In our introduction to interpreting financial information we identified five main areas for investigation of accounting information. The use of ratio analysis in each of these areas is introduced below:
Profitability Ratios
These ratios tell us whether a business is making profits - and if so whether at an acceptable rate. The key ratios are:
Gross Profit Margin: [Gross Profit / Revenue] x 100 (expressed as a percentage)
This ratio tells us something about the business's ability consistently to control its production costs or to manage the margins its makes on products its buys and sells. Whilst sales value and volumes may move up and down significantly, the gross profit margin is usually quite stable (in percentage terms). However, a small increase (or decrease) in profit margin, however caused can produce a substantial change in overall profits.
Operating Profit Margin: [Operating Profit / Revenue] x 100 (expressed as a percentage)
Assuming a constant gross profit margin, the operating profit margin tells us something about a company's ability to control its other operating costs or overheads.
Return on capital employed ("ROCE") : Net profit before tax, interest and dividends ("EBIT") / total assets (or total assets less current liabilities
ROCE is sometimes referred to as the "primary ratio"; it tells us what returns management has made on the resources made available to them before making any distribution of those returns.
Efficiency ratios
These ratios give us an insight into how efficiently the business is employing those resources invested in fixed assets and working capital.
Sales /Capital Employed : Sales / Capital employed
A measure of total asset utilisation. Helps to answer the question - what sales are being generated by each pound's worth of assets invested in the business. Note, when combined with the return on sales (see above) it generates the primary ratio - ROCE.
Sales or Profit / Fixed Assets: Sales or profit / Fixed Assets
This ratio is about fixed asset capacity. A reducing sales or profit being generated from each pound invested in fixed assets may indicate overcapacity or poorer-performing equipment.
Stock Turnover: Cost of Sales / Average Stock Value
Stock turnover helps answer questions such as "have we got too much money tied up in inventory"?. An increasing stock turnover figure or one which is much larger than the "average" for an industry, may indicate poor stock management.
Credit Given / "Debtor Days": (Trade debtors (average, if possible) / (Sales)) x 365)
The "debtor days" ratio indicates whether debtors are being allowed excessive credit. A high figure (more than the industry average) may suggest general problems with debt collection or the financial position of major customers.
Credit taken / "Creditor Days": ((Trade creditors + accruals) / (cost of sales + other purchases)) x 365
A similar calculation to that for debtors, giving an insight into whether a business i taking full advantage of trade credit available to it.
Liquidity Ratios
Liquidity ratios indicate how capable a business is of meeting its short-term obligations as they fall due:
Current Ratio:Current Assets / Current Liabilities
A simple measure that estimates whether the business can pay debts due within one year from assets that it expects to turn into cash within that year. A ratio of less than one is often a cause for concern, particularly if it persists for any length of time.
Quick Ratio (or "Acid Test": Cash and near cash (short-term investments + trade debtors)
Not all assets can be turned into cash quickly or easily. Some - notably raw materials and other stocks - must first be turned into final product, then sold and the cash collected from debtors. The Quick Ratio therefore adjusts the Current Ratio to eliminate all assets that are not already in cash (or "near-cash") form. Once again, a ratio of less than one would start to send out danger signals.
Stability Ratios
These ratios concentrate on the long-term health of a business - particularly the effect of the capital/finance structure on the business:
Gearing: Borrowing (all long-term debts + normal overdraft) / Net Assets (or Shareholders' Funds)
Gearing (otherwise known as "leverage") measures the proportion of assets invested in a business that are financed by borrowing. In theory, the higher the level of borrowing (gearing) the higher are the risks to a business, since the payment of interest and repayment of debts are not "optional" in the same way as dividends. However, gearing can be a financially sound part of a business's capital structure particularly if the business has strong, predictable cash flows.
Interest cover : Operating profit before interest / Interest
This measures the ability of the business to "service" its debt. Are profits sufficient to be able to pay interest and other finance costs?
Investor Ratios
There are several ratios commonly used by investors to assess the performance of a business as an investment:
Earnings per share ("EPS"): Earnings (profits) attributable to ordinary shareholders / Weighted average ordinary shares in issue during the year
A requirement of the London Stock Exchange - an important ratio. EPS measures the overall profit generated for each share in existence over a particular period
Price-Earnings Ratio ("P/E Ratio"): Market price of share / Earnings per Share
At any time, the P/E ratio is an indication of how highly the market "rates" or "values" a business. A P/E ratio is best viewed in the context of a sector or market average to get a feel for relative value and stock market pricing.
Dividend Yield: (Latest dividend per ordinary share / current market price of share) x 100
This is known as the "payout ratio". It provides a guide as to the ability of a business to maintain a dividend payment. It also measures the proportion of earnings that are being retained by the business rather than distributed as dividends
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values and vision
Nhãn: Finance
Values form the foundation of a business’ management style. Values provide the justification of behaviour and, therefore, exert significant influence on marketing decisions.
Consider the following examples of a well-known business – BT Group - defining its values:
BT's activities are underpinned by a set of values that all BT people are asked to respect:
- We put customers first
- We are professional
- We respect each other
- We work as one team
- We are committed to continuous improvement.These are supported by our vision of a communications-rich world - a world in which everyone can benefit from the power of communication skills and technology.A society in which individuals, organisations and communities have unlimited access to one another and to a world of knowledge, via a multiplicity of communications technologies including voice, data, mobile, internet - regardless of nationality, culture, class or education.Our job is to facilitate effective communication, irrespective of geography, distance, time or complexity.Source: BT Group plc web site
Why are values important in marketing?
Many Japanese businesses have used the value system to provide the motivation to make them global market leaders. They have created an obsession about winning that is communicated at all levels of the business that has enabled them to take market share from competitors that appeared to be unassailable.
For example, at the start of the 1970’s Komatsu was less than one third the size of the market leader – Caterpillar – and relied on just one line of smaller bulldozers for most of its revenues. By the late 1980’s it had passed Caterpillar as the world leader in earth-moving equipment. It had also adopted an aggressive diversification strategy that led it into markets such as industrial robots and semiconductors.
If “values” shape the behaviour of a business, what is meant by “vision” and how does it relate to marketing planning?
To succeed in the long term, businesses need a vision of how they will change and improve in the future. The vision of the business gives it energy. It helps motivate employees. It helps set the direction of corporate and marketing strategy.
What are the components of an effective business vision? Davidson identifies six requirements for success:
- Provides future direction- Expresses a consumer benefit- Is realistic- Is motivating- Must be fully communicated- Consistently followed and measured 0 nhận xét
Consider the following examples of a well-known business – BT Group - defining its values:
BT's activities are underpinned by a set of values that all BT people are asked to respect:
- We put customers first
- We are professional
- We respect each other
- We work as one team
- We are committed to continuous improvement.These are supported by our vision of a communications-rich world - a world in which everyone can benefit from the power of communication skills and technology.A society in which individuals, organisations and communities have unlimited access to one another and to a world of knowledge, via a multiplicity of communications technologies including voice, data, mobile, internet - regardless of nationality, culture, class or education.Our job is to facilitate effective communication, irrespective of geography, distance, time or complexity.Source: BT Group plc web site
Why are values important in marketing?
Many Japanese businesses have used the value system to provide the motivation to make them global market leaders. They have created an obsession about winning that is communicated at all levels of the business that has enabled them to take market share from competitors that appeared to be unassailable.
For example, at the start of the 1970’s Komatsu was less than one third the size of the market leader – Caterpillar – and relied on just one line of smaller bulldozers for most of its revenues. By the late 1980’s it had passed Caterpillar as the world leader in earth-moving equipment. It had also adopted an aggressive diversification strategy that led it into markets such as industrial robots and semiconductors.
If “values” shape the behaviour of a business, what is meant by “vision” and how does it relate to marketing planning?
To succeed in the long term, businesses need a vision of how they will change and improve in the future. The vision of the business gives it energy. It helps motivate employees. It helps set the direction of corporate and marketing strategy.
What are the components of an effective business vision? Davidson identifies six requirements for success:
- Provides future direction- Expresses a consumer benefit- Is realistic- Is motivating- Must be fully communicated- Consistently followed and measured 0 nhận xét
Legal structures
Nhãn: Business
The legal structure a business chooses is fundamental to the way it operates. This legal framework determines who shares in the profits and losses, how tax is paid, where legal liabilities rests. It also determines the nature of a business' relationships with business associates, investors, creditors and employees.
There are three options for a business' legal structure:
(1) Sole TraderAn individual who runs an unincorporated business on his or her own. Sometimes otherwise known as a "sole proprietor" or (in the case of professional services) a"sole practitioner".
The sole trader structure is the most straight-forward option. The individual is taxed under the Inland Revenue's Self-Assessment system, with income tax calculated after deduction for legitimate business expenses and personal allowances. A sole trader is personally liable for the debts of the business, but also owns all the profits.
(2) PartnershipA partnership is an association of two or more people formed for the purpose of carrying on a business. Partnerships are governed by the Partnership Act (1890). Unlike an incorporated company (see below), a partnership does not have a "legal personality" of its own. Therefore the Partners are liable for any debts of the business.
Partner liability can take several forms. General Partners (the usual situation) are fully liable for business debts. Limited Partners are limited to the amount of investment they have made in the Partnership. Nominal Partners also sometimes exist. These are people who allow their names top be used for the benefit of the partnership, usually for remuneration, but they do not get a share of the partnership profits.
The operation of a partnership is usually governed by a "Partnership Agreement". The specific terms of this agreement are determined by the partners themselves, covering issues such as:
- Profit-sharing - normally, partners share equally in the profits;- Entitlement to receive salaries and other benefits in kind (e.g. cars, health insurance)- Interest on capital (the amount invested in the partnership)- Arrangements for the introduction of new partners- Arrangements for retiring partners- What happens when the partnership is dissolved
(3) Incorporated CompanyIncorporating business activities into a company confers life on the business as a "separate legal person". Profits and losses are the company's and it has its own debts and obligations. The company continues despite the resignation, death or bankruptcy of management or shareholders. A company also offers the best vehicle for expansion and the provision of outside investors.
There are four main types of company:
(1) Private company limited by shares - members' liability is limited to the amount unpaid on shares they hold
(2) Private company limited by guarantee - members' liability is limited to the amount they have agreed to contribute to the company's assets if it is wound up.
(3) Private unlimited company - there is no limit to the members' liability
(4) Public limited company (PLC) - the company's shares may be offered for sale to the general public and members' liability is limited to the amount unpaid on shares held by them.
Specific arrangements are required for public limited companies. The company must have a name ending with the initials "plc" and have an authorised share capital of at least £50,000 of which at least £12,5000 must be paid up. The company's "Memorandum of Association" must comply with the format in Table F of the Companies Regulations (1985). The company may offer shares and securities to the public. In return for this right to issue shares publicly, a public limited company is subject to much stricter regulation, particularly in relation to the publication of financial information.
The vast majority of companies incorporated in the UK and in other major industrialised countries are private companies limited by shares - "private limited liability companies".
The Office of the Registrar of Companies" (based in Cardiff) maintains a record of all UK private and public companies, their shareholders, directors and financial information. All this information has to be provided by Companies by law and is available to any member of the public for a small charge. You can search the Companies House databases at http://ws2.companieshouse.gov.uk/index.shtml 0 nhận xét
There are three options for a business' legal structure:
(1) Sole TraderAn individual who runs an unincorporated business on his or her own. Sometimes otherwise known as a "sole proprietor" or (in the case of professional services) a"sole practitioner".
The sole trader structure is the most straight-forward option. The individual is taxed under the Inland Revenue's Self-Assessment system, with income tax calculated after deduction for legitimate business expenses and personal allowances. A sole trader is personally liable for the debts of the business, but also owns all the profits.
(2) PartnershipA partnership is an association of two or more people formed for the purpose of carrying on a business. Partnerships are governed by the Partnership Act (1890). Unlike an incorporated company (see below), a partnership does not have a "legal personality" of its own. Therefore the Partners are liable for any debts of the business.
Partner liability can take several forms. General Partners (the usual situation) are fully liable for business debts. Limited Partners are limited to the amount of investment they have made in the Partnership. Nominal Partners also sometimes exist. These are people who allow their names top be used for the benefit of the partnership, usually for remuneration, but they do not get a share of the partnership profits.
The operation of a partnership is usually governed by a "Partnership Agreement". The specific terms of this agreement are determined by the partners themselves, covering issues such as:
- Profit-sharing - normally, partners share equally in the profits;- Entitlement to receive salaries and other benefits in kind (e.g. cars, health insurance)- Interest on capital (the amount invested in the partnership)- Arrangements for the introduction of new partners- Arrangements for retiring partners- What happens when the partnership is dissolved
(3) Incorporated CompanyIncorporating business activities into a company confers life on the business as a "separate legal person". Profits and losses are the company's and it has its own debts and obligations. The company continues despite the resignation, death or bankruptcy of management or shareholders. A company also offers the best vehicle for expansion and the provision of outside investors.
There are four main types of company:
(1) Private company limited by shares - members' liability is limited to the amount unpaid on shares they hold
(2) Private company limited by guarantee - members' liability is limited to the amount they have agreed to contribute to the company's assets if it is wound up.
(3) Private unlimited company - there is no limit to the members' liability
(4) Public limited company (PLC) - the company's shares may be offered for sale to the general public and members' liability is limited to the amount unpaid on shares held by them.
Specific arrangements are required for public limited companies. The company must have a name ending with the initials "plc" and have an authorised share capital of at least £50,000 of which at least £12,5000 must be paid up. The company's "Memorandum of Association" must comply with the format in Table F of the Companies Regulations (1985). The company may offer shares and securities to the public. In return for this right to issue shares publicly, a public limited company is subject to much stricter regulation, particularly in relation to the publication of financial information.
The vast majority of companies incorporated in the UK and in other major industrialised countries are private companies limited by shares - "private limited liability companies".
The Office of the Registrar of Companies" (based in Cardiff) maintains a record of all UK private and public companies, their shareholders, directors and financial information. All this information has to be provided by Companies by law and is available to any member of the public for a small charge. You can search the Companies House databases at http://ws2.companieshouse.gov.uk/index.shtml 0 nhận xét
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