A presentation which focuses on the analysis and interpretation of financial reports.

1. Financial Reports and Ratios Analytical Techniques

8. Ratios

20. Expense Groups to Sales Indicates the amount of the sales dollars needed to cover expenses. Compare result to industry benchmarks to determine suitability of business performance.

22. Recommendations Investigate unusually high or low expense items to ensure errors have not been made in recording. Increase net profit while retaining expense levels at current level. Decrease expenses while retaining or improving sales.

23. Rate of Return on Equity Ratio Indicates the return to the owner on the amount invested in the business Aim for a return of, around, 14% which allows funding for future growth and a return on investment.

29. Recommendations Increase net profit. Decrease average total assets – ensure optimum level of assets retained. Carefully consider potential of assets prior to acquisition.

30. Financial Stability Financial Stability indicates the short-term liquidity and long-term solvency of an enterprise.

32. Current Ratio Measures the ability of the enterprise to meet its short-term financial obligations; that is, commitments due in the current financial year. Ideal result = 2:1; for every $1 of CL (short-term financial obligations) business carries $2 CA to cover.

34. Recommendations Pay off bank overdrafts as soon as possible. Investigate alternative suppliers (accounts payable) to lower cost of stock. Invest ‘idle funds’ in areas likely to attract a higher return.

35. Quick Ratio Indicates the entity ’s ability to meet its immediate financial obligations such as accounts payable from its immediately accessible or quickly converted assets such as cash and accounts receivable. Does not include inventories and prepayments because they are difficult to convert to cash in the short term. Bank overdrafts are usually not due in the next accounting period, therefore; not included. Ideal result = 1:1; for every $1 of CL (immediate financial obligations, not including bank overdraft) business has $1 CA (not including stock/prepaids) to cover.

37. Recommendations Consider level of accounts payable Ensure cash flow is optimal – accounts receivable pay on time. Maintaining adequate levels of cash rather than excessive (better invested in higher returning applications)

38. Equity Ratio Indicates the extent to which the owner has financed the business ’s assets as opposed to using alternative source of finance – borrowings (debt). Mirror of Debt Ratio – both ratios should equal 100%. A = L + Oe Ideal is 50% - that is business assets are half funded by equity and half by debt. Finance companies will “move in” when ratio reaches 70:30 debt to equity.

40. Recommendations Heavy dependence on equity indicates business is not highly geared. (Gearing refers to level of debt). In times of low interest rates on money market and if business is performing well owner should invest further in business. Decrease debt through repayment to achieve 50:50 balance of debt/equity. Minimise need to carry hold/own large assets.

41. Debt Ratio Indicates the way in which business is financed and extent of borrowing in relation to assets.

43. Recommendations Heavy dependence on debt indicates business is highly geared. Places high burden on business to meet repayments. Repay as soon as possible. Carefully consider any further investment in future beyond the 50:50 balance of debt/equity.

44. Effectiveness of Management Policies Management effectiveness is a measurement of how successfully managers have been in directing and maintaining the set policies of an enterprise.

46. Turnover of Accounts Receivable Ratio Measures the efficiency of the business in managing its accounts receivable. Business operations are dependant upon the collection of this debt. Cash flow into the buisness is required to maintain operations eg pay wages, bills etc.

50. Turnover of Inventories Ratio Measures how efficiently the inventory of the business is being managed. Comparison against industry averages will indicate acceptable turnover.

52. Recommendations Stock at appropriate levels – JIT Investigate methods of lowering COGS. Target customers more effectively – marketing.