Summary
Summary Financial Statement Analysis
- Institution
- University Of Cape Town (UCT)
Summary of 2 pages for the course Corporate Financial Management at UCT (Complete summary)
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By: maryamgopal • 3 year ago
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MODULE 2: FINANCIAL STATEMENT ANALYSISObjectives of Financial Analysis
To enable various users to make informed decisions about a firm’s future prospects.
The major users:
Equity investors
- Assess return on capital invested
- Assess capital preservation (risk assessment)
Credit grantors
- Assess ability to pay interest, accounts payable and capital
Management
- Monitor their own firm’s performance and planning
- Help understand the policies of competitors
- Check on the financial health of customers
Others (employees, analysts, auditors, SARS and public)
Financial Ratios
Profitability
1. Gross Profit Margin Gross Profit x100/Sales
Low margins = product line losses; High margins
customer losses
2. Operating Profit Margin Profit before interest & tax/Revenue
Higher = effective control of operating costs
3. Net Profit Margin Net profit after tax/Revenue
Affected by GPM, operating expenses & tax expenses
4. Return on Total Assets Profit before interest & tax/Total Assets
How much firm has generated for every R100 of assets
5. Return on Equity Profit after tax/Total Equity
Efficiency (asset management or turnover)
1. Total Asset Turnover Total Revenue/Total Assets
How much revenue was generated for every R1
invested in assets
2. Days Inventory on Hand [Inventory (EOY) x 365]/Cost of Sales
Number of days inventory took to sell
3. Inventory Turnover Cost of Sales/Inventory (EOY) OR 365/DIOH
Indicator of efficient inventory management
4. Accounts Receivable Days [Accounts Receivable (EOY) x 365]/Credit Sales
Average number of days it takes to collect cash
from debtors
5. Accounts Receivable Credit Sales/Accounts Receivable (EOY)
Turnover How efficiently AR is managed/speed at which firm
converts AR to cash
6. Accounts Payable Days [Accounts Payable(EOY) x 365]/Credit Purchases
Average number of days it take to pay creditors
Liquidity (short-term solvency)
1. Current Ratio Current Assets/Current Liabilities
Too low – high liquidity; too high - inefficient
2. Quick/Acid-test Ratio [Current Assets – Inventory]/Current Liabilities
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