 0.98: 1 0.69: 1

The fact that the differences between the current and acid test ratios arenot too large tells us that the Carphone Warehouse stocks are not that

Financial Ratio Analysis - The Acid Test Ratio














large either. The stocks are worth around £52 million in 2001; but sincecurrent assets are £315 million, that's not a huge level of stock holdings.

Additionally, the acid test ratio has increased over the two year period,meaning that the Carphone Warehouse has a stronger liquidity positionthan it had before. Normally that is a good thing.




Financial Ratio Analysis - The Acid Test Ratio










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 10 - Vodafone Acid TestRatio


Activity 10 - Vodafone Acid TestRatioAs you must expect now, it's your turn to go back to Vodafone's netcurrent asset information and calculate its acid test ratios for the twoyears for which we have data.


Acid Test Ratio For Vodafone


_____: _____ ___: 1


_____: _____ ___: 1

Did you get this?

As we did with the Carphone Warehouse, let's put the current and acidtest ratios side-by-side to help us to understand what is happening to thebusiness:

Comparison Current Acid Test

2001 0.70: 1 0.66: 1

2000 1.47: 1 1.14: 1

We saw that Vodafone's liquidity position had worsened when we lookedat its current ratio. Well, given that the level of stock it carries haveincreased by around 65% over the years, the acid test ratio has fallenfrom 2001 to 2002. We don't know how serious that fall is for the overallhealth of the business but we do know that Vodafone is not in a veryhealthy state at the moment.

Current assets might not be that liquid since almost 80% of them aredebtors. It does have £1.8 billion of short-term investments that it mightsell to pay its bills if necessary. Vodafone has almost no cash. When welook at debtors we will see how liquid they are.




Financial Ratio Analysis - Activity 10 - Vodafone Acid Test Ratio






















Financial Ratio Analysis - Activity 10 - Vodafone Acid Test Ratio


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You are here: Home > Company Info > Financial Ratio Analysis > Ideal Ratio


No such thing as an Ideal RatioIt's time to say that whatever you've read about the ideal current ratiobeing 2:1 and the ideal acid test ratio being 1: 1 forget it! This is a goldenrule ...there's no such thing as an ideal current ratio or acid test ratio ... oran ideal any other ratio for that matter.

We still need to know whether 0.98: 1 and 1.42: 1 are good results,though.

For the Carphone Warehouse, there has been a major turnaround betweenthe two years as the ratio has increased from 0.98: 1 to 1.42:1. Look atthe accounting information above and you can see that whilst the businesshas increased its sales by 59% over the two years, its stocks are almostunchanged; debtors have increased by 80%, investments by 316% andcash by 166%.

As always, we have to point out that we only have two years' worth ofdata so any conclusions we can draw have to be done cautiously.

You can now attempt some additional questions or move on to Assetusage




Financial Ratio Analysis - Ideal Ratio






















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You are here: Home > Company Info > Financial Ratio Analysis > Liquidity - Additional question 12


Liquidity - Additional question 12Go to the database and calculate

the current (working capital) ratio and1.

the acid test (liquid or quick) ratio2.

for each of the following retailing companies

Marks & Spencer●

Safeway●

J Sainsbury plc●

Tesco plc●

Thorntons●

Comment on your findings for parts 'a' and 'b' of this question.

Did you get this?

Try the next question.




Financial Ratio Analysis - Liquidity - Additional question 12

http://www.bized.ac.uk/compfact/ratios/liquid7_add12.htm [25/09/2006 14:16:41]






















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Liquidity - Additional question 13Go to the database and calculate

the current (working capital) ratio and1.

the acid test (liquid or quick) ratio2.

for each of the following Transport Sector companies

BAA●

British Airways●

easyJet●

Comment on your findings for parts 'a' and 'b' of this question.

Did you get this?

Try the next question.



























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Liquidity - Additional question 14Compare and comment on the current and acid test ratio results you gotfor the retailing and transport businesses in questions 12 and 13respectively. Is there such a thing as an ideal current and acid test ratiovalue?

Did you get this?

Now move on to Asset usage


























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You are here: Home > Company Info > Financial Ratio Analysis > Asset Usage


Asset UsageThe assessment of asset usage is important as it helps us to understand theoverall level of efficiency at which a business is performing.

The basic equations for this section are:

Total Asset Turnover = Turnover Total Assets

Stock Turnover = Average Stocks Credit Sales/365

Debtors' Turnover = Average Debtors Credit Sales/365

Creditors' Turnover = Average Creditors Credit Sales/365

The assessment of asset usage is important as it helps us to understand theoverall level of efficiency at which a business is performing.

Our basic ratios for this section are

Total asset turnover - The overall efficiency of the business. We willlook at total asset turnover and net asset turnover; then we willinvestigate the fixed and current asset turnover ratios.

Stock turnover, Debtors' turnover and Creditors' turnover help us toassess the liquidity position as well as giving us detailed informationabout stock control and credit control.

We'll look at total asset turnover first and then we'll look at the otherthree together, under the general heading of working capital managementII.




Financial Ratio Analysis - Asset Usage






















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You are here: Home > Company Info > Financial Ratio Analysis > Total Asset Turnover


Total Asset TurnoverThe asset turnover ratio simply compares the turnover with the assets that thebusiness has used to generate that turnover. In its simplest terms, we are just sayingthat for every £1 of assets, the turnover is £x. The formula for total asset turnoveris:


As usual, we'll take a look at the Carphone Warehouse's total asset turnover ratiosfirst, for practice, and then we'll try to work out what we've found. Here are thefigures we need:

Carphone WarehouseConsolidated Profit and Loss Account

31 March 2001 25 March 2000

£'000 £'000

Turnover 1,110,678 697,720



Total Asset Turnover Ratio for the Carphone Warehouse

31 March 2001 1,110,678 396,175 + 315,528

= 1.56 times

25 March 2000 697,720 100,279 + 171,160

= 2.57 times

We see the result of 1.56 times for 2001 ... this means that turnover is 1.56 timesbigger than total assets. Another way of saying that is that the Carphone Warehousewas able to generate sales of £1.56 for every £1 of assets it owned and used for theyear ended 31 March 2001. For the year ended 25 March 2000, it was even higherat 2.57 times.

The Total Asset turnover ratio has worsened a lot over the two years. If 2.57 timeswas good, then 1.56 times is definitely worse.

Can we see why this ratio fell so sharply? Actually, it's not as bad as it seems.Turnover increased by 59% but fixed assets increased by 295% and current assetsby 84%. Here we have one of those cases where a ratio is falling in value but the

Financial Ratio Analysis - Total Asset Turnover

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underlying changes might not be so bad. That is, the Carphone Warehouse hasmade major investments in its assets that have yet to generate their previous level ofsales: 1.56 times versus 2.57 times. However, we should say that we expect thatnext year this ratio should improve again.

Let's have some bad news, though. Over the four years to 2001, this is the CarphoneWarehouse's Net Asset Turnover Ratio profile:

Net Asset Turnover Ratio 2001 2000 1999 1998

Net Asset Turnover 2.27 7.05 5.03 6.17

What are the signs telling us? Take a look at this graph:

The Carphone Warehouse is growing steadily in terms of turnover and its assetbase. However, the very high net asset turnover ratio values came when theturnover and asset values were low, so mathematically this can often mean that theratio is very likely to be high. So, it's not always bad when a ratio falls - it shouldrecover, though, as the additional assets start to generate more sales and profit inthe coming months.




Financial Ratio Analysis - Total Asset Turnover










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 11 - Vodafone total assetturnover ratio


Activity 11 - Vodafone total assetturnover ratioLet's see what we find when we analyse Vodafone's total asset turnover ratio. Go tothe database and find the data you need for these calculations then calculate thetotal asset turnover ratios and tell us what you have found.

Did you get this?

Did you think these were terrible results? Me too! Especially when we compare itwith the Carphone Warehouse's results which were 1.56 and 2.57 for its latest twoyears respectively - significantly better than Vodafone's turnover ratio results.

History shows us Vodafone's total asset turnover ratio looks like this:

Vodafone plc 2002 2001 2000 1999 1998

Total Asset Turnover Ratio 0.14 0.09 0.05 0.91 0.96

It's been terrible for three years now, but it might be that 2001 was the worst year.

This graph might help us to understand the underlying picture, too:

We can see now that Vodafone grew phenomenally quickly from 1999 to 2000 andalthough it is still a large company, it isn't growing at the same rate. Moreover, itsassets have grown at a much quicker rate than its turnover. This could suggest thatVodafone is investing very heavily it its future. We would expect to see major

Financial Ratio Analysis - Activity 11 - Vodafone total asset turnover ratio















improvements over the coming years just as we would for the CarphoneWarehouse. We have to say, though, that Vodafone's total asset turnover ratio hasnever been that good.

Additional notes are available on advanced asset usage or you can move on to theStocks, Debtors and Creditors section.




Financial Ratio Analysis - Activity 11 - Vodafone total asset turnover ratio










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You are here: Home > Company Info > Financial Ratio Analysis > Advanced Asset Usage


Advanced Asset UsageThe advanced equations for this section are:

Fixed Asset Turnover = Turnover Fixed Assets

Current Asset Turnover = Turnover Current Assets

Capital Employed Turnover = Turnover


Working Capital Turnover = Sales

Working Capital

Look at this as we try to unravel the more involved aspects of asset usageor turnover:

Vodafone plc 31 Mar 2002 31 Mar 2001

Consolidated balance sheet £m £m

Fixed assets

Intangible Assets 105,944 108,853

Tangible assets 18,541 10,586

Investments 28,977 34,769


Look where the growth in assets is taking place - intangible assets. Theseintangible assets seem to have appeared between 1999 and 2000 and areprobably the reason for such a dreadful total asset turnover ratio.Incidentally most of the intangible assets are goodwill, by the way. Forthe sake of argument, if we assumed that the goodwill had been around£100 million since it first appeared and then recalculated the total assetturnover ratio, we would find:

Vodafone plc 2002 2001 2000 1999 1998

Adjusted Total Asset Turnover Ratio 0.36 0.21 0.15 0.91 0.96

Financial Ratio Analysis - Advanced Asset Usage














Making this adjustment makes a difference and it helps us to understandthe underlying trend in the total asset turnover ratio; and taking goodwillinto account in the way we have is the kind of adjustment that a financialanalyst might make were he to look at Vodafone's financial statements.




Financial Ratio Analysis - Advanced Asset Usage










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You are here: Home > Company Info > Financial Ratio Analysis > Split the Total Asset Turnover Ratio


Split the Total Asset TurnoverRatio: fixed asset and current assetturnoversLet's take a more detailed look at asset usage and efficiencies now bysplitting down the total asset usage ratio into its component parts. Weknow that total asset turnover matches the turnover of a business with allof the assets it has used to generate that turnover - the bigger the value ofthe ratio the better. We can break this ratio into two to start with so thatwe can see in more detail how those assets have been used. The tworatios we will look at are:

Fixed Asset Turnover = Turnover Fixed Assets

Current Asset Turnover = Turnover Current Assets

Let's find the data for the Carphone Warehouse, do the calculations andthen discuss what we have found.




Financial Ratio Analysis - Split the Total Asset Turnover Ratio






















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You are here: Home > Company Info > Financial Ratio Analysis > Fixed Asset Turnover


Fixed Asset TurnoverThe data:

Carphone WarehouseConsolidated Profit and Loss

Account

31 March 2001 25 March 2000

for the year ended £'000 £'000

Turnover 1,110,678 697,720



The calculations

Fill in the figures and calculate the ratio values

Fixed Asset Turnover Ratio for the Carphone Warehouse

31 March 2001

__________ times

25 March 2000

__________ times

Did you get this?

What did you think of those results? Well, 2001's result is less than 50%of 2000's result, which is poor on the face of it.

2001 2000 Change 2000 - 2001

Turnover 1,110,678 697,720 59.19%

Total Fixed Assets 396,175 100,279 295.07%

In the situation we see here, we will always find that whilst the businessis growing, it is growing in such a way that its ratios cannot stay constant.Here we have a 59% increase in sales and a 295% increase in fixedassets: this is bound to mean that the fixed asset turnover will get worse.

What this means is that whilst the business has invested heavily in newfixed assets, turnover has not increased enough to reflect the newinvestments. We expect to see a major improvement in this ratio next

Financial Ratio Analysis - Fixed Asset Turnover














year.




Financial Ratio Analysis - Fixed Asset Turnover










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You are here: Home > Company Info > Financial Ratio Analysis > Fixed Asset Turnover: Advanced 1


Fixed Asset Turnover: Advanced 1We can investigate a little bit further, though, as we did with the totalasset turnover ratio before we can make our final assessment. However,we need to look at which of the fixed assets have increased so much incase it's not as simple as it might look:

Carphone WarehouseConsolidated Balance Sheet

31 March 2001 25 March 2000

Fixed assets £'000 £'000

Intangible Assets 231,471 26,933

Tangible assets 120,278 63,190

Investments 44,426 11,584


Whilst tangible fixed assets such as land, buildings, machinery and so onhave doubled and investments have quadrupled, the largest increase of allis in intangible assets. The notes to the financial statements in theCarphone Warehouse's annual report shows us that the majority of theintangible asset came from the goodwill arising from having bought therest of the shares in a business in which it already had a 76% holding in.Here are those notes:

Intangible fixed assets: goodwill ... extract

Group £'000

Cost

At 25 March 2000 27,167

Acquisition of minority interests in the Group (see note 12a) 169,050

Other acquisitions 42,580

Amounts written off ... 1,776

Foreign exchange 340

At 31 March 2001 240,913

Net book value

At 31 March 2001 231,471

At 25 March 2000 26,933

Financial Ratio Analysis - Fixed Asset Turnover: Advanced 1














Acquisition of minority interests in the GroupOn 22 June 2000, the Company acquired 24% of the issued share capitalof The Phone House Holdings (UK) Limited, a company registeredEngland in which it already had a 76% interest, in exchange for 81.9mshares in the Company. The shares in the Company had a fair value of£104.1m, giving rise to goodwill on acquisition of £105.9m. On 14 July2000, the Company acquired all minority interests in The Phone HouseSA (France), Phone Warehouse SL (Spain) and Polirent Comercio eAluguer de Bens e Servicos LDA (Portugal), in exchange for 31.3mshares in the Company. The shares in the Company had a fair value of£62.5m, giving rise to goodwill on acquisition of £63.1m.

The Carphone Warehouse's accounting policy on goodwill is:

Intangible assets - goodwillGoodwill arising on the acquisition of subsidiary undertakings andbusinesses, representing any excess of the fair value of the considerationgiven over the fair value of the identifiable assets and liabilities acquired,is capitalised and written off on a straight line basis over its usefuleconomic life of 20 years.

Source: Carphone Warehouse Annual Report - page 30 [PDF]

Let's adjust for the goodwill. For 2001 let's take out all £169,050,000 of itand see the impact that has on the fixed asset turnover ratio.

Adjusted Fixed Asset Turnover Ratio for the Carphone Warehouse

31 March 2001 1,110,678396,175 - 169,050

4.89 times

25 March 2000 697,720100,279

6.96 times

Good, now the change is not so dramatic - it has fallen by only 30% now.Still fixed assets have changed at a quicker rate than turnover so we arestill looking for improvements next year.






http://www.cpwplc.com/cpw/ir/reports/annrep01/annrep01full.pdf









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Current Asset TurnoverAlong with the basic data we need to calculate the current asset turnoverratio, we have provided the rates of change for each component, too. Usethis additional information in your analysis, as we have done with thefixed asset turnover ratio.

Carphone Warehouse 2001 2000 Change2000 - 2001

Turnover 1,110,678 697,720 59.19%

Total Current Assets 315,528 171,160 84.35%

Fill in the blanks with the data from the above table.

Current Asset Turnover Ratio for the Carphone Warehouse

31 March 2001

__________ times

25 March 2000

__________ times

Did you get this?

Given the rates of change in the turnover and current assets, 59% and84%, this result has behaved exactly as we would have expected: whenthe rate of increase in current assets is higher than the rate of increase inturnover, the ratio will fall. Given the increase in investment in currentassets this year, however, we need to see this ratio improving next year atleast.

Cross-reference: now that we know that the current asset turnover ratiohas worsened a little, we need to monitor the effect of this change indetail in our review of the three working capital ratios we are about tolook at: stock, debtors' and creditors' turnover. Two of these are part ofthe current assets turnover ratio and therefore have some influence on itsvalue.




Financial Ratio Analysis - Current Asset Turnover






















Financial Ratio Analysis - Current Asset Turnover


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You are here: Home > Company Info > Financial Ratio Analysis > Activity 12 - Vodafone Fixed andCurrent Asset Turnover ratios


Activity 12 - Vodafone Fixed andCurrent Asset Turnover ratiosWe can work on these ratios together now, for practice purposes. Go tothe database and find the data for Vodafone that you need to calculate thefixed and current asset turnover ratios. Calculate the ratios and discusswhat you have found: include your views on the strength of the ratios andindicate the additional information you need to resolve any problems youmight find.

Once you have carried out the basic ratio analysis, look back at thediscussion on the total asset turnover ratio when we isolated theintangible assets for Vodafone and incorporate the intangible assets valuein your analysis.

Did you get this?

Good news! Vodafone has an improved fixed asset turnover ratio: anincrease of 50% over the previous year. We can see that thisimprovement is due to the turnover having increased at a faster rate thanthe increase in fixed assets.




Financial Ratio Analysis - Activity 12 - Vodafone Fixed and Current Asset Turnover ratios























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You are here: Home > Company Info > Financial Ratio Analysis > Fixed Asset Turnover: Advanced 2


Fixed Asset Turnover: Advanced 2However, we do know that Vodafone has an intangible assets issue in thesame way that the Carphone Warehouse has, so we need to adjust for thatto give us a true view of operating asset turnover. When we discussed thetotal asset turnover ratio we assumed that Vodafone's goodwill value was£100,000 million and adjusted the ratio for that: we can do the same withthe fixed asset turnover ratio since intangible assets are part of fixedassets.

Adjusted Fixed Asset Turnover Ratio for Vodafone

31 March 2002 22,845 153,462 - 100,000

0.43 times

31 March 2001 15,004 154,208 - 100,000

0.28 times

Again, the ratio has improved over the previous year, an increase of 54%.However, the values of the ratios have changed, of course, and for thelatest year the ratio is 0.43 times when the unadjusted value was 0.15times. Similarly for 2001, unadjusted it was 0.1 times and adjusted it is0.28 times.

These are not very high ratios, of course and they are a fraction of thevalues of the equivalent Carphone Warehouse ratios suggesting thatVodafone is nowhere near as efficient as the Carphone Warehouse.

Current Asset Turnover Ratio for Vodafone

31 March 2002 22,8459,438

2.42 times

31 March 2001 15,00418,182

0.83 times

Vodafone has clearly made some effort to resolve a weak current assetturnover ratio, increasing it threefold over the two years we are lookingat. This is good news, of course, and we will look into the stock anddebtors part of the current asset turnover ratio in a following section.


























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You are here: Home > Company Info > Financial Ratio Analysis > Capital Employed Turnover


Capital Employed TurnoverWe know that the ROCE (return on capital employed) ratio gives us agood idea of how the profit the business is earning relates to the capitalthe shareholders have invested in their business. Here is another ratiothat's not exactly the same as the ROCE ratio, but it does enhance ourview of a business.

The capital employed turnover ratio tells us the state of the relationshipbetween the shareholders' investment in the business and the turnover thatthe management of the business have been able to generate from it.

Capital Employed Turnover = Turnover


As with all financial ratios, there is no ideal value to this ratio, so weshould find out what the Carphone Warehouse has done over the latesttwo years and then try to interpret what we find.


£'000 £'000

Turnover 1,110,678 697,720


Capital Employed Turnover Ratio for the Carphone Warehouse

31 March 2001 1,110,678436,758

2.54 times

25 March 2000 697,72044,190

15.79 times

The Carphone Warehouse has gone from a capital employed turnoverratio of almost 16 to one of 2.54 in a year - a major change that suggests aproblem. We need to understand why they have this problem.

The answer to our question is simple once we review the EquityShareholders' Funds section of the balance sheet for the two years:

Capital and reserves 2001 2000

Called-up share capital 833 600

Share premium 356,235 0

Financial Ratio Analysis - Capital Employed Turnover














Other reserves 0 0

Profit and loss account 79,690 43,590


There are two changes of importance:

The profit and loss account has increased by 83%, which is a good thing.

We now have a share premium account, a massive share premiumaccount: they have issued some shares at an enormous premium and it isthis value that has distorted the capital employed turnover ratio.

If we remove the share premium value from the ratio, we can see whetherthe underlying trend is good or bad:

Adjusted Capital Employed Turnover Ratio for the CarphoneWarehouse

31 March 2001 1,110,678436,758 - 356,235

13.79 times

25 March 2000 697,72044,190

15.79 times

See the difference the share premium account has made? The CarphoneWarehouse has lost a bit of ground in this ratio over the two years, butnot as serious as we thought before. The ground it has lost, though, to fallfrom 15.79 to 13.79 is explained by turnover rising at a slower rate thanthe capital employed.

As we have said before, we would expect this ratio to catch up over thecoming year otherwise the investments it is making are not as valuable asthey ought to be.




Financial Ratio Analysis - Capital Employed Turnover










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 13 - Capital EmployedTurnover


Activity 13 - Capital EmployedTurnoverLet's repeat these calculations now by working on Vodafone's capitalemployed turnover ratio. Gather the data you need, calculate the ratiosand make any comments you think are worthwhile.

Did you get this?

The analysis

Vodafone's ratios continue to say, "There is a problem." Here's anothercase of a very dynamic business returning a very poor result.

We have the situation here where £1 worth of investment by shareholdersis returning as little as £0.10 by way of turnover. Turnover has grown52% over the two years but capital employed has fallen by 10%. Thissituation helps to explain why Vodafone's capital employed turnover is sopoor.

What is the underlying reason for such a poor ratio, though? We havealready seen that around 80% of Vodafone's Net Assets are in the form ofintangible assets. Whilst intangible assets are not especially productiveassets of themselves, we ought to be able to expect that the source of theintangibles would be generating a more significant level of sales than wecan see here.

Vodafone clearly has a problem.




Financial Ratio Analysis - Activity 13 - Vodafone Capital Employed Turnover






















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You are here: Home > Company Info > Financial Ratio Analysis > Working Capital Turnover


Working Capital TurnoverThe final ratio in this section is the working capital turnover ratio - therelationship between turnover and working capital.

The working capital turnover ratio is straightforward and here it is!

Working Capital Turnover = Sales

Working Capital

What this ratio tries to highlight is how effectively working capital isbeing used in terms of the turnover it can help to generate: no ideal valueshere but the higher the better, surely. Working with the CarphoneWarehouse, we have:


£'000 £'000

Turnover 1,110,678 697,720


Working Capital Turnover Ratio for the Carphone Warehouse

31 March 2001 52,437830,126 ÷ 365

11.92 times

25 March 2000 51,842505,738 ÷ 365

-262.30 times

Oops, then much better! In 2000, the result of the working capitalturnover ratio was strange because year-end working capital (net currentliabilities in this case) was negative - it's difficult to interpret such a ratio.In 2001, though, it had turned this situation round and returned a value of11.92 times.

The best way to understand what this ratio means is to calculate it a fewtimes. Let's start with Vodafone and take it from there.




Financial Ratio Analysis - Working Capital Turnover






















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You are here: Home > Company Info > Financial Ratio Analysis > Activity 14 - Vodafone WorkingCapital Turnover


Activity 14 - Vodafone WorkingCapital TurnoverGather the data you need, calculate the ratios and make any commentsyou think are worthwhile.

Did you get this?

In line with many of its ratios, Vodafone has a problem with its workingcapital turnover ratio, too. Not only is the value for 2002 negative, butalso the positive value for 2001 is very small, especially when comparedwith the Carphone Warehouse's 2001 value.

Here we see another worrying aspect of Vodafone's performance.




Financial Ratio Analysis - Activity 14 - Vodafone Working Capital Turnover






















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You are here: Home > Company Info > Financial Ratio Analysis > Working Capital Management II


Working Capital Management IIWhat we are about to study - stock, debtors and creditors control - are allpart of working capital management in the same way that a discussion ofliquidity was part of working capital management.

We know that working capital is concerned with the ability of a businessto be able to pay its way. The three ratios we are concerned with now areconcerned with spending and saving money in the right places. Too muchstock and we waste money on buying it and keeping it. Too much moneyloaned to our debtors and it's money we can't use for something else, suchas buying machinery, paying our creditors or even investing it. Too muchmoney in the form of creditors and we might have a problem that no oneelse will give us credit for anything else because they think we can'tafford it, and, if we suddenly have a cash problem, we might not be ableto pay our creditors.

Working capital management is concerned with the control aspects of theissues we have just mentioned.




Financial Ratio Analysis - Working Capital Management II






















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You are here: Home > Company Info > Financial Ratio Analysis > Stock Turnover: stock control


Stock Turnover: stock controlIn principle, the lower the investment in stocks the better. Apart frombuffer stocks that businesses sometimes need in case of shortages ofsupply and strategic stocks in case of war, sudden changes in demand andso on, modern stock control theory tells us to minimise our investment instocks.

Let's see how the Carphone Warehouse behaves in this respect.

The formula for this ratio is:

Stock Turnover = Average Stocks (Cost of Sales/365)

Carphone WarehouseConsolidated Profit and Loss

Account

31 March 2001 25 March 2000

£'000 £'000

Cost of sales 830,126 505,738

Stock 52,437 51,842

Stock Turnover Ratio for the Carphone Warehouse

31 March 2001 52,437830,126 / 365

23.06 days

25 March 2000 51,842505,738 / 365

37.42 days

If you use alternative formulae and are happy with them, that's fine. Ifyou think you need help because of that, see your teacher/lecturer forguidance.

Firstly, the result of this calculation is that the answer is instantlyin terms of the number of days, on average, that the stocks are heldin the business.

●

Secondly, we use the cost of sales figure because stocks are boughtand shown in the profit and loss account and the balance sheet atcost; so we need to compare like with like.

●

Thirdly, we only have two years' worth of stock information, so wecan't use the average stock for both years as we should do

●

Financial Ratio Analysis - Stock Turnover: stock control

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according to the formula. Never mind, even though the answerwon't be 100% spot on, it will give us a very good estimate of howstock control is going.

How can we interpret this ratio? With a result of 23.06 days, we canimagine that we bought our £52,437,000 worth stocks of raw materials orwhatever they were on 1st January 2002. We then know that we ran outof those raw materials on 1 + 23.06 days = just into 25th January.

Similarly with the result of 37.42 days, if we bought our £51,738,000worth of raw materials on 1st January, we would run out and have to buysome more on 7th February.

This ratio has fallen from 37 days to 23 days over the two years and thatis probably a good thing. If there's less stock to worry about, lowerinvestment in stocks meaning that the money they used to have tied up inthe stock room is now free to spend somewhere else.

In fact, stocks have remained at around £52 million as we mentionedbefore, but the cost of sales has increased by 64% over the two years. Putthese two facts together and that explains the improvement in this ratio.

Well done the Carphone Warehouse!

Remember that we talked about the liquidity of stocks when we discussedthe acid test ratio. Now we can see that the Carphone Warehouse's stocksare fairly liquid, since a turnover ratio of 23 days isn't too bad!




Financial Ratio Analysis - Stock Turnover: stock control










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 15 - Vodafone StockTurnover


Activity 15 - Vodafone StockTurnoverRepeat the stock turnover ratio calculations for Vodafone. Go to thedatabase and find the information you need then calculate and commenton what you have found.

Did you get this?

Good results: Vodafone's stock turnover ratio is much less than theCarphone Warehouse and in general that it is a good thing. In addition,the ratio is fairly stable, in that it has only changed by about 5% over thetwo years.

Well done, Vodafone!

Take the opportunity now to go to the database and select anotherbusiness to work on. Calculate the ratios you have just seen in this sectionand see what you think about that business's results.




Financial Ratio Analysis - Activity 15 - Vodafone Stock Turnover
























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You are here: Home > Company Info > Financial Ratio Analysis > Debtors' Turnover


Debtors' TurnoverIn the same way that stock control is a vital aspect of working capitalmanagement, so too is debtors' control. Many businesses need to sell theirgoods on credit, otherwise they might find it difficult to survive if theircompetitors provide such credit facilities; this could mean losingcustomers to the opposition.

Nevertheless, since we do provide credit, we must do so as optimally aspossible. We've used the word 'optimal' before and let me confirm that itdoesn't necessarily mean the best possible, but the best possible under thecircumstances.

Why is credit control so important? For the Carphone Warehouse, thetotal amount owing by debtors was £149 million at the end of 31 March2001, which as a percentage of total assets, is 14.09%. That's a lot ofmoney in absolute terms and relatively, and it's 80% more than it was theyear before.

So, they've given an additional £69 million worth of credit to theircustomers over the year. What we need to know, though, is whether theyare controlling these debtors. We can do that by looking at their debtors'turnover ratios for the two years, firstly.

Carphone Warehouse 31 Mar 2001 25 Mar 2000

£000 £000

Turnover 1,110,678 697,720


The formula for debtors' turnover is:

Debtors' Turnover = Average Debtors Credit Sales/365

We have to assume, by the way, that all sales are credit sales unless weknow which sales are for cash.

The calculations:

Debtors Turnover Ratio for the Carphone Warehouse

31 March 2002 149,2001,110,678 ÷ 365

49.03 days

Financial Ratio Analysis - Debtors' Turnover














25 March 2001 82,826697,720 ÷ 365

43.33 days

Well, what do you think of that?

Firstly, the ratio seems to have worsened by going from 43 to 49 daysover the two years; and it means that, on average, the CarphoneWarehouse's debtors are taking one and a half months to pay theiraccounts. Does this sound as if it's a good policy? How do we know?

One of the ways we can tell, in fact, whether this ratio is good or not is togo to a Carphone Warehouse shop or go to their Web site and find outtheir terms of business. If we sign up with them, will they give us around49 days to pay our bills?

At the time of writing, the pagehttp://www.carphonewarehouse.com/commerce/servlet/gben-store-Mobileshows that there are a number of ways we can choose to get a phone fromthe Carphone Warehouse:

Pay monthly●

Handset only●

Pay for calls ... no line rental●

Pay as you go●

Try and work out how it's possible to have a debtors' turnover figure of 49days from these deals ... it's not! So what's the problem? Well, do theyhave corporate customers who are allowed to pay after, say, 55 days or 60days? Do some research and find the answer if you can.




Financial Ratio Analysis - Debtors' Turnover


http://www.carphonewarehouse.com/commerce/servlet/gben-store-Mobile









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You are here: Home > Company Info > Financial Ratio Analysis > Debtors' Turnover Ratio: Advanced


Debtors' Turnover Ratio: AdvancedHowever, this table from the Carphone Warehouse's annual report canhelp us with our research.

2001 2000

Debtors falling due within one year: £'000 £'000

Trade debtors 104,827 55,557

Other debtors 27,516 20,419

Prepayments and accrued income 16,857 6,850

Amounts falling due after more than one year:

Amounts owed by Group undertakings - -

Total Debtors 149,200 82,826

Do what the financial analyst would do: rework the debtors' turnover ratioand find the length of time that TRADE debtors take to pay their accounts... is it more in line with what we found on the Web site? ...http://www.carphonewarehouse.com/commerce/servlet/gben-store-Mobile

Put the data into the same format as before:

Carphone Warehouse 31 Mar 2001 25 Mar 2000

£000 £000

Turnover 1,110,678 697,720

TRADE Debtors due within one year 104,827 55,557

TRADE Debtors Turnover Ratio for the Carphone Warehouse

31 March 2002 104,8271,110,678 ÷ 365

34.45 days

25 March 2001 55,55782,826 ÷ 365

29.06 days

There now, a bit nearer to what we are expecting aren't they? Why notEXACTLY 30 days, though, since anyone who has credit seems to haveto pay at the end of a month ... find out and explain the answer to thisquestion.

Financial Ratio Analysis - Debtors' Turnover Ratio: Advanced














http://www.carphonewarehouse.com/commerce/servlet/gben-store-Mobile

See if you can find out what OTHER debtors might be; and say why wehave ignored it for the purposes of these new calculations.

The final stage in this part of our analysis: if we had good enoughsegmental information, we might be able to find even more informationthat would give us the exact ratio values we were looking for. What weare really trying to do is to match sales with debtors: only when we dothat and have credit and cash turnover data, will we have the true valuefor the debtors' turnover ratio.

Since we don't have precise information, our values for the debtors'turnover ratio are estimates. Nevertheless, we have seen already that wecan check some aspects of the results we get by, for example, going to aCarphone Warehouse shop and investigating payment terms.

Here is the Carphone Warehouse's segmental turnover information ... butit's still not enough for us to be able to match turnover with trade debtors.

Turnover Turnover

Divisional results are analysed as follows £'000 £'000

Distribution 1,079,143 685,838

Telecoms Services 30,481 10,456

Wireless Data Services 1,054 1,426

Total Turnover 1,110,678 697,720




Financial Ratio Analysis - Debtors' Turnover Ratio: Advanced










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 16 - Vodafone Debtors'Turnover Ratio


Activity 16 - Vodafone Debtors'Turnover RatioLet's repeat these calculations but for Vodafone. Go to the database, findthe information you need and calculate the debtors' turnover ratios forthem.

Did you get this?

Vodafone is consistent... consistently terrible when compared with theCarphone Warehouse. Can it really be true that a mobiletelecommunications business waits three months for its debtors to paytheir accounts? After all, the demand for mobile phones is such thatVodafone can insist on its payment terms can't they?

Here's some additional information taken from Vodafone's annual reportthat will help us to sort this mess out!

2002 2001

Debtors due within one year: £m £m

Trade debtors 3,389 1,852

... ... ...

Total Debtors 6,095 3,701

Do what the financial analyst did for the Carphone Warehouse andrework the debtors' turnover ratio and find the length of time that tradedebtors take to pay their accounts ... is it more sensible and realistic thanthree months?

Put the data into the same format as before:


£m £m

Turnover 22,845 15,004

TRADE Debtors due within one year 3,389 1,852

Debtors Turnover Ratio for Vodafone

Financial Ratio Analysis - Activity 16 - Vodafone Debtors' Turnover Ratio















31 March 2002 3,38922,845 ÷ 365

54.15 days

31 March 2001 1,85215,004 ÷ 365

45.05 days

A lot better and much nearer to what we should expect and ... still a lotlonger than the Carphone Warehouse. Try to find out what is it aboutVodafone that makes their Trade debtors payment terms so generouswhen compared with the Carphone Warehouse.

Remember that we talked about the liquidity of debtors when wediscussed the acid test ratio. Now we can see that the CarphoneWarehouse's debtors are not that liquid.




Financial Ratio Analysis - Activity 16 - Vodafone Debtors' Turnover Ratio










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You are here: Home > Company Info > Financial Ratio Analysis > Creditors' Turnover Ratio


Creditors' Turnover RatioCreditors are the businesses or people who provide goods and services incredit terms. That is, they allow us time to pay rather than paying in cash.

There are good reasons why we allow people to pay on credit eventhough literally it doesn't make sense! If we allow people time to paytheir bills, they are more likely to buy from your business than fromanother business that doesn't give credit. The length of credit periodallowed is also a factor that can help a potential customer decide whetherto buy from your business or not: the longer the better, of course.

In spite of what we have just said, creditors will need to optimise theircredit control policies in exactly the same way that we did when we wereassessing our debtors' turnover ratio - after all, if you are my debtor I amyour creditor!

We give credit but we need to control how much we give, how often andfor how long. Let's do some calculations for the Carphone Warehouse.


Creditors' Turnover = Average Creditors (Cost of Sales/365)

As with the stock turnover ratio, creditor values relate to the costs of rawmaterials, goods and services, which is why we use the cost of salesfigure in the denominator (Remember the numerator? Well, this is theopposite. The denominator is the bottom part of a fraction!)


£'000 £'000

Cost of sales 830,126 505,738


222,348 173,820

Creditors Turnover Ratio for the Carphone Warehouse

31 March 2001 222,348830,126 ÷ 365

97.76 days

25 March 2000 173,820505,738 ÷ 365

125.45 days

Financial Ratio Analysis - Creditors' Turnover Ratio














We interpret this ratio in exactly the same way as the debtors' turnoverratio. That is, in 2001 if we had bought some supplies for £222,348 on 1stJanuary, we would have paid for them 97.76 days later on 6th April. Youcan work out the payment date for 2000 if we imagine buying somesupplies for £173,820 on 1st January of that year.

Having found that debtors are taking somewhere between 30 and 50 daysto pay their accounts, notice that the business is taking over three monthscredit for itself in 2001 and about four months' credit in 2000. Theseresults are worrying: especially when we know that small businesses inthe UK are suffering because large businesses take too long to pay theiraccounts; and if the Carphone Warehouse has many small suppliers thatis worrying.

You can now attempt an additional question.

Additional notes are available on advanced stock, creditors and debtors oryou can move on to the Gearing section.




Financial Ratio Analysis - Creditors' Turnover Ratio










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You are here: Home > Company Info > Financial Ratio Analysis > Additional question 15


Additional question 15You should now be able to complete the four parts of the below question.

Find Sage plc (the accounting software developer) in the database andgather the data you need to calculate and comment on the followingratios:

Total Asset Turnover.

Stock Turnoverb.

Debtors' Turnoverc.

Creditors' Turnoverd.

Did you get this?





Financial Ratio Analysis - Additional question 15

http://www.bized.ac.uk/compfact/ratios/sdc8_15.htm [25/09/2006 14:16:54]






















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You are here: Home > Company Info > Financial Ratio Analysis > Creditors' Turnover: Advanced 1


Creditors' Turnover: Advanced 1The Carphone Warehouse has a supplier payment policy, as stated in itsannual report:

Supplier payment policyThe Group's policy is to agree terms of transactions, including paymentterms, with suppliers and, provided suppliers perform in accordance withthe agreed terms, it is the Group's normal practice that payment is madeaccordingly. The number of days outstanding between receipt of invoicesand date of payment calculated by reference to the amount owed to tradecreditors at the period end as a proportion of the amounts invoiced bysuppliers during the period, was 53 days (2000 - 45 days).

Source: Carphone Warehouse Annual Report - page 22 [PDF]

This supplier payment policy tells us that the creditors' turnover ratio was53 days in 2001 and 45 days in 2000. Can we prove that this is true fromthe information we have? Well, a note to the accounts in the annual reportalso shows us the breakdown of the creditors' values

2001 2000

Creditors: amounts falling due within one year £'000 £'000

Obligations under finance leases and hire purchasecontracts

256 125

Loans and overdrafts 10,537 28,131

Trade creditors 144,908 75,948

Corporation tax 8,102 9,577

Other taxes and social security costs 15,933 6,772

Other creditors 11,685 19,959

Accruals and deferred income 30,927 33,308

222,348 173,820

Let's rework the creditors' turnover ratio now on the basis of tradecreditors and see what we find, fill in the blanks:

Trade Creditors Turnover Ratio for the Carphone Warehouse

31 March 2001 ______________

_____days

Financial Ratio Analysis - Creditors' Turnover: Advanced 1














http://www.cpwplc.com/cpw/ir/reports/annrep01/annrep01full.pdf

25 March 2000 ______________

_____ days

Trade Creditors Turnover Ratio for the Carphone Warehouse

31 March 2001 144,908830,126 ÷ 365

63.71days

25 March 2000 75,948505,738 ÷ 365

54.81 days

These figures are clearly a lot less than our original estimates of thecreditors' turnover figures but still not in agreement with the figures thatthe Carphone Warehouse have given us. Who is right, us or the CarphoneWarehouse? Seriously, our figures are arithmetically correct but we aremissing something ... what is it that we are missing?

We are missing enough detailed information to allow us to agree with the53 and 45 days we have been given. What we have is the end of yearcreditors' balances: what the Carphone Warehouse has is the exactamounts invoiced by suppliers during the period ... we only have the costof sales information and that's not the same, is it?














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You are here: Home > Company Info > Financial Ratio Analysis > Creditors' Turnover: Advanced 2


Creditors' Turnover: Advanced 2For fun, we could work backwards (we could call it reverse engineering!)to find the amounts invoiced by supplies based on the 53 days we aregiven by the business couldn't we? This will help us to reconcile thevalue of 53 days that we see in the annual report and accounts. Go on,then, have a go!

OK, here's the first bit of the first one to start you off:

53 days = Creditors = 144,908 =

Cost of sales X2001

365 365

Finish it off now!

Did you get this?

... how do you interpret this result?


























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You are here: Home > Company Info > Financial Ratio Analysis > Activity 17 : Vodafone creditors'turnover ratio


Activity 17 : Vodafone creditors'turnover ratioGo to the database of businesses, find the relevant information andcalculate the creditors' turnover ratios as far as you can. Beware, you maybe surprised at your answers!

Now contrast your calculations with the following extract fromVodafone's annual report:

Creditor payment terms It is the Group's policy to agree terms oftransactions, including payment terms, with suppliers and, providedsuppliers perform in accordance with the agreed terms, it is the Group'snormal practice that payment is made accordingly. The number of daysoutstanding between receipt of invoices and date of payment, calculatedby reference to the amount owed to trade creditors at the year end as aproportion of the amounts invoiced by suppliers during the year, was 36days in aggregate for the Group.

Did you get this?

Don't say we didn't warn you: these are astonishing results, aren't they? Ayear to pay their creditors in 2002 and a year and eight months to pay in2001? Can't be right can they? Well, arithmetically we have done nothingwrong ... what's the problem, then, as surely Vodafone can't be abusingits creditors' privileges so badly can they?

You can now attempt Additional question 16 or move on to the NextSection.




Financial Ratio Analysis - Activity 17 : Vodafone creditors' turnover ratio























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Additional question 16Compare the results in answer to question 15 and repeat thosecalculations for:

One Saturday●

The Hilton Group●

Paddy Power plc●

Fox Kids Europe●

Present your ratios and discussion in the most appropriate way.

Did you get this?

Go to Additional question 17


























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Additional question 17Paddy Power plc is a service business that provides sports bettingservices a chain of licensed betting offices principally in Ireland togetherwith telephone and on-line interactive betting.

You are required to undertake a full review of Paddy Power's

profitability●

rates of return●

liquidity●

asset usage●

Consequently, you need to go to the database and obtain all of theinformation you need to evaluate the ratios under each of the aboveheadings.

You should find the following additional information useful: include asmuch of this information as possible in your analysis of the business.

NOTE: all of Paddy Power's data are in Euro.

Paddy Power plcFive Year Review

(Euro '000)

2001 2000 1999 1998 1997

Turnover 461,075 362,825 269,640 193,501 154,915

Operating profit 8,507 10,629 7,037 5,566 4,477

Profit on ordinaryactivities beforetaxation

9,092 10,950 7,065 5,585 4,521

Profit on ordinaryactivities aftertaxation

7,329 8,013 4,958 3,577 2,721

Net assets 30,733 26,088 16,207 14,122 10,678

Did you get this?




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http://www.bized.ac.uk/compfact/ratios/sdc11_17.htm (2 of 2) [25/09/2006 14:16:57]









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Additional question 18Jarvis Porter Group plc provides printing and manufacturing of labels,packaging and promotional products.

You are required to undertake a full review of Jarvis Porter Group's

profitability●

rates of return●

liquidity●

asset usage●

Consequently, you need to go to the database and obtain all of theinformation you need to evaluate the ratios under each of the aboveheadings.

You should find the following additional information useful: include asmuch of this as possible in your analysis of the business.

Jarvis Porter Group plcFive Year record

1997 1998 1999 2000 2001

Turnover (£m) 95.40 101.20 106.40 108.80 60.10

Profit/(loss) before tax (£m) 12.40 14.00 5.00 -0.20 -4.30

Shareholders' funds ( m) 28.00 26.30 23.50 26.70 23.10

Earnings/(loss) per share(pence)

14.60 20.00 -5.40 -54.90 -7.70

Adjusted earnings/(loss) pershare (pence)

17.70 20.00 5.30 -3.40 -7.70

Equity dividends (pence) 7.35 7.80 3.75 70.00 0.00

Average number of employees 1,066 1,215 1,392 1,344 760

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You are here: Home > Company Info > Financial Ratio Analysis > Gearing 1


Gearing 1

Gearing = Long Term Liabilities Equity Shareholders' Funds

Gearing is concerned with the relationship between the long termsliabilities that a business has and its capital employed. The idea is thatthis relationship ought to be in balance, with the shareholders' fundsbeing significantly larger than the long term liabilities.




Financial Ratio Analysis - Gearing 1






















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Gearing 1Shareholders ought to have the upper hand because if they don't thatcould cause them problems as follows:

Shares earn dividends but in poor years dividends may be zero:that is, businesses don't always need to pay any!

●

Long term liabilities are usually in the form of loans and they haveto be paid interest; even in bad years the interest has to be paid

●

Equity shareholders have the voting rights at general meetings andcan made significant decisions

●

Long term liability holders don't have any voting rights at generalmeetings but they have the power to override the wishes of theshareholders if there are severe problems over their interest orcapital repayments

●

So, shareholders like to see the gearing ratio, the relationship betweenlong term liabilities and capital employed, being in their favour! Let'slook at the Carphone Warehouse's gearing ratio.

The formula:

Gearing = Long Term Liabilities Equity Shareholders' Funds

The data:


£'000 £'000

Creditors: Amounts falling due aftermore than one year

14,107 21,033


Gearing Ratio for the Carphone Warehouse

31 March 2001 14,107: 436,758 0.032: 1

25 March 2000 21,033: 44,190 0.476: 1

A shareholder of the Carphone Warehouse will be happy with theseresults. Even in 2000 when the ratio was relatively high at 0.476 or47.6% they probably were not too worried because their other ratios were


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fine too.

In 2001 the gearing ratio fell to almost zero indicating that the businessmuch prefers equity funding to debt funding. This minimises the interestpayment problems and the control problems of having a dangerously highlevel of long-term debt on the balance sheet.





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You are here: Home > Company Info > Financial Ratio Analysis > Activity 18 : Vodafone gearing


Activity 18 : Vodafone gearingGather the gearing data from the database, calculate the gearing ratio andanalyse your findings for Vodafone.

Did you get this?

You can now try an additional question.




Financial Ratio Analysis - Activity 18 : Vodafone gearing























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You are here: Home > Company Info > Financial Ratio Analysis > Additional question


Additional questionAnalyse the gearing ratio of any business whose details are listed in thedatabase: that is, calculate the ratio and comment on what you find.

Did you get this?




Financial Ratio Analysis - Additional question

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Gearing 2There is an alternative gearing ratio, we can call it the Gearing Ratio II.


Gearing 2 = Long Term Liabilities

Long Term Liabilities + Equity Shareholders' Funds

Let's just get on with this one. Gather the necessary data from both of ourbusinesses, Carphone Warehouse and Vodafone and calculate this ratiofor them.

The calculations:

Gearing II Ratio for the Carphone Warehouse

31 March 2001 14,107: 436,758 + 14,107 0.031: 1

25 March 2000 21,033: 44,190 + 21,033 0.322: 1

Gearing II Ratio for Vodafone

31 March 2002 13,118: 130,573 + 13,118 0.091: 1

31 March 2001 11,235: 145,007 + 11,235 0.072: 1

In the case of both the Carphone Warehouse and Vodafone, these ratiosare, as we should expect, smaller than Gearing 1 and they are still,therefore, insignificant by the end of the two years we are analysing here.

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Additional question 20Using whichever newspaper or Web site you wish, carry out an analysisof any business in the database from the point of view of an investor. Youshould include at least the following ratios in your analysis:

earnings per share●

dividends per share●

dividend yield●

dividend cover●

P/E ratio●

Did you get this?

Now try additional question 21.



























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Additional question 21Go to the database and for any company you choose, calculate thefollowing ratios for one year's financial statements.

.

As an outside analyst, state the questions you would want to askmanagement based on the ratios you have calculated.

Return on Total Assets❍

Return on Equity❍

Gross Profit Margin❍

Net Profit Margin❍

Asset Turnover❍

Stock Turnover Ratio (Days)❍

Debtors Turnover Ratio (Days)❍

Current Ratio❍

Acid Test Ratio❍

Times Interest Earned Ratio❍

Gearing Ratio❍

b.

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Additional question 22From the database, find an industry that has at least three businesses in itand compare the results under the headings given below for eachbusiness. State the conclusions you would draw from your findings:

Profitability●

Rate of Return●

Liquidity●

Asset Usage●

Asset Usage●

Gearing●

Investor●

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Additional question 23ADVANCED From the database, find an industry that has at least threebusinesses in it and compare the following results for each business andstate the conclusions you draw from your findings.

ProfitabilityGross profit marginNet profit marginProfit before interest and taxation %Profit before taxation %Profit for the year %Operating costs %

Rate of ReturnReturn on Capital EmployedReturn on Total AssetsReturn on Fixed AssetsReturn on Working Capital

You should include statistical and graphical analysis in your solution.

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Investor ratiosBasic equations you'll need:

Earnings per share = Profit available to equity shareholders

Average number of issued equity shares

Dividends per share = Dividends paid to equity shareholders


Dividend yield = Latest annual dividends Current market share price

Dividend cover = Net profit available to equity shareholders

Dividends paid to equity shareholders

Price/earnings or p/e ratio = Current market share price

Earnings per share


























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Investor ratiosMost of the investor ratios that we might need to use are relatively simpleboth to use and to understand. We can contrast these ratios with others,such as stock and debtors' turnover; and the relationships between theROCE and the profit margin and assets turnover ratios, at the top of thepyramid of ratios.

That's good news, then!

The basic five ratios we are interested in are:

Earnings per share●

Dividends per share●

Dividend yield●

Dividend cover●

P/E ratio●

As before, we'll take each ratio in turn and use the Carphone Warehouseand Vodafone accounts to apply them.


























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You are here: Home > Company Info > Financial Ratio Analysis > Earnings per share


Earnings per share: EPSThis is, perhaps, the fundamental investor ratio: in this case, we work outthe average amount of profits earned per ordinary share issued. Theformula is:

Earnings per share = Profit available to equity shareholders


Here are the extracts from the accounts that we need and they arefollowed by the results for one of the two years, you should calculate theEPS for the other year.


Account

31 March 2001 25 March 2000

Profit for the financial period (£) 38,159,000 16,327,000

Weighted average number of issuedshares

833,000,000 600,000,000

31 March 2001 25 March 2000

EPS 38,159,000833,000,000

£0.04648 _____________

Did you get this?

The good news for investors here is that the average earnings per issuedordinary share has almost doubled over the two years. Notice that thenumber of shares issued has increased from 600 million to 833 million, sothis really is a good result as profits available for shareholders must haveincreased significantly too from £16,327,000 to £38,159,000.




Financial Ratio Analysis - Earnings per share






















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You are here: Home > Company Info > Financial Ratio Analysis > Activity 19 : Vodafone EPS


Activity 19 : Vodafone EPSGo to the database and find the data you need to calculate the EPS forVodafone and then calculate it for the two years for which you have data.

Here are two templates to help you along: aren't we kind?

VodafoneConsolidated Profit and Loss Account

31 Mar 2002 31 Mar 2001

Profit for the financial period (£)


31 Mar 2002 31 Mar 2001

EPS

__________ £ ______ __________ £ ______

Did you get this?

Big numbers for the profit and the shares but in the end, as we shouldexpect by now, the EPS for Vodafone is a disaster - negative andrelatively large. For every share, ordinary shareholders have lost 25 pencein 2002 and they lost 16 pence in 2001. The Carphone Warehouse'sshareholders have made gains on average per share.

Advanced: Special note on the EPS




Financial Ratio Analysis - Activity 19 : Vodafone EPS























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You are here: Home > Company Info > Financial Ratio Analysis > Dividends per Share: DPS


Dividends per Share: DPSThe DPS ratio is very similar to the EPS: EPS shows what shareholdersearned by way of profit for a period whereas DPS shows how much theshareholders were actually paid by way of dividends. The DPS formulais:

Dividends per share = Dividends paid to equity shareholders


Oops, there are no dividend data for the Carphone Warehouse, on page13 of their annual report and accounts they say:

Profit for the period attributable to shareholders was £38.2m resulting intotal shareholders' funds of £436.8m at the period end. As in previousperiods the Board has decided to retain these earnings for continuedinvestment in the development of the Group and the future enhancementof shareholder value and is not therefore proposing a dividend for theperiod.

Vodafone has paid dividends in recent years so gather the relevant datafrom the database and calculate the DPS for it. Here are the templates weso kindly began to provide under the EPS heading!

Here are two templates to help you along: aren't we kind?

VodafoneConsolidated Profit and Loss Account

31 Mar 2002 31 Mar 2001

Equity dividends (£)


31 Mar 2002 31 Mar 2001

DPS

__________ £ ______ __________ £ ______

Did you get this?

Vodafone themselves report the DPS as

Dividend per share 1.4721p in 2002 and 1.4020p in 2001

In conclusion we can see that even though Vodafone is suffering large

Financial Ratio Analysis - Dividends per Share: DPS

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losses, it is still paying dividends to its shareholders, yet the CarphoneWarehouse, which is apparently in a better position is not payingdividends.




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You are here: Home > Company Info > Financial Ratio Analysis > Activity 20 - DPS


Activity 20 - DPSGet copies of and read their respective annual reports and accounts andtry to find out why these companies have adopted the dividend strategiesthey have.




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You are here: Home > Company Info > Financial Ratio Analysis > Dividend Yield


Dividend YieldThe dividend yield ratio allows investors to compare the latest dividendthey received with the current market value of the share as an indictor ofthe return they are earning on their shares. Note, though, that the currentmarket share price may bear little resemblance to the price that aninvestor paid for their shares. Take a look at the history of a business'sshare price over the last year or two and you will see that today's shareprice might be a lot higher or a lot lower than it was a year ago, two yearsago and so on.

We clearly need the latest share price for this ratio and we can get thatfrom newspapers such as the Financial Times, The Times, The Guardianand the Daily Telegraph. We can also find the share prices on theInternet.

The formula for the dividend yield is:

Dividend yield = Latest annual dividends Current market share price

It is common for newspapers and others to calculate the dividend yieldautomatically as part of their offerings. Take a look at the extract fromThe Times and you'll find the dividend yield figure in the second righthand column, before the P/E ratio.

Here's an extract from The Times newspaper's share page (Source: TheTimes Newspaper 18 September 2002) together with a few links to someWeb sites where we can find share prices. Use them now or later.

12 monthHigh

12 monthLow Company

Price(p) +/-

Yld% P/E

TELECOMMUNICATIONS

295½ 181¾ BT Group 193 -4½ 1.0 48.4

395¾ 131½ Cable Wireless 138 -4½ 3.6 ...

337½ 65 Easynet 71 -1½ ... ...

96 34½ mmO2 43¼ -½ ... ...

665 278 Orange 340 -5 ... ...

82 1 TeleWest 1¼ ... ... ...

195 79¾ Vodafone Gp 90½ -1½ 1.6 17.9

Financial Ratio Analysis - Dividend Yield














Source: The Times Newspaper 18 September 2002.

Web Sites

Here is a selection of Web sites that will find the latest share prices forus: you either need to know the code for the share you are interested in,eg CPW for the Carphone Warehouse and VOD for Vodafone; or youwill probably be given the opportunity to search for the code.

Bloomberg Market Monitor http://www.bloomberg.co.uk/●

Yahoo UK & Ireland Finance http://uk.finance.yahoo.com/●

Reuters http://www.reuters.co.uk/●

Since the Carphone Warehouse hasn't paid a dividend recently, we can'tcalculate its dividend yield: we can, however, for Vodafone. Combine thedividend data for Vodafone and combine it with the newspaper andinternet extracts above to determine the dividend yield ... remember, theyield is the yield as at today, or the time of the latest available share price.

Did you get this?

A yield of 1.63% is not that high but there are shareholders who only paid79.75 pence per share for their investment so their dividend yield is1.85%; but others have paid as much as 195 pence per share for theirshares, so their dividend yield is only 0.75%. We have taken these twoprices from the Times newspaper from the last year's highest and lowestprices.

Take a look at the dividend yields of other businesses and see how wellVodafone is doing compared to the average... any company you like, infact. Here are a few examples.

Food Retailers Dividend Yield (%)

Budgens 2.0

Dairy Farm International 1.1

Morrison 1.1

Safeway 4.4

Sainsbury 4.6

Tesco 2.9

Thorntons 5.8

Average 3.13

Source: The Times 18 September 2002.

Breweries, Pubsand Restaurants

Dividend Yield (%)

Burtonwood Brewery 3.7

Greene King 3.5



http://www.bloomberg.co.uk/

http://uk.finance.yahoo.com/

http://www.reuters.co.uk/

Pizza Express 3.5

Scottish and Newcastle 5.1

JD Wetherspoon 1.0

Average 3.36

Source: The Times 18 September 2002.

At the time of writing, dividend yields seem to be rather low. The aboveexamples are representative of the overall market. Still, why wouldshareholders accept such low yields? The answer is probably thatshareholders are more concerned with capital gains, i.e. increases in theshare price, rather than the dividend they might receive.














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You are here: Home > Company Info > Financial Ratio Analysis > Activity 21 : Vodafone DividendYield


Activity 21 : Vodafone DividendYield

Take the latest prices for Vodafone's shares from either Yahoo orReuters and rework the dividend yield value for Vodafone.

1.

Get the latest share price from a newspaper or a Web site andrework the dividend yield for Vodafone

2.

Choose another business from the database and evaluate itsdividend yield, taking your current market share price from anysource you wish.

3.

Did you get this for question 1?

For question 2, check your figures carefully and feel free to use thistemplate:

Vodafone dividend yield pence Yield

Latest annual dividend ____%

Current market share price

For question 3, here is the dividend yield for Tesco.

Tesco dividend yield pence Yield

Latest annual dividend 5.62.74%

Current market share price 204.5

Sources: Annual report and accounts financial year ended 23 February2002 and The Times 18 September 2002.




Financial Ratio Analysis - Activity 21 : Vodafone Dividend Yield























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You are here: Home > Company Info > Financial Ratio Analysis > Dividend Cover


Dividend CoverThe dividend cover ratio tells us how easily a business can pay itsdividend from profits. A high dividend cover means that the company caneasily afford to pay the dividend and a low value means that the businessmight have difficulty paying a dividend. Here's the formula followed byan example.

Dividend cover = Net profit available to equity shareholders

Dividends paid to equity shareholders

Since the Carphone Warehouse hasn't paid a dividend, let's turn toVodafone immediately. In the database find the data you need tocalculate the dividend coverage for the two years for which we have datafor Vodafone and calculate the dividend cover ratio for those two years.Here's a template for you to fill in with the data you find.

VodafoneConsolidated profit and loss account

31 Mar 2002 31 Mar 2001

£m £m


Dividends

Vodafone dividend cover 31 Mar 2002 31 Mar 2001


Dividends

Did you get this?

In this case, we see a terrible situation, as usual, for Vodafone. The profitfor the period is in fact negative, so these results are dreadful - eventhough the values are positive, that is only because of the mathematics ...Vodafone has no dividend cover at all for these two years.




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You are here: Home > Company Info > Financial Ratio Analysis > Activity 22 : Dividend Cover


Activity 22 : Dividend CoverGo to the database and find the relevant data to enable you to calculateand comment on the dividend cover ratio for any business in the databasethat has paid dividends.




Financial Ratio Analysis - Activity 22 : Dividend Cover
























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You are here: Home > Company Info > Financial Ratio Analysis > Price Earnings Ratio


Price Earnings Ratio: P/E ratioThe P/E ratio is a vital ratio for investors. Basically, it gives us anindication of the confidence that investors have in the future prosperity ofthe business. A P/E ratio of 1 shows very little confidence in that businesswhereas a P/E ratio of 20 expresses a great deal of optimism about thefuture of a business.

Here's the formula, then we'll work through an example

Price/earnings or p/e ratio = Current market share price

Earnings per share

Here are the P/E ratios of five businesses in the Telecommunicationssector:

Telecommunications P/E ratio

BT 48.4

Project Telecom 12.0

Telecom Plus 19.7

Vanco 78.4

Vodafone 17.9

Average 35.28

Source: The Times Newspaper 18 September 2002

See how big some of these P/E ratios are - that's not necessarily a goodthing! Let's look at the calculations and then we can interpret ourfindings.

Again, we need current market share prices as well as the EPS values.This means we can go back to the Carphone Warehouse even though itisn't paying dividends at the moment:

The Carphone Warehouse pence P/E ratio

Current market share price 76.016.52

EPS 4.6

Note:the current market share price is taken from The Times newspaper18 September 2002 and the EPS is taken from the table below

1.

Financial Ratio Analysis - Price Earnings Ratio














(previously calculated in the EPS section, above)

we have worked in pence here; but we could just as easily haveworked in Pounds and the answer would have been the same, at aP/E ratio of 16.52

2.

The Carphone Warehouse

31 March 2001

EPS 38,159,000£0.046

833,000,000

What does a P/E ratio of 16.52 mean? In raw terms it means thatinvestors are currently paying the equivalent of 16.52 years' worth ofearnings to own a share in the Carphone Warehouse. That is, they harecurrently paying 76 pence per share and since the EPS is 4.6 pence pershare, this means that they will recover their investment in a share after16.52 years - equivalent to the break even and payback period if you like.

16.52 is a high value for a P/E ratio; but not the highest and essentiallythe higher the ratio the better. However, we would say that P/E ratios of78.4 and 48.4 are excessive and might reflect an unreal situation. It'spossible in extreme circumstances that the share price is, in fact,independent of the current market share price so that a high P/E ratio isactually based on more up to date news than last years EPS value.

BT has a P/E ratio of 48.4 yet it is not too long ago that it was heading forpotential liquidation as its victory in securing its third generation licenceshad led to its taking on a massive debt burden that it could not, in reality,sustain. However, it seems now that investors like the currentperformance of BT and are voting for it by buying its shares at highlyinflated values relative to its EPS.




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You are here: Home > Company Info > Financial Ratio Analysis > Activity 23 : Vodafone P/E ratio


Activity 23 : Vodafone P/E ratioUsing the database find the relevant data for Vodafone and calculate itsP/E ratio. If you have worked through the EPS section of this part of thesite, you should have Vodafone's EPS ratio value already. If not, go thereand work through it so that you can get your own EPS ratio for Vodafone.

Note: we found a negative EPS for Vodafone so we can't use that for ourP/E ratio calculations. Let's take the adjusted EPS values fromVodafone's latest annual report and accounts:

Adjusted EPS: 3.54 pence per share

Vodafone pence P/E ratio

Current market share price

EPS

Did you get this?

Isn't it strange that a business with a negative EPS is quoted in anewspaper, The Times, as having a P/E ratio of +17.9: surely thispresents a false set of expectations for current and potential investors?

Nevertheless, investors are saying that Vodafone is a good prospect forthe future by marking up its P/E ratio so highly. This is despite the factthat Vodafone has had, at the time of writing, a string of very poor resultsand its senior executives had been battling over their bonuses!

Additional notes are available on advanced investor ratios.




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You are here: Home > Company Info > Financial Ratio Analysis > Advanced Investor ratios


Advanced Investor ratiosThe interest cover ratio is the twin brother of the dividend payout ratioand it both means the same and is calculated in the same way. Here's theinterest cover ratio formula:

Interest Cover = Net profit before interest

Interest paid




Financial Ratio Analysis - Advanced Investor ratios






















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You are here: Home > Company Info > Financial Ratio Analysis > Interest cover


Interest coverThe interest cover ratio tells us the safety margin that the business has interms of being able to meet its interest obligations. That is, a high interestcover ratio means that the business is easily able to meet its interestobligations from profits. Similarly, a low value for the interest cover ratiomeans that the business is potentially in danger of not being able to meetits interest obligations.


Account

31 March 2001 25 March 2000

£'000 £'000


Net interest receivable (payable) 2,385 -196

Here's a reminder of the formula:

Interest Cover = Net profit before interest

Interest paid

Here's the first interest cover value calculated for you, now you work outthe value for the missing one.

31 March 2001 25 March 2000

Profit before interest andtaxation

45,012

18.87

Net interest receivable (payable) 2,385

Did you get this?

In 2001, the Carphone Warehouse had no problem with its interestobligations since it was a net receiver of interest: the interest it earnedwas greater than the interest it might have had to pay. For the previousyear, though, its interest obligations were negative, meaning that itneeded to pay more interest than it had earned. However, at 129.08, itsinterest cover ratio is more than satisfactory as it means that the necessaryprofit is 129.08 times larger than the interest payments that the businesshad incurred.


Financial Ratio Analysis - Interest cover
















Financial Ratio Analysis - Interest cover










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 24 : Vodafone Interestcover


Activity 24 : Vodafone Interest coverCalculate the interest cover ratios for Vodafone for the two years forwhich the data in the database are available. Explain your findings.

Here are the templates to help you on your way.


31 Mar 2002 31 Mar 2001

£m £m

Profit before interest and taxation

Net interest receivable (payable)

Did you get this?

These results follow on from all other poor results for Vodafone, exceptthe P/E ratio, of course. Although the results are positive, they areterrible. Why? Well, the values are positive because both the profit andthe interest are negative amounts and as any good mathematician knows,two negatives make a positive!

Consequently, Vodafone's interest cover ratio tells us that its profits areinsufficient to pay the interest it owes.

However, these results help us to illustrate a good point: even though theinterest cover ratio gives us a bad result, it doesn't mean the Vodafonecan't pay the interest it owes: in fact it must have because its still inbusiness and its creditors have yet to take it to court for recovery of itsdebt.

You can now try these additional questions.




Financial Ratio Analysis - Activity 24 : Vodafone Interest cover























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Additional question 24Choose the same businesses as you did for question 23 and carry out asimilar comparative analysis of those businesses based on the following:

LiquidityCurrent ratioAcid Test (Liquid) Ratio

Asset UsageTotal Asset TurnoverStock TurnoverDebtors' TurnoverCreditors' TurnoverFixed Asset TurnoverCapital Employed Turnover

GearingDebt: EquityDebt: Debt + Equity

InvestorEarnings per shareDividends per shareDividend yieldDividend coverPrice/earnings ratioInterest cover

You should include statistical and graphical analysis in your solution.

Did you get this?

You can now try Additional question 25.





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Additional question 25The table below contains the common size statements of eight different business, the industry/sector inwhich these business operate are given at the end of the table.

Your job is to decide which business belongs in which industry/sector. For example, if you think thatbusiness 1 is a retail organisation then your answer will be 1 = retail organisation

The following ratios also relate to these businesses and they might be helpful in helping you to arrive atyour decisions:

Year 1Common

SizeStatements

1 2 3 4 5 6 7 8

ConsolidatedProfit and

LossAccount

Turnover 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales -88.59% -94.38% -90.36% -72.54% -88.01% -10.45% 0.00% -64.86%

Gross profit 11.41% 5.62% 9.64% 27.46% 11.99% 89.55% 100.00% 35.14%

Operatingexpenses

-5.95% -0.83% -1.82% -16.59% 0.00% -62.41% -244.32% -23.41%

Operatingprofit

5.45% 4.79% 7.81% 10.87% 11.99% 27.15% -144.32% -10.48%

Othercosts/income

-3.83% -0.73% -0.45% 0.00% 0.64% 0.00% 4.46% 0.00%

Profit beforeinterest andtaxation

1.63% 4.05% 7.36% 10.87% 12.63% 27.15% -139.86% -10.48%

Net interestreceivable(payable)

0.17% -2.44% -2.39% -2.49% -1.20% -0.76% 20.77% -0.36%

Profit onordinaryactivitiesbeforetaxation

1.80% 1.62% 4.97% 8.38% 11.44% 26.39% -119.09% -10.84%

Tax on profiton ordinaryactivities

-1.85% -0.74% -1.45% 0.00% -3.36% -8.44% 0.00% -3.61%


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Profit onordinaryactivitiesafter taxation

-0.05% 0.87% 3.52% 8.38% 8.08% 17.94% -119.09% -14.45%

Equityminorityinterests

-0.02% -0.15% -0.01% 0.00% -0.06% 0.02% 0.00% -3.19%

Profit for thefinancialperiod

-0.07% 0.72% 3.52% 8.38% 8.02% 17.96% -119.09% -17.64%

Dividends -3.20% -2.08% 0.00% 0.00% -3.12% -1.19% 0.00% 0.00%

Retainedprofit

-3.27% -1.36% 3.52% 8.38% 4.89% 16.77% -119.09% -17.64%

ConsolidatedBalance

Sheet

Fixed assets

IntangibleAssets

0.00% 2.58% 44.23% 4.81% 22.83% 118.91% 0.00% 36.58%

Tangibleassets

89.90% 458.58% 121.98% 307.62% 101.58% 10.23% 21.48% 21.11%

Investments 6.95% 18.32% 3.41% 0.00% 15.88% 0.00% 0.00% 0.00%

Total FixedAssets

91.18% 479.48% 169.62% 312.43% 140.29% 129.14% 21.48% 57.68%

Currentassets

Stock 10.31% 7.31% 1.02% 0.00% 13.34% 0.55% 0.83% 12.82%

Debtors duewithin oneyear

57.39% 62.11% 14.15% 62.33% 38.40% 18.78% 14.24% 19.34%

Short-terminvestments

0.00% 37.20% 0.00% 0.00% 0.89% 0.00% 0.00% 0.00%

Cash at bankand in hand

3.37% 3.05% 3.44% 21.44% 1.58% 14.61% 97.12% 33.05%

76.75% 109.68% 18.62% 83.76% 54.21% 33.95% 112.19% 65.22%

Creditors:Amountsfalling duewithin oneyear

43.25% -142.28% -36.17% -128.56% 52.06% -24.24% -21.71% -20.97%

Net currentassets(liabilities)

33.50% -32.60% -17.55% -44.79% 2.15% 9.70% 90.48% 44.25%

Total assetsless currentliabilities

124.67% 446.88% 152.07% 267.64% 142.44% 138.84% 111.96% 101.93%



Creditors:Amountsfalling dueafter morethan one year

16.05% -296.82% -51.00% -164.82% -25.15% -17.27% -11.96% -0.78%

Provisionsfor liabilitiesand charges

8.63% -50.06% -1.07% -2.82% 17.29% -21.58% 0.00% -1.15%

Net assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Capital andreserves

Called-upshare capital

15.65% 11.66% 6.01% 70.98% 7.64% 2.79% 6.98% 2.19%

Sharepremium

0.00% 33.89% 68.18% 0.00% 0.00% 95.20% 251.91% 95.14%

Otherreserves

18.20% 12.47% 9.16% 0.00% 0.00% 13.45% 41.54% -0.47%

Profit andloss account

65.81% 33.20% 16.51% 29.02% 91.57% -11.46% -202.94% 3.14%

Equityshareholders'funds

99.66% 91.23% 99.86% 100.00% 99.21% 99.98% 100.00% 100.00%

Minorityinterests

0.34% 8.77% 0.14% 0.00% 0.79% 0.02% 0.00% 0.00%

Total capitalemployed

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Ratios 1 2 3 4 5 6 7 8

Return on Capital Employed -0.12% 3.16% 5.56% 33.63% 16.17% 16.29% -38.75% -7.44%

Asset Turnover 1.93 0.83 0.93 1.28 1.43 0.70 1.52 0.04

Stock Turnover Ratio(Days)

24.11 7.09 2.61 0.00 27.65 21.10 n/a n/a

Debtors Turnover Ratio(Days)

118.84 56.81 32.73 56.69 70.06 75.60 159.78 249.58

Acid Test Ratio 1.54 -0.72 -0.49 -0.65 0.79 -1.38 -5.13 19.58

Gearing Ratio 0.16 -3.25 -0.51 -1.65 -0.25 -0.17 -0.12 0.01

The industry/sector in which a business can operate must be taken from the following list:

Accounting Software Developer and Supplier●

Established International Airline●

Leisure and Hotels●

Manufacturer●

New Discount Airline●

Oil Extraction and Refining●

Retailer●



Scientific Research●

Did you get this?

You can now try Additional question 26.














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Additional question 26Ratio analysis is a powerful tool that accountants and analysts can use tounderstand how a business is being managed. Ratios can be groupedunder a number of different headings such as

profitability●

rate of return●

liquidity●

asset usage or activity●

Give a brief description of each of these headings and give examples oftwo ratios under each heading.

Did you get this?





http://www.bized.ac.uk/compfact/ratios/investor16_26.htm [25/09/2006 14:17:12]





















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You are here: Home > Company Info > Financial Ratio Analysis > What do we want ratio analysis totell us?


What do we want ratio analysis totell us?The key question in ratio analysis isn't only to get the right answer: forexample, to be able to say that a business's profit is 10% of turnover. Wehave to start working on ratio analysis with the following question in ourheads:

What are we trying to find out?

Isn't this just blether, won't the exam just ask me to tell them that profit is10% of turnover? Well, yes, but then they want to know that you are agood student who understands what it means to say that profit is 10% ofturnover.

We can use ratio analysis to try to tell us whether the business

is profitable1.

has enough money to pay its bills2.

could be paying its employees higher wages3.

is paying its share of tax4.

is using its assets efficiently5.

has a gearing problem6.

is a candidate for being bought by another company or investor7.

and more, once we have decided what we want to know then we candecide which ratios we need to use to answer the question or solve theproblem facing us.

There are ratios that will help us with question 1, but that wouldn't helpus with question 2; and ratios that are good for question 5 but not forquestion 4 - we'll see!

Let's look at the ratios we can use to answer these questions.

The Ratios

We can simply make a list of the ratios we can use here but it's muchbetter to put them into different categories. If we look at the questions inthe previous section, we can see that we talked about profits, havingenough cash, efficiently using assets - we can put our ratios intocategories that are designed exactly to help us to answer these questions.The categories we want to use, section by section, are:

Profitability: has the business made a good profit compared to its1.

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turnover?

Return Ratios: compared to its assets and capital employed, has thebusiness made a good profit?

2.

Liquidity: does the business have enough money to pay its bills?3.

Asset Usage or Activity: how has the business used its fixed andcurrent assets?

4.

Gearing: does the company have a lot of debt or is it financedmainly by shares?

5.

Investor or Shareholder6.

Not everyone needs to use all of the ratios we can put in these categoriesso the table that we present at the start of each section is in two columns:basic and additional.

The basic ratios are those that everyone should use in these categorieswhenever we are asked a question about them. We can use the additionalratios when we have to analyse a business in more detail or when wewant to show someone that we have really thought carefully about aproblem.

Users of Accounting Information

Now we know the kinds of questions we need to ask and we know theratios available to us, we need to know who might ask all of thesequestions! This is an important issue because the person asking thequestion will normally need to know something particular.

Of course, anyone can read and ask questions about the accounts of abusiness; but in the same way that we can put the ratios into groups, weshould put readers and users of accounts into convenient groups, too: let'slook at that now.

The list of categories of readers and users of accounts includes thefollowing people and groups of people:

Investors●

Lenders●

Managers of the organisation●

Employees●

Suppliers and other trade creditors●

Customers●

Governments and their agencies●

Public●

Financial analysts●

Environmental groups●

Researchers: both academic and professional●














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You are here: Home > Company Info > Financial Ratio Analysis > What do the Users of AccountsNeed to Know?


What do the Users of AccountsNeed to Know?The users of accounts that we have listed will want to know the sorts ofthings we can see in the table below: this is not necessarily everythingthey will ever need to know, but it is a starting point for us to think aboutthe different needs and questions of different users.

Investors to help them determine whetherthey should buy shares in thebusiness, hold on to the sharesthey already own or sell theshares they already own. Theyalso want to assess the ability ofthe business to pay dividends.

Lenders to determine whether their loansand interest will be paid whendue

Managers might need segmental and totalinformation to see how they fitinto the overall picture

Employees information about the stabilityand profitability of theiremployers to assess the abilityof the business to provideremuneration, retirementbenefits and employmentopportunities

Suppliers and other tradecreditors

businesses supplying goods andmaterials to other businesseswill read their accounts to seethat they don't have problems:after all, any supplier wants toknow if his customers are goingto pay their bills!

Customers the continuance of a business,especially when they have along term involvement with, orare dependent on, the business

Financial Ratio Analysis - What do the Users of Accounts Need to Know?














Governments and their agencies the allocation of resources and,therefore, the activities ofbusiness. To regulate theactivities of business, determinetaxation policies and as thebasis for national income andsimilar statistics

Local community Financial statements may assistthe public by providinginformation about the trendsand recent developments in theprosperity of the business andthe range of its activities as theyaffect their area

Financial analysts they need to know, for example,the accounting conceptsemployed for inventories,depreciation, bad debts and soon

Environmental groups many organisations now publishreports specifically aimed atinforming us about how they areworking to keep theirenvironment clean.

Researchers researchers' demands cover avery wide range of lines ofenquiry ranging from detailedstatistical analysis of the incomestatement and balance sheetdata extending over many yearsto the qualitative analysis of thewording of the statements




Financial Ratio Analysis - What do the Users of Accounts Need to Know?










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You are here: Home > Company Info > Financial Ratio Analysis > Which ratios will each of thesegroups be interested in?


Which ratios will each of thesegroups be interested in?On this page you should complete the table below (you can do this byprinting it out). In the left hand column there is a list of interest groupsone by one. Your job is to complete the right hand column by giving twoor three examples of ratios they might be interested in.

We have given an example of each to help you get started.

When you've filled in the gaps you will appreciate that it gives us someideas about the ratios that each of the users we have identified would beinterested in looking at.

Interest Group Ratios to watch

Investors

Return on Capital Employed

Lenders

Gearing ratios

Managers

Profitability ratios

Employees

Return on Capital Employed

Suppliers and other trade creditors

Liquidity

Customers

Profitability

Governments and their agencies

Profitability

Local Community

This could be a long andinteresting list

Financial Ratio Analysis - Which ratios will each of these groups be interested in?














Financial analysts

Possibly all ratios

Environmental groups

Expenditure on anti-pollutionmeasures

Researchers

Depends on the nature of theirstudy

Did you get this?














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You are here: Home > Company Info > Financial Ratio Analysis > Brief Review of the Accounts


Brief Review of the AccountsIt's all very well being armed with a list of ratios and people who mightwant to use them, but we need to know where to get all the figures to putinto those ratios, don't we?

Here's a reminder of the layout of a basic profit and loss account and of abasic balance sheet; we will look at more advanced versions later if weneed to. If it helps, why not print out these financial statements and havethem alongside you as you work through the ratios?

These accounts, for Tesco plc, the retailing giant, also show two sets oftitles: the titles on the left show the titles that you might be familiar withfrom your text books; the titles on the left are the ones we can find inpublished reports and accounts for a business. We have highlighted theterms and phrases that might be different in your books compared topublished accounts. We will use these different terms almostconstantly so you do need to read and understand them. We havehighlighted the differences for you in this table: (ahhh, aren't we kind?)

Tesco plc

Text book version Annual Report andAccounts Version

Consolidated profit andloss account

23 Feb 02 Consolidated profit andloss account

for the year ended £m for the year ended

Sales 23,653 Turnover

Cost of Sales -21866 Cost of sales

Gross Profit 1,787 Gross profit

Operating Expenses -465 Operating expenses

Net Profit before otherincome/costs

1,322 Operating profit

Other income/costs 32 Other costs/income

Net Profit before interestand taxation

1,354 Profit before interest andtaxation

Net interest receivable(payable)

-153 Net interest receivable(payable)

Financial Ratio Analysis - Brief Review of the Accounts














Net Profit on ordinaryactivities before taxation

1,201 Profit on ordinaryactivities before taxation

Tax on profit on ordinaryactivities

-371 Tax on profit on ordinaryactivities

Net Profit on ordinaryactivities after taxation

830 Profit on ordinaryactivities after taxation

Equity minority interests 0 Equity minority interests

Profit for the year 830 Profit for the financialperiod

Dividends -390 Dividends

Retained profit 440 Retained profit

Tesco plc

Text book version Annual Report andAccounts Version

Consolidated balance sheet 23 Feb 02 Consolidated balance sheet

Fixed assets £m Fixed assets

Intangible Assets 154 Intangible Assets

Tangible assets 11,032 Tangible assets

Investments 317 Investments

Total Fixed Assets 11,503 Total Fixed Assets

Current assets Current assets

Stock 929 Stock

Debtors 454 Debtors due within oneyear

Short term investments 225 Short-term investments

Cash at bank and in hand 445 Cash at bank and in hand

Total Current Assets 2,053 Total Current Assets

Creditors -4,809 Creditors: Amounts fallingdue within one year

Working Capital -2,756 Net current assets(liabilities)

Total assets less currentliabilities

8,747 Total assets less currentliabilities

Long Term Liabilities -2,741 Creditors: Amounts fallingdue after more than one

year

Provisions for liabilitiesand charges

-440 Provisions for liabilitiesand charges



Net assets 5,566 Net assets

Represented by Capital and reserves

Ordinary share capital 350 Called-up share capital

Share premium 2,004 Share premium

Other reserves 40 Other reserves

Profit and loss account 3,136 Profit and loss account

Ordinary shareholders'funds

5,530 Equity shareholders' funds

Minority interests 36 Minority interests

Capital Employed 5,566 Total capital employed














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You are here: Home > Company Info > Financial Ratio Analysis > Basic Profitability


Basic ProfitabilityFirst some basic profitability equations:

Gross Profit Margin =Gross Profit

* 100Turnover

Operating Profit Margin =Operating Profit

* 100Turnover

Net Profit Margin =Net Profit

* 100Turnover

Retained Profit Margin =Retained Profit

* 100Turnover

Profit Mark up =Profit

* 100Cost

What are you going to do if someone asks you to tell them whether abusiness is profitable or not?

Firstly, do you remember what profit is? Profit is the difference betweenturnover, or sales, and costs: that is,

profit = turnover - costs

One problem is that there are several ways of measuring profit: grossprofit; net profit before and after taxation; and retained profit are justsome of them. So, you didn't print out those Tesco accounts we showedyou did you? Well, look back at them to remind yourself of all thesenames for profit

A profit margin is one of the profit figures we just mentioned shown asa percentage of turnover. They always tell us how much profit, onaverage, our business has earned per £1 of turnover.

We already know from the ratios table that there are several ratios wecould use to calculate the profitability of a business. Next we'll discussgross and net profit margins.


Financial Ratio Analysis - Basic Profitability

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Financial Ratio Analysis - Basic Profitability










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You are here: Home > Company Info > Financial Ratio Analysis > Gross Profit Margin


Gross Profit MarginFirst some basic profitability equations:

Gross Profit Margin =Gross Profit

* 100Turnover

Remember:

Turnover = Sales

Gross Profit = Turnover - Cost of Sales

The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is avery simple idea and it tells us how much gross profit per £1 of turnover our business is earning.

Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. So weshould have a much higher gross profit margin than net profit margin.

Here are a few examples of the gross profit margins from differentbusinesses:

Leisure&

Hotels




AccountingSoftware

Grossprofit

9.64% 5.62% 35.14% 11.41% 27.46% 11.99% 47.52% 89.55%

See how the gross profit margins vary from business to business and from industry to industry. For example, theinternational airline has a gross profit margin of only 5.62% yet the accounting software business has a grossprofit margin of 89.55%.

If a company's raw materials and factory wages go up a lot, the gross profit margin will go down unless thebusiness increases its selling prices at the same time.




Financial Ratio Analysis - Gross Profit Margin






















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You are here: Home > Company Info > Financial Ratio Analysis > Net Profit Margin


Net Profit MarginFirst some basic profitability equations:

Net Profit Margin =Net Profit

* 100 =Profit before Interest and Taxation

* 100Turnover Turnover

Remember:

Net Profit = Gross Profit - Expenses

Why do we have two versions of this ratio - one for net profit and the other for profit before interest andtaxation? Well, in some cases, you will find they use the term net profit and in other cases, especially publishedaccounts, they use profit before interest and taxation. They both mean the same: look back at the financialstatements for Tesco where we compared different names for the same things.

The net profit margin ratio tells us the amount of net profit per £1 of turnover a business has earned. That is,after taking account of the cost of sales, the administration costs, the selling and distributions costs and all othercosts, the net profit is the profit that is left, out of which they will pay interest, tax, dividends and so on.

Here are a few examples of the net profit margins from the same businesses we saw in the gross profit marginsection:

Leisure&

Hotels




AccountingSoftware

NetProfit

7.36% 4.05% -10.48% 1.63% 10.87% 12.63% 7.55% 27.15%

Just like the gross profit margins, the net profit margins also vary from business to business and from industryto industry. When we compare the gross and the net profit margins we can gain a good impression of theirnon-production and non-direct costs such as administration, marketing and finance costs.

We saw that the international airline's gross profit margin was the lowest of this group of eight businesses atonly 5.62%; but look, its net profit margin is 4.05%, only a little bit lower than its gross profit margin. On theother hand, the discount airline's gross profit margin is 27.46% but its net profit margin is a lot less than that at10.87%. As we just said, these comparisons give us a great insight into the cost structure of these businesses.

Look at the software business too, a very high gross profit margin of 89.55% but a net profit margin of 27.15%.This is still high, but we can now see that the administration and similar expenses are very high whilst its costof sales and operating costs are relatively very low.




Financial Ratio Analysis - Net Profit Margin






















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You are here: Home > Company Info > Financial Ratio Analysis > Activity 2 - Carphone Warehouseprofit margin


Activity 2 - Carphone Warehouseprofit marginNow that we know a bit about two profitability ratios, let's see how to usethem. Here are parts of the profit and loss account for the CarphoneWarehouse plc; we will use that information to calculate its gross and netprofit margin.

Carphone Warehouse


for the year ended 31 March 2001 25 March 2000

£'000 £'000

Turnover 1,110,678 697,720

Cost of sales 830,126 505,738

Gross profit 280,552 191,982

Operating expenses 176,960 129,359


Other costs/income 6,555 -5,132


Let's put these ratios in a table:

Profitability Ratios for the Carphone Warehouse

Ratio Name Ratio Formula 31 Mar 01 25 Mar00

Profitability For the year ended 31Mar 01

Gross Profit Margin 280,552 ÷ 1,110,678*100 25.26%

Net Profit Margin 45,012 ÷ 1,110,678*100 4.05%

Look and see where these figures and ratios came from: don't do anythingelse until you have agreed with what it is in this table. We won't worryabout what these results mean just yet.

Financial Ratio Analysis - Activity 2 - Carphone Warehouse profit margin














Your Turn: Profitability 1

Did you see that for the year ended 25 March 2000, we didn't give youthe ratio results?

Well spotted! So, using the profit and loss account above, calculate thegross and net profit margins for the Carphone Warehouse for the yearended 25 March 2000, enter those ratios in the table above.

Did you get this?

Now we have some information to make comments on. The CarphoneWarehouse has given us almost the same profitability results for the twoyears. This suggests the business is being managed in a stable way.

From what we know about the mobile phone industry, we might say thatit is good that they have been so stable because the industry has beenchanging and growing so quickly.

We still can't say, though, whether a gross profit margin of about 25% isgood or bad and we can't say whether a net profit margin of around 4% isgood or bad: we still need even more information.

There are two ways to tell whether ratio result is good:

find ratio values for the business we are looking at for three, fouror more year, preferably more: this is known as trend analysis;

●

find ratio values for other businesses in the same industry: this isknown as inter firm comparison

●

We don't have more than two years' worth of data for the CarphoneWarehouse but we do have data for Vodafone, another business in themobile telephone industry. In the next activity we examine the data forVodafone ...




Financial Ratio Analysis - Activity 2 - Carphone Warehouse profit margin










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You are here: Home > Company Info > Financial Ratio Analysis > Activity 3 - Vodafone profit margin


Activity 3 - Vodafone profit marginUse the database in this section of this site to find the data you need tocalculate the gross and net profit margins for Vodafone plc ... be ready,there are some losses to deal with here.

You use this table to enter your results.

Vodafone plc

Profitability 31 Mar 2002 31 Mar 2001

Gross Profit Margin

Net Profit Margin

Did you get this?

Let's discuss what these results mean.

Firstly, Vodafone has, compared to the Carphone Warehouse, anapparently healthy gross profit margin: Vodafone's gross profit margin isaround 40% compared to the Carphone Warehouse's gross profit marginof around 25%.

However, look at the net profit margin: something strange is happening toVodafone because it has made a net loss for both of the two years. Take alook at Vodafone in the database for more information on what mighthave gone wrong. Vodafone's operating expenses have increased by £8billion over the year whilst turnover has increased by £6.2 billion; and thecost of sales has increased by £4.7 billion. The net effect of these changesis that losses have gone from -6.9 billion to -12.7 billion: a huge increasein the net loss.

So, even though the businesses are in the same industry, they have verydifferent results, we can say they have very different 'profiles'.

Why not try some more profitability questions?

Additional notes are available on advanced profitability or you can moveon to the Rate of Return section.




Financial Ratio Analysis - Activity 3 - Vodafone profit margin
























Financial Ratio Analysis - Activity 3 - Vodafone profit margin


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You are here: Home > Company Info > Financial Ratio Analysis > Profitability - Additional Question 1


Profitability - Additional Question 1Here is part of the profit and loss account for Marks & Spencer for twoyears. Compare these results by calculating the ratios named below anddiscuss what you find.

Gross profit margin.

Operating profit marginb.

Consolidated profit and lossfor the year

Marks & Spencer plc

2002 2001

£m £m

Turnover 8,135.4 8,075.7

Cost of sales -6,862.5 -7,154.3

Gross profit 1,272.9 921.4

Operating expenses -629.1 -480.9

Operating profit 643.8 440.5

Did you get this?

Why not try question 2?





Financial Ratio Analysis - Profitability - Additional Question 1

http://www.bized.ac.uk/compfact/ratios/profit_add1.htm [25/09/2006 14:17:18]





















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Profitability - Additional Question 2J Sainsbury plc has published the following two years' worth of turnoverand profit information. Calculate the following ratios and makecomments on what you find.



Net profit before interest and taxation marginc.

Consolidated profit and loss account J Sainsbury plc

for the year ended 30-Mar-02 30-Mar-01

£m £m

Turnover 17,162 17,244

Cost of sales -15,905 -16,082

Gross profit 1,257 1,162

Other selling and distribution costs -632 -629

Operating profit 625 533

Other costs/income -5 -20

Profit before interest and taxation 620 513

Did you get this?

Try question 3.


























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Profitability - Additional Question 3Go to the database and find the data for the Hilton Group plc andcalculate and comment on the following ratios for the two years forwhich data is available:




Did you get this?

Try question 4.



























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Profitability - Additional Question 4Go to the database and for any business you wish, calculate thefollowing ratios from the data you find there and comment on yourfindings:




Did you get this?




























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You are here: Home > Company Info > Financial Ratio Analysis > Advanced Profitability - Activity 5 -Carphone Warehouse


Advanced ProfitabilityFirst some advanced profitability equations:

PBIT =Profit before Interest and Taxation

* 100Turnover

PBT =Profit for the Year

* 100Turnover

Profit for the Year Margin =Net Profit

* 100Turnover

Administration costs % =Administration costs

* 100Turnover

Interest costs % =Interest costs

* 100Turnover

Overhead costs % =Total Overhead Costs

* 100Cost

Who uses these Profitability Ratios?

Look back at the table of users and what they use to see who might use aprofitability ratio... now think about why they use them and what theresults tell them.

Use the Profitability Ratios 2: more advanced

Now that we have worked through some of the basic profitability ratios,let's sharpen our pencils and get our calculators out and do some moreadvanced analysis...




Financial Ratio Analysis - Advanced Profitability - Activity 5 - Carphone Warehouse






















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You are here: Home > Company Info > Financial Ratio Analysis > Advanced Profitability - Activity 5 -Carphone Warehouse


Advanced Profitability - Activity 5 -Carphone WarehouseHere are the sales and profit data for the Carphone Warehouse, mobilecommunications company, for the latest two years. What we want toknow is whether the Carphone Warehouse is a profitable company ... andhow do we know?

Following the Profit and Loss Account for the Carphone Warehouse,below is the profitability section of our ratio table and we have includedthe name of the ratio, the formula and the workings for the year ended 31March 2001.

Carphone Warehouse


31 March 2001 25 March 2000

for the year ended £'000 £'000

Turnover 1,110,678 697,720

Cost of sales -830,126 -505,738

Gross profit 280,552 191,982

Operating expenses -176,960 -129,359


Other costs/income -21,004 -16,089



Profit on ordinary activities beforetaxation

47,397 25,104

Tax on profit on ordinary activities -8,675 -8,831

Profit on ordinary activities aftertaxation

38,722 16,273

Equity minority interests -563 54

Profit for the financial period 38,159 16,327

Dividends 0 0















Retained profit 38,159 16,327

Here is a list of the profitability ratios for the year ended 31 March 2001for the Carphone Warehouse. Read down this page and make sure youcan follow where all the figures come from as we work through theseratios... and make sure that you agree with the answers you see here...then you should repeat the calculations for the year ended 25 March2000.

Note: we don't have any administration and overhead costs so we can'tcalculate those ratios; but we do have interest and operating costs so wecan report those instead.

Here are the figures for the year ended 31 March 2001, put into ratioformat, that you should have extracted from the Profit and Loss Accountsand that you will then have used to calculate the ratio values... check thatyou agree with them and then repeat what you see there for the yearended 25 March 2000.

Carphone Warehouse For the year ended

Basic Ratios 31 Mar 01 25 Mar 00

Gross profit margin 280,552/1,110,678 * 100 =

Operating profit margin 660,16/1,110,678 * 100 =

Net profit margin 45,012/1,110,678 * 100 =

Retained profit margin 38,159/1,110,678 * 100 =

Profit mark up 280,552/830,126 * 100 =

Additional Ratios

Profit before interestand taxation %

45,012/11,10,678 * 100 =

Profit before taxation%

47,397/11,10,678 * 100 =

Profit for the year % 38,159/11,10,678 * 100 =

Operating costs % 176,960/1,110,678 * 100 =

Interest costs % 2,385/1,110,678 * 100 =

Here are the ratio answers for the year ended 31 March 2001



Gross profit margin 25.26%

Operating profit margin 5.94%

Net profit margin 4.05%

Retained profit margin 3.44%

Gross profit mark-up 33.80%



Additional Ratios

Profit before interest and taxation % 4.05%

Profit before taxation % 4.27%

Profit for the year % 3.44%

Operating costs % 15.93%

Interest costs % 0.21%

Did you get this?

Now we need to interpret what we've found: what do all of these ratioresults mean? In fact, these results are remarkably consistent from year toyear. Follow through our analysis of the Carphone Warehouse as itunfolds in this section of this site and keep referring back to theseprofitability ratios to see how they fit in with our overall view of thisbusiness.

You can try some advanced profitability questions or move on to the Rateof Return section.














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You are here: Home > Company Info > Financial Ratio Analysis > Advanced Profitability - AdditionalQuestion 5


Advanced Profitability - AdditionalQuestion 5Following on from question 1, go to the database and for Marks &Spencer, gather enough information to enable you to do the followingand, including your findings from question 1, comment on what you find:

Calculate the profit margin:

before interest and taxation.

before taxationb.

for the financial periodc.

Did you get this?

Try question 6.




Financial Ratio Analysis - Advanced Profitability - Additional Question 5























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Advanced Profitability - AdditionalQuestion 6J Sainsbury plc's published accounts contain the following historicalinformation. Use both ratios and graphs to highlight Sainsbury'sperformance over these five years.

You should prepare a graph or graphs that show:

Turnover trends.

Operating profit trendsb.

Group profit before tax trendsc.

1.

You should also identify:

Operating profit margin in total.

Group profit before tax marginb.

Interest payable as a percentage of turnoverc.

Operating profit trend segment by segmentd.

2.

Advanced - Estimate Sainsbury's total costs from the groupturnover and profit before taxation data and then prepare abreak-even chart that will help you to estimate Sainsbury's breakeven point.

Five year review(£m)

1991 1992 2000 2001 2002

Group turnover 15,496 16,378 17,414 18,441 18,206

Operating profit 790 794 651 628 677

Source of operatingprofit by segment

Sainsbury'sSupermarkets

751 711 518 470 515

Sainsbury's Bank -15 -5 3 13 22

Shaw's Supermarkets 37 52 79 115 137

Other operatingactivities

10 12 16 25 15

Profit sharing -39 -40 -9 -8 -10

3.


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Discontinuedoperations

46 64 44 13 -2

Interest payable -78 -50 -72 -76 -49

Profit/(Loss) fromjoint ventures

16 12 1 -3 -1

Group profit beforetaxation

728 756 580 549 627

Advanced - Estimate Tesco's total costs from the data that followsand then prepare a break-even chart that will help you to estimateits break-even point. Contrast this chart with the break even chartyou prepared for Sainsbury plc

Tesco Data forbreak even analysis

1998 1999 2000 2001 2002

Turnover 16,452 17,158 18,796 20,988 23,653

Profit for thefinancial year

532 606 674 722 830

Total Costs (Turnover- Profit for the year)

15,920 16,552 18,122 20,266 22,823

4.

Did you get this?

Move on to the Rate of Return section.





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You are here: Home > Company Info > Financial Ratio Analysis > Activity 2 - Carphone Warehouseprofit margin


Activity 2 - Carphone Warehouseprofit margin - answer

The Carphone Warehouse

Profitability 31 March 2001 25 March 2000

Gross Profit Margin 25.26% 27.52%

Net Profit Margin 4.05% 3.63%

Check again if you have a problem and ask your teacher/lecturer for helpif it's not clear.

Back to Activity 2 - Carphone Warehouse profit margin




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Activity 3 - Vodafone profit margin -answer

Vodafone plc

Profitability 31 Mar 2002 31 Mar 2001

Gross Profit Margin 41.14% 42.00%

Net Profit Margin -55.57% -46.05%

Check again if you have a problem: ask your teacher/lecturer for help ifit's not clear.

Back to Activity 3 - Vodafone profit margin





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Profitability - Additional Question 1answerSolution

Marks & Spencer Profitability 2002 2001

Gross profit margin 15.65% 11.41%

Operating profit margin 7.91% 5.45%

M&S has had a successful year in 2002 as its rates of gross and operatingprofitability have increased. Whilst turnover has increased only slightlyover the two year period, profits have grown more quickly.

Why not try question 2?





Financial Ratio Analysis - Profitability - Additional Question 1 answer

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Profitability - Additional Question 2answer

J SainsburyProfitability

30-Mar-02 30-Mar-01



Net profit margin 3.61% 2.97%

Although Sainsbury's have increased their profitability ratios, they havenot done so by very much. Compared to M&S, in question 1, theincreases in profitability for Sainsbury have been poor.

Try question 3.


























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Profitability - Additional Question 3answer

The Hilton GroupProfitability

31 December 2001 31 December 2000




The Hilton Group has had a worse 2001 than it had in 2000. By all threemeasures of profitability it is now worse off than it was before.

Try question 4.


























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Profitability - Additional Question 4answerSince you could have chosen any one of the businesses in the database, itis not feasible to try to give all of the answers here. Work throughquestions 1 - 3, check your answers and workings and then try question 4.You should then be confident that your work is accurate.




























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Advanced Profitability answer






Retained profit margin 3.44% 2.34%

Gross profit mark up 33.80% 37.96%

Additional Ratios

Profit before interest and taxation % 4.05% 3.63%

Profit before taxation % 4.27% 3.60%

Profit for the year % 3.44% 2.34%

Operating costs % 15.93% 18.54%

Interest costs % 0.21% -0.03%

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Advanced Profitability - AdditionalQuestion 5 answer

Marks & SpencerProfitability 2002 2001

Profit before interest and taxation % 3.91% 1.63%

Profit before taxation % 4.13% 1.80%

Profit for the year % 1.88% -0.07%

The results from question 1 were:



We can see that in every respect M&S has performed much better in 2002than it did in 2001. We might ask the question now, though, of whether2001 was a bad year for the business? After all, a good year could be theresult of sorting out a bad year. It can, of course, mean that M&S reallyhas just had a good year!

Try question 6.




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Advanced Profitability - AdditionalQuestion 6 answers1. The graph below shows the profit on the left hand vertical axis and the turnoveron the right hand vertical axis. As we can see whilst turnover has increased over thefive years until the final year, profits have tended to fall: they have recoveredslightly in the final year, however.

2. The ratio values, first of all, for the profitability measures are:

Sainsbury Profitability ratios 1991 1992 2000 2001 2002

Total operating profit margin 5.10% 4.85% 3.74% 3.41% 3.72%

Group profit before tax margin 4.70% 4.62% 3.33% 2.98% 3.44%

Interest payable as a percentage ofturnover

0.50% 0.31% 0.41% 0.41% 0.27%

In general, we can see that Sainsbury managed to hold its profitability rates steadyfor the period 2000 to 2002. However, profitability was better over the period 1998- 1999. Clearly, profit margins have suffered at Sainsbury, this could possibly be asa result of competition in the supermarket business (their largest segment) or as aresult of management problems. Our analysis of the trends in the segmentaloperating profit might help us to explain what is happening.

Financial Ratio Analysis - Advanced Profitability - Additional Question 6 answers

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We can see major changes in the profit mix at Sainsbury. Supermarkets are nowcontributing significantly less than they were five years ago; Sainsbury's bank isvirtually operating at break even point since its profits are so small; Shaw'ssupermarket division is returning ever increasing profits and the profit sharing partof the business is suffering as a result of the drop in the overall profitability of thebusiness.

3. Sainsbury's break-even chart:

Whilst we don't see a break-even point for Sainsbury, we can see that it may beheading for it! Profits are falling year by year and this break-even chart helps toillustrate that Sainsbury's total costs are almost equal to its turnover. From amathematical point of view, we can use a spreadsheet or statistical package to helpus to find out that Sainsbury's total fixed costs amount to -£1715.5 million per year:an unusual result since it's negative but that's not a surprise for data such as thiswhere we only have five data points for each value.

If you are familiar with the high-low method of calculating total fixed costs you canuse it to find that they are around -£1,670 million per year: a bit different from what



the spreadsheet told us; but not too far away. Again, the value is negative and againthat's unusual but the graph we have drawn is the important thing here,

As with the Sainsbury break-even chart, this break-even chart doesn't directly showus the break even point. However, if we were to extend the curves backwardstowards the vertical axis in the case of Tesco, we would see a break-even point forthem as the following version of Tesco's break-even chart shows - a break-evenpoint of around £6,750: to see whether you agree with this value, print out thisrevised chart and make your own estimate of the break-even point.

Notice again that because we are dealing with overall data for the business, ourestimate of total fixed costs is not reliable. In this case total fixed costs areestimated to be around £60 million. Check this estimate from the chart, if you printit out. Alternatively put the data into a spreadsheet and estimate the fixed costs fromthere.

Move on to the Rate of Return section.




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You are here: Home > Company Info > Financial Ratio Analysis > Return on Capital Employed Ratioanswer


Return on Capital Employed Ratioanswer

ROCE For the Carphone Warehouse

31 March 2001 Profit for the yearEquity shareholders' funds

38,159436,758

= 8.74%


16,27344,190

= 36.95%

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 6 - Vodafone ROCEanswer


Activity 6 - Vodafone ROCE answer

ROCE For Vodafone


-16,155130,573

= -12.37%


-9,885145,007

= -6.82%

Notice Vodafone's ROCE for both years is negative. This is not good.More than that, Vodafone's capital employed didn't grow between the twoyears; in fact, it shrank. Something else has gone wrong with Vodafone -maybe we will discover their problems as we work through the rest ofthese ratios.

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You are here: Home > Company Info > Financial Ratio Analysis > Return on Total Assets Ratioanswer


Return on Total Assets Ratioanswer

ROTA For the Carphone Warehouse

31 March 2001 Profit before Interest and TaxTotal Assets

45,012711,703

= 6.32%


25,300271,439

= 9.32%

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 7 - Vodafone ROTAanswer


Activity 7 - Vodafone ROTA answer

ROTA For Vodafone


-12,694162,900

= -7.79%


-6,909172,390

= -4.01%

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You are here: Home > Company Info > Financial Ratio Analysis > Rate of Return - AdditionalQuestion 7 answer


Rate of Return - Additional Question7 answer

2002 2001

Return on Capital Employed 4.97% -0.12%

Return on Total Assets 2.1% -0.071%

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You are here: Home > Company Info > Financial Ratio Analysis > Return on Fixed Assets answer


Return on Fixed Assets answer

ROFA For the Carphone Warehouse

31 March 2001 Profit before Interest and TaxFixed Assets

45,102396,175

= 11.36%

25 March 2000 Profit before Interest and TaxFixed Assets

25,300100,279

= 25.23%

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You are here: Home > Company Info > Financial Ratio Analysis > Return on Working Capital answers


Return on Working Capital answers

ROWC For the Carphone Warehouse

31 March 2001 Profit before Interest and TaxWorking Capital

45,01293,180

= 48.31%

25 March 2000 Profit before Interest and TaxWorking Capital

25,300-2,660

= -951.13%

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You are here: Home > Company Info > Financial Ratio Analysis > Additional Question 8 answer


Additional Question 8 answer

2002 2001

Return on Fixed Assets 9.28% 3.15%

Return on Working Capital 15.84% 8.58%

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Additional Question 9 answerWe would analyse the data we were given in a number of ways:

Graphically●

Calculate new ratios●

Calculate rates of growth ratios●

We chose to concentrate on the rates of growth ratios - the percentageincrease from year to year in each of the values we were given. Inaddition, we have highlighted exceptional performance by showing anygrowth that is negative in red and any growth that exceeds 50% in blue;all other values are in ordinary type. We chose the 50% threshold torepresent exceptional positive growth just for demonstration purposes -we could have chosen 20%, 175% or any other threshold that we considerto be exceptional.

Growth ratios 1998 - 99 1999 - 2000 2000 - 01 2001 - 02

Turnover 4.29% 9.55% 11.66% 12.70%

Turnover by segment

UK 5.77% 7.09% 8.34% 9.14%

Rest of Europe -21.20% 17.74% 27.80% 25.46%

Asia n/a 197.44% 85.34% 62.56%

Operating profit 5.81% 8.08% 12.56% 13.46%

Operating profit bysegment

UK 5.03% 8.05% 10.78% 10.27%

Rest of Europe 29.73% 6.25% 37.25% 28.57%

Asia n/a -50.00% -500.00% 625.00%

Profit on ordinaryactivities beforetaxation

10.79% 10.81% 12.97% 13.95%

Profit for the financialyear

13.91% 11.22% 7.12% 14.96%


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Return on shareholders'funds

0.00% -1.88% 8.61% 2.20%

Return on capitalemployed

-8.02% -6.40% 3.11% -3.01%

We can see some very good performances here in terms of sales andprofit: the Asian sector seems strong in terms of sales, albeit from arelatively small base in 1999, although Asian profitability is weak.

The rest of Europe is also relatively strong, meaning that the UK, thelargest segment in the business is pulling back overall growth.

Profitability is climbing steadily, although not exceptionally; but returnson shareholders' funds and capital employed are weak to poor.















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Additional Question 10 answerAgain, we have a number of possible ways of analysing the data we weregiven. We could have prepared some graphs and ratios but this time wehave chosen to compare the total with the UK by deriving simple ratios:Total ÷ UK for each relevant heading. These ratios provide us with anidea of how stable the relationships are as between the entire group andthe UK operations.

To highlight exceptional relationships this time, we have set the thresholdat the ratio of 1.2. That is if the group: UK ratio is greater than 1.2, wesee that as exception ... we could have chosen 1.1 or 1.5 ... Similarly, ifthe ratio has fallen below 1, we have highlighted that too.

The figures in red, greater than 1.2, show that the UK is falling behind therest of the group in terms of the numbers of stores and so on. Of course,this is not necessarily a bad thing since the business is diversifying nowand would like to see Europe and Asia becoming more important. Theseratios do show, though, that Tesco is undergoing significant change overthe five year period.

Ratio ofGroup to UK

1998 1999 2000 2001 2002

Number ofstores

1.264 1.285 1.282 1.311 1.343

Total sales area- 000 sq ft

1.200 1.337 1.423 1.579 1.726

Average storesize (sales area- sq ft)

0.917 1.015 1.068 1.131 1.161

Full timeequivalentemployees

1.192 1.211 1.244 1.335 1.417

UK retailproductivity £


149,798 151,138 156,426 161,161 165,347

Profit peremployee

8,755 8,771 9,160 9,649 10,002















Weekly salesper sq ft

18.92 19.06 19.30 19.67 20.49

Wages peremployee

15,079 15,271 15,600 16,087 16,821

Growth rates:UK

productivity

1998 - 99 1999 -2000

2000 - 01 2001 - 02


0.89% 3.50% 3.03% 2.60%

Profit peremployee

0.19% 4.43% 5.34% 3.66%

Weekly salesper sq ft

0.74% 1.26% 1.89% 4.17%

Wages peremployee

1.27% 2.15% 3.12% 4.56%

We should all be able to agree with the UK retail productivity figures wewere asked to provide. Here is how we got these results:

Turnover per employee UK turnover ÷ UK full time equivalentemployees

Profit per employee UK profit ÷ UK full time equivalentemployees

Weekly turnover per sq ft UK turnover ÷ total square feet ÷ 52 weeks

Finally, the growth rates derived from the UK productivity figures giveus a good idea of how well the UK's operations are doing vis-a-vis thegroup and so on.















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Additional Question 11 answerGo to the database and find the data for both British Airways plc andeasyJet plc that will allow you to calculate and comment on the followingratios:

British Airways easyJet

31 March02

31 March01

30-Sep-01 30-Sep-00

Return on CapitalEmployed

-7.04% 3.16% 11.98% 33.63%

Return on TotalAssets

0.57% 2.74% 7.50% 11.01%

easyJet's rates of return are far superior to those of British Airways (BA),the old, long established traditional airline. There are many reasons whyeasyJet should out perform BA, such as the fact that easyJet is a new,very dynamic company that is not facing stiff competition oncross-Atlantic routes. easyJet is a much smaller operation than BA with afleet of aircraft that is only a fraction of the size of BA's. Hence easyJet'sfixed costs ought to be far less than BA's and so on.

On the other hand, shouldn't we expect BA to enjoy economies of scaleand managerial efficiencies that should help it to perform better thaneasyJet?

A key factor in BA's results is the consequence of the bombing of theWorld Trade Centre in September 2001 and the effect that had on worldairline travel. At the time of writing, BA has just announced that thistragedy has only just begun to wear off. easyJet did not suffer the sameproblems as BA following the bombing, as it is an entirelyEurope-centred airline.

Finally, we can see that easyJet's ratios have fallen in value from 2000 to2001. 2002's results will be interesting from that point of view, to seewhether they have continued to fall.

ADVANCED

British Airways easyJet

31 March 02 31 March 01 30-Sep-01 30-Sep-00
















Return on FixedAssets

0.70% 3.37% 17.60% 13.96%

Return onWorking Capital

-12.15% -49.60% 21.40% -97.36%

These ratios for BA and easyJet shed more light on their performancesbut overall they give us the same message. However, easyJet'smanagement of its fixed assets and working capital have improvedsignificantly over the two years. BA's performance here is still lacklustre!















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You are here: Home > Company Info > Financial Ratio Analysis > Activity 9 - Vodafone Current Ratioanswer


Activity 9 - Vodafone Current Ratioanswer

Current Ratio For Vodafone


9,438: 13,455 0.70: 1


18,182: 12,377 1.47: 1

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The Acid Test Ratio answer

31 March2001

Current Assets -Stocks: CurrentLiabilities

(315,528-52,437): 222,348 1.18: 1

25 March2000


(171,160-51,842): 173,820 0.69: 1

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 10 - Vodafone Acid TestRatio answer


Activity 10 - Vodafone Acid TestRatio answer

Acid Test Ratio For Vodafone

31 March2002


(9,438-513): 13,455 0.66: 1

31 March2001


(18,182-316): 12,377 1.14: 1

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Liquidity - Additional question 12answer

Marks &Spencer

Safeway Sainsbury Tesco Thorntons

2002 2001 2002 2001 2002 2001 2002 2001 2001 2000

Currentratio

2.1 1.8 -0.5 -0.4 0.8 0.9 0.4 0.4 0.7 0.8

AcidTestratio

2.0 1.5 -0.2 -0.2 0.6 0.7 0.2 0.2 0.4 0.3

The first thing to notice here is that only M&S has a current ratio of around 2:1and none of them has an acid test ratio value of 1: 1 ... these are all highlysuccessful businesses and they are surviving on working capital ratios that areeven negative in the case of Safeway.

These results help us to appreciate that there is no such thing as an ideal ratiovalue EXCEPT that the business itself will set its own ratio targets and willwork to maintain or achieve them.

That is, M&S is presumably happy with a current ratio of around 2: 1, Safewayis presumably happy with a negative current ratio; and so on for all business inthis sample: all retailing business, by the way, in case you hadn't spotted!

As a matter of interest, the following table shows the supermarket industry'soverall working capital ratios for the years shown:

Supermarkets 1988/89 1989/90 1990/91

Current ratio 0.6 0.6 0.6

Acid Test ratio 0.3 0.3 0.4

Retailers have been working with such low working capital ratios for a longtime, then.

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Liquidity - Additional question 13answer

BAA British Airways easyJet

2002 2001 2002 2001 2001 2000

Current ratio 1.6 0.8 0.8 0.8 2.6 0.7

Acid Test ratio 1.6 0.7 0.8 0.7 2.6 0.7

We can see great variability in the working capital ratios now as BA haslow ratios and BAA has relatively high ratios, by the end of 2002anyway. Why has easyJet's ratios suddenly almost quadrupled, though?Let's look at the working capital section of its balance sheet:

easyJetCurrent assets

2001 2000

Stock 0 0


Short-term investments 0 0

Cash at bank and in hand 244,435 14,088


Creditors: Amounts falling due within one year -113,428 -84,483


easyJet has had a massive injection of cash - from an issue of sharecapital that it had not spent (on new aircraft) by the end of the year.

If we take out the additional cash, we can calculate its ratios again to giveus the underlying working capital situation. We'll assume that cash wouldhave been the same in 2001 as it was in 2000 for this exercise:

Revised ratios for 2001 easyJet

2001 2000

Current ratio 0.5 0.8

Acid Test ratio 0.5 0.7















We now see that easyJet's working capital management might be evenmore strict than it had been before, providing our estimate of its basiccash position is a good one.

In any case, all three transport-related businesses are managing theirworking capital aggressively by setting their ratios at such low levels.















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Liquidity - Additional question 14answerWhilst different industries have different characteristics, and thereforeshould have different working capital ratio values, we can't say thatretailing and transport in the UK are radically different from each other inthat both industry samples have the same values as each other.Nevertheless, the average current and acid test ratios do show somedifferences:

Industry Averages for the latest year Retail Transport


Acid Test ratio 0.6 1.7

Overall, and as we should expect, retailing, a cash based industry, hassignificantly lower working capital ratios.

Moreover, our discussions in questions 12 and 13 and our findings herehelp to prove that there can be no such thing as an overall ideal ratiovalue. However, we can begin to say that there might be an ideal, or atleast a target, value for a ratio value.






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You are here: Home > Company Info > Financial Ratio Analysis > Activity 11 - Vodafone total assetturnover ratio answer


Activity 11 - Vodafone total assetturnover ratio answer


31 Mar 2002 31 Mar 2001

for the year ended £m £m

Turnover 22,845 15,004



Total Asset Turnover Ratios 0.14 0.09


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You are here: Home > Company Info > Financial Ratio Analysis > Fixed Asset Turnover answer


Fixed Asset Turnover answerFill in the figures and calculate the ratio values

Fixed Asset Turnover Ratio for the Carphone Warehouse

31 March 2001 1,110,678396,175

2.80 times

25 March 2000 697,720100,279

6.96 times

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Current Asset Turnover answer

Current Asset Turnover Ratio for the Carphone Warehouse

31 March 2001

1,110,678315,528

3.52 times

25 March 2000

697,720171,160

4.08 times

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 12 - answer


Activity 12 - Vodafone Fixed andCurrent Asset Turnover ratiosanswer

31 Mar 2002 31 Mar 2001

Vodafone £m £m

Turnover 22,845 15,004



Fixed Asset Turnover Ratio for Vodafone

31 March 2002 22,845153,462

0.15 times

31 March 2001 15,004154,208

0.10 times

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Activity 13 - Capital EmployedTurnover answer


£m £m

Turnover 22,845 15,004

Capital and reserves

Called-up share capital 4,273 4,054

Share premium 52,044 48,292

Other reserves 99,862 97,938

Profit and loss account -25,606 -5,277


Capital Employed Turnover Ratio for Vodafone

31 March 2002 22,845130,573

0.17 times

31 March 2001 15,004145,007

0.10 times

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 14 - answer


Activity 14 - Vodafone WorkingCapital Turnover answer


£m £m

Turnover 22,845 15,004

Net current assets (liabilities) -4,017 5,805

Working Capital Turnover Ratio for Vodafone

31 March 2002 22,845-4,017

-5.69 times

31 March 2001 15,0045,805

2.58 times

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 15 - Vodafone StockTurnover answer


Activity 15 - Vodafone StockTurnover answer


£m £m

Cost of sales 13446 8702

Stock 513 316

Stock Turnover Ratio for the Vodafone

31 March 2002 513 13,446 ÷ 365

13.93 days

31 March 2001 316 8,702 ÷ 365

13.25 days

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 16 - Vodafone Debtors'Turnover Ratio answer


Activity 16 - Vodafone Debtors'Turnover Ratio answer


£m £m

Turnover 22,845 15,004


Debtors Turnover Ratio for Vodafone

31 March 2002 7,05322,845 ÷ 365

112.69 days

31 March 2001 4,58715,004 ÷ 365

111.59 days

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Additional question 15 solution

Sage Asset Usage 2001 2000

Total Asset Turnover 0.47 0.56

Stock Turnover 16.61 21.10

Debtors' Turnover 71.81 75.60

Creditors' Turnover 996.33 933.80

We know that it is difficult to comment on only two year's worth of ratioresults and the case of Sage, the accounting software developer andsupplier, is no exception!

Total asset turnover seems poor at much less than 1: 1, stock turnover isfine at around 17 days in 2002. Sage's credit control seems to be badlymanaged, though.

Debtors' turnover is very high at 72 days in 2002 and it was 76 days theyear before that. This means that Sage sells on credit and then waits foreight weeks to be paid. Is this good? Should Sage be doing somethingabout this situation? Look at what we said in the answer to question 12 -businesses will set their own ratio targets and it is probable that Sage ishappy with eight weeks and this is probably the industry norm for thiskind of business. If this is not true then Sage needs a new creditcontroller!

As far as creditors are concerned, we have a strange situation on the faceof it with payment terms of around three years! Unlikely don't you think?Let's look at their creditors' due within one year information in moredetail ... from the notes to the accounts, we have:

Creditors: amounts falling due within one year 2001 2000

Group £'000 £'000

Current portion of loans (note 15(a)) 7,584 8,131

Bank overdraft (note 24(b)) 10 402

Current portion of finance lease obligations (note15(b))

57 199


Amounts owed to Group undertakings 0 0

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Corporation tax 31,255 17,537

Other creditors, taxes and social security costs 12,188 11,238

Accruals 20,962 15,271

Deferred consideration on acquisitions and cost ofshare options assumed

19,039 16,499

Proposed dividend 3,583 3,250

138,479 110,178

So, only around a third of the creditors' falling due within one year relateto trade creditors - let's rework the ratio and see the true value:

2001 2000

Adjusted Creditors' turnover ratio 315.14 319.11

The ratio is still exceptionally high, at almost a year, so we still have aproblem as this result is unlikely to be true. However, there is no moreinformation in the annual report that can help us, so we can simplyconclude that we need more information but we're not going to get it!


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You are here: Home > Company Info > Financial Ratio Analysis > Creditors' Turnover: Advanced 2 -answer


Creditors' Turnover: Advanced 2 -answerYou need to multiply both sides of the equation by

X2001

365

Then cancelling and rearranging gives:

X2001 = 144,908 * 365 = 997,951.353

... that is, if the creditor days are 53 and the creditors' balance is£144,908, then the amounts invoiced by the business in the period mustbe £997,951.3

The second one ... did you get this?

45 days = Creditors = 75,948 =

Cost of sales X2001

365 365

X2001 = 75,948 * 365 = 616,022.753

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Activity 17 : Vodafone creditors'turnover ratio answer

2002 2001

Creditors: amounts falling due within one year £m £m

Bank loans, other loans and overdrafts 1,219 3,601

Commercial paper - -

Finance leases 100 10


Amounts owed to subsidiary undertakings - -

Amounts owed to associated undertakings 10 7

Taxation 3,107 2,540

Other taxes and social security costs 509 285

Other creditors 1,485 1,314

Accruals and deferred income 3,179 2,257

Proposed dividend 511 464

13,455 12,377

Trade Creditors Turnover Ratio for Vodafone

31 March 2002 3,33513,446 ÷ 365

53.28 days

31 March 2001 1,8998,702 ÷ 365

46.20 days

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Additional question 16 solution

Sage One Saturday The HiltonGroup

Paddy Powerplc

Fox KidsEurope

2001 2000 2001 2000 2001 2000 2000 1999 2001 2000

TotalAssetTurnover

0.47 0.56 12.03 3.62 0.82 0.84 0.05 0.47 0.44 0.37

StockTurnover

16.61 21.10 0.00 1.46 2.40 2.61 0.00 0.00 0.00 0.00

Debtors'Turnover

71.81 75.60 20.64 34.60 35.15 32.73 390.19 199.91 153.71 124.21

Creditors'Turnover

996.33 933.80 320.20 213.42 101.29 92.55 6198.90 n/a 829.56 497.32

As we would expect when we put together sets of ratios from a wide range of industries, we cansee a wide range of ratio values.

With the exception of One Saturday, (a dating agency,) asset turnover is poor for all businesses.Stock turnover rates for three of the businesses are zero. Can you say why this should be the case?Debtors' turnover and creditors' turnover ratios are all very high ... what else should we do to findthe true values for these two sets of ratios?

Well, we ought to know the answers to all of these questions now; and we have worked throughthis exercise to try to encourage you to realise that to get to the full truth, we need to look ataccounting data very carefully and critically. Secondly, we really need to appreciate that differentbusinesses and different industries all behave in different ways: the table above helps to provethat.







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Additional question 17 solutionEven though Paddy Power's data are in Euro, we can still calculate their financialratios: here are the basic ratios we have discussed so far.

Paddy Power plcProfitability

2000 1999


Operating profit margin -482.58% -285.20%

Net profit margin -488.22% -285.20%

Retained profit margin -404.55% -289.14%

Rate of Return

Return on Capital Employed -23.83% -269.22%

Return on Total Assets -24.79% -134.52%

Liquidity


Acid Test (Liquid) Ratio 7.7 1.3

Asset Usage

Total Asset Turnover 5.08% 47.17%

Stock Turnover 0.00 n/a


Creditors' Turnover 6198.90 n/a

The first point must be that Paddy Power plc is hardly very profitable is it? Apartfrom gross profit, Paddy Power plc has only recorded losses - big losses, too, as theratios clearly demonstrate.

A possible reason for such a poor performance in 2000 probably that it hasundergone a period of rapid growth. Take a look at its balance sheet and you willsee that it has grown from £653,000 to £40,335,000. At the same time turnover hasincreased from £605,000 to £2,376,000 whereas operating expenses have gonethrough the roof, so to speak!

We assume the Paddy Power has major redevelopment plans as it still has much ofthe cash it raised in a share issue in 2000: in cash and investments.















Paddy Power's rates of return ratios were a disaster in 1999 and whilst they aren'tperfect yet, they are improving. Because of the share issue and not having spent thatcash yet, the current and acid test ratios are huge for 2000. Notice they are the samesince the business does not have any stocks. This cash and investment mountain hashad its impact on total asset turnover too as that has dived from 48% to 5% from1999 to 2000.

Stock turnover is zero as they have no stocks and we would need more informationconcerning debtors and creditors to justify the massive payments periods we havefound. We don't have this additional information but clearly the figures quoted inthe balance sheet are not the trade debtors and creditors' figures.

Taking the five year, horizontal, data into account now we can get a better idea ofhow Paddy Power plc has come to be in the position it is now it.

It is clear from the profitability ratios that we calculated, see the table below, thatfrom 1999 onwards, Paddy Power plc has been going through a period ofadjustment, as until then it seemed to be in control of its profitability at least. Thegraph we have drawn for Paddy Power plc confirms this overall view of itsprofitability.

Net asset turnover, on the other hand, whilst as volatile as profitability, hasmaintained a good level. This is also shown on the graph below.

Paddy Power plcProfitability and

Net Asset Turnover Ratios

2001 2000 1999 1998 1997

operating profit margin 1.85% 2.93% 2.61% 2.88% 2.89%

profit before tax margin 1.97% 3.02% 2.62% 2.89% 2.92%

profit after tax margin 1.59% 2.21% 1.84% 1.85% 1.76%

Net asset turnover 15.00 13.91 16.64 13.70 14.51

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Additional question 18 solutionThe Jarvis Porter Group is a printing and manufacturing business and thefollowing table contains the basic ratios under the headings given in thequestion.

Jarvis Porter Group 2001 2000

Profitability


Operating profit margin -7.23% -23.51%

Net profit margin -7.23% -21.80%

Retained profit margin -6.17% -55.00%

Gross Profit mark up 15.90% 28.58%

Rate of Return

Return on Capital Employed -16.04% -98.28%

Return on Total Assets -11.18% -40.45%

Liquidity


Acid Test (Liquid) Ratio 1.1 1.1

Asset Usage

Total Asset Turnover 1.55 1.86

Stock Turnover 48.30 49.77


Creditors' Turnover 91.60 88.90

Along with several businesses in the database, the Jarvis Porter Grouphas been going through a period of change and possibly difficulty.Although its profitability ratios are largely negative, they have improvedover the two year period.

The five year summary data confirm the turmoil that this business hasbeen going through; although generally, the group has been growing andimproving its profit before tax margin and its rate of return. In place ofasset turnover we have shareholders' funds turnover and that is a little
















volatile suggesting uncertain overall management of the business, or avolatile time for the economy and the sector in which they operate.

Otherwise, the working capital and asset usage ratios all seem to bodewell for the group except that we have the usual problem with debtorsand creditors' turnover ratios probably being in need of revision if we hadthe additional data to work with.

Ratios 1997 1998 1999 2000 2001

Profit before taxmargin

13.00% 13.83% 4.70% -0.18% -7.15%

ROCE 44.29% 53.23% 21.28% -0.75% -18.61%

Shareholders' fundsturnover

3.41 3.85 4.53 4.07 2.60

Earnings/(loss) pershare (pence)

14.6 20 -5.4 -54.9 -7.7

Adjustedearnings/(loss) pershare (pence)

17.7 20 5.3 -3.4 -7.7

Equity dividends(pence)

7.35 7.8 3.75 70 0

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 18 : Vodafone gearinganswer


Activity 18 : Vodafone gearing answer

Vodafone 31 March 2002 31 March 2001

£m £m

Creditors: Amounts falling due after more than one year 13,118 11,235


Gearing Ratio for Vodafone

31 March 2002 13,118: 130,573 0.100: 1

31 March 2001 11,235: 145,007 0.077: 1

As with the Carphone Warehouse, Vodafone's results clearly demonstrate that equity funding is the preferredsource of finance for mobile telecommunications businesses with little danger of any threat from long term liabilityholders.

Here are some other Gearing 1 ratios to consider:

Leisure&

Hotels




AccountingSoftware

Gearing 1 51.08% 325.37% 0.78% 16.10% 164.82% 25.35% 79.39% 17.27%

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Additional questionSince you might choose any one of the many businesses in the database itis not possible to anticipate every answer. Here are a few, however, incase you have worked on these:

Gearing Debt:Equity

Latest year Previous year

Next plc 0.037 0.037

BP Amoco 0.207 0.254

Paddy Power plc 0.026 0.000

Clyde Marine 0.461 0.705

Probus Estates 0.147 0.467

Take a look at each of these businesses in the database, look at theirproducts or services and see whether you feel their gearing ratio is in linewith what you would expect of that product or service.




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Additional question 20 answerThis is an open-ended question for which it's impossible to anticipate allanswers. Check your results carefully and if you find a mistake, pleasecheck it carefully and correct it as best you can. Read the relevant bit ofwork again if necessary.





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Please note that whilst we may have used them before, or not, thisquestion specifically asks you for statistical and graphical analysis.


























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You are here: Home > Company Info > Financial Ratio Analysis > Earnings per share -answer


Earnings per share: EPS - answer

31 March 2001 25 March 2000

EPS 38,159,000833,000,000

£0.046 16,327,000600,000,000

£0.027

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You are here: Home > Company Info > Financial Ratio Analysis > Activity 19 : Vodafone EPS answer


Activity 19 : Vodafone EPS answer

VodafoneConsolidated Profit and Loss

Account

31 Mar 2002 31 Mar 2001

Profit for the financial period (£) -16,155,000,000 -9,885,000,000


65,012,501,146 61,334,032,162

31 Mar 2002 31 Mar 2001

EPS -16,155,000,00065,012,501,146

£-0.25 -9,885,000,00061,334,032,162

£-0.16

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Advanced note on EPSLook at the following extracts from the annual report and accounts of the CarphoneWarehouse and Vodafone.

From the Carphone Warehouse's annual report and accounts:

Financial highlightsEarnings per share 5.4p for 2001 and 3.8p for 200

Note that these EPS values don't agree with our calculations because the profitfigure they use is profit before exceptional items and amortisation. They haveadjusted their EPS figures for highlighting purposes.

On page 13 of their report, the Carphone Warehouse does say:

The Group's basic EPS rose by 85% from 2.7p to 5.0p. EPS before amortisation ofgoodwill and exceptional items rose by 42% from 3.8p to 5.4p per share.

So, figures we can agree with and the adjusted figure shown for special purposes.Contrast this with Vodafone.

From page 3 of the Vodafone report, here is a graph that Vodafone presents thatshows its EPS to be positive for each of the last five years, including 2001 and2002.

Financial Ratio Analysis - Advanced note on EPS

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Are our calculations wrong, then? No, here is why:

From page 27 of their report:

... Adjusted basic earnings per share is calculated after adjusting for goodwillamortisation and exceptional items. It is not a recognised measure under US GAAPbut is presented under UK GAAP in order to highlight underlying performance.

Vodafone is showing us the adjusted EPS in order to highlight the underlyingperformance! This can be dangerous if we believe that the real EPS is as shown intheir diagram.

On page 37 of their report, though, Vodafone does admit:

Basic loss per share, after goodwill and exceptional items, increased from a loss of16.09p for the year ended 31 March 2001 to a loss per share of 23.77p for the yearended 31 March 2002. The loss per share of 23.77p includes an increase in thecharge for the amortisation of goodwill from 19.32p per share, for the year ended31 March 2001, to a charge of 19.82p per share for the year.

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You are here: Home > Company Info > Financial Ratio Analysis > Dividends per Share: DPS answer


Dividends per Share: DPS answer

VodafoneConsolidated Profit and Loss

Account

31 Mar 2002 31 Mar 2001

Equity dividends (£) 1,025,000,000 887,000,000


65,012,501,146 61,334,032,162

31 Mar 2002 31 Mar 2001

DPS

1,025,000,00065,012,501,146

£0.0158 887,000,00061,334,032,162

£0.0145

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You are here: Home > Company Info > Financial Ratio Analysis > Dividend Yield answer


Dividend Yield answer

Vodafone dividend yield pence yield



Note: the current market share price was taken from the extract from TheTimes newspaper and relates to the share price at the close of business on17 September 2002.

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Activity 21 : Vodafone DividendYield answer




Source: Yahoo




Source: Reuters

Note: both sets of prices are as at mid morning on 20 September 2002and are taken from the sources indicated and since I took the priceswithin 10 minutes of each other, there has been no change to the pricehence the yield is the same for each source! These prices will change overtime so your answers will probably be different to the results you seehere.

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You are here: Home > Company Info > Financial Ratio Analysis > Dividend Cover answer


Dividend Cover answer

Consolidated profit and loss accountfor the year ended

31 Mar 2002 31 Mar 2001

£m £m

Profit for the financial period -16,155 -9,885

Dividends -1,025 -887

Vodafone dividend cover 31 Mar 2002 31 Mar 2001

Profit for the financial period -16,15515.76

-9,88511.14

Dividends -1,025 -887

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Activity 23 : Vodafone P/E ratioanswer

Vodafone pence P/E ratio

Current market share price 90.525.56

EPS 3.54

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Additional notes are available on advanced investor ratios.




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Interest cover answer

31 March 2001 25 March 2000

Profit before interest andtaxation

45,012

18.87

25,300

-129.08


Note: a positive value here means that the Carphone Warehouse is a netinterest earner.

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Activity 24 : Vodafone Interest coveranswer


31 Mar 2002 31 Mar 2001

£m £m

Profit before interest and taxation -12,694 -6,909

Net interest receivable (payable) -845 -1177

31 Mar 2002 31 Mar 2001

Profit before interest and taxation -12,69415.02

-6,9095.87

Net interest receivable (payable) -845 -1177

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Please note that whilst we may have used them before, or not, thisquestion specifically asks you for statistical and graphical analysis.






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Additional question 25 answerThis question is often best answered in a group of two or three people.Here are the answers anyway:

Company Industry

1 Retailer

2 Established International Airline

3 Leisure and Hotels

4 New Discount Airline

5 Oil Extraction and Refining

6 Accounting Software Developer and Supplier

7 Scientific Research

8 Manufacturer






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Additional question 26 answerHere are many of the ratios to choose from when answering this questionand a basic meaning, or brief description, of each group of ratios.

Ratio Name Basic Meaning

Profitability

Gross Profit MarginProfitability ratios are all percentagesand they tell us how much profit wehave made per £1 of turnover. Thereare many different profitability ratiosand here are just a few of them.

Operating Profit Margin

Profit Before Interest andTaxation Margin

Retained Profit Margin

Rate of Return Ratios

Return on Capital Employed Rates of return ratios show us howprofitability of a business relates to thecapital and assets employed, or used,by the business.

Return on Total Assets

Liquidity

Current Ratio Liquidity ratios give us an idea of howwell the business is able to pay all ofits bills over the short termAcid Test Ratio

Activity

Total Asset Turnover Ratio When we ask a businessman how wellhe has used the assets in his business,these are the ratios he would calculatein order to answer our question. Thereare many of these ratios and each onetells us a little bit about the business'sefficiency in using its assets

Fixed Asset Turnover Ratio

Stock Turnover Ratio

Debtors Turnover Ratio

Creditors Turnover Ratio

Gearing

Debt: Equity The gearing ratios tell us whether theshareholders are really in control oftheir own business or whether thenbanks or debenture holders might be.

Debt: Debt + Equity



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You are here: Home > Company Info > Financial Ratio Analysis > Which ratios will each of thesegroups be interested in?


Which ratios will each of thesegroups be interested in? - answer

Interest Group Ratios to watch

Investors Return on Capital EmployedEarnings per ShareDividends per ShareDividend YieldInterest CoverLiquidityP/E Ratio

Lenders Gearing ratiosInterest coverDividend payout ratioDividend CoverDividend Yield

Managers Profitability ratiosAsset turnover ratiosStock, debtors and creditorsturnover ratiosLiquidity ratiosInvestor ratios

Employees Return on Capital EmployedProfitabilityCash flow figuresInvestor ratios

Suppliers and other trade creditors ProfitabilityLiquidityCreditors' turnoverWorking capital management

Customers ProfitabilityLiquidityReturn on Capital Employed

Governments and their agencies ProfitabilityLiquidityReturn on Capital Employed


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Local community This could be a long andinteresting list

Financial analysts The majority of all ratios

Environmental groups Expenditure on anti pollutionschemesExpenditure on animal basedresearchDonations to charities andpolitical organisations

Researchers Depends on the purpose of theirstudy

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