SU 4 - Analysis _ Interpretation _Lynette_.ppt

NOTES

1. Analysis& Interpretation
•Study unit 4
•Correia chapter 5

2. Admin
•Assignment analysis & interpretation
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3. Analysis and interpretation
Learning outcomes
•Afterthecompletionof thechapteryoushouldbeableto:
–Calculate and interpret a full range of accounting ratios;
–Analyse Financial statements (in the context of the information
provided in the statements and reports) in order to report on the
performance and position;
–To prepare a brief report about the results of an analysis of financial
statements;
–Discuss the limitations of ratio analysis.
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4. Analysis and interpretation
Analysis & Interpretation
•Financial statements and the analysis and interpretationthereof
is important to provide users of financial statements information
to make good economic decisions.
•The most common source is the company's annual report
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5. Analysis and interpretation
Analysis & Interpretation
Who are the users of financial statements?
•Equity investors (provide capital)
•credit providers
•management
•employees
•possible acquirer
•auditors
•other parties: Customer, SARS
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6. Analysis and interpretation
Analysis & Interpretation
Approaches to financial statements
Techniques include:
1.Comparison between years and trend analysis
2.Index analysis
3.Common size analysis
4.Ratio analysis
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7. Analysis and interpretation
Analysis & Interpretation
1.Comparison between years and trend analysis
•This is an overview of the changes from year to year
•Trends can be calculated which may indicate expectations of
change.
•A Minimum of 5 years are needed to do trend analysis.
72008 2009 2010 2011 2012
Sales 100000110000 99000 80000 95000
+10% -10%-19.20%+18.75%

8. Analysis and interpretation
Analysis & Interpretation
2. Index analysis
•Table 5.4 and 5.5 Correia
•Compare to base year (100%)
82011 2012 2011 2012
100000120000 100 120
-60000-70000 100 116.67
40000 50000 100 125
20000 15000 100 75
-35000-45000 100 129
25000 20000 100 80
Sales
Cost of sales
Gross profit
Interest income
Operating expenses
Net profit before tax

9. Analysis and interpretation
Analysis & Interpretation
3. Common size analysis
•Sales and total assets as 100%
•Correiatable 5.6
92012 2012
120000 100
-70000 58.33
50000 41.67
15000 12.5
-45000 37.5
20000 16.67Net profit before tax
Sales
Cost of sales
Gross profit
Interest income
Operating expenses

10. Analysis and interpretation
Analysis & Interpretation
4. Ratio analysis
–Video
–Most commonly used
–Show a relationship between a quantity and another
–Can be shown as 0.8: 1, or 80%
–Value will depend on interpretation
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11. Ratios
Profitability
GP margin
Operating profit
margin
NP margin
Return op assets
Return on
equity
Asset
management
Total Assets
turnover
Accounts
receivable days
Inventory
Turnover
Market
Dividend cover
Dividend yield
Earning yield
PE ratio
EVA/SVA
Liquidity
Current ratio
Quick ratio
Debt
management
Debt/assets
Debt/Equity
Interest cover
Creditor
payment period
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Return Risk

12. Analysis and interpretation
1. Profitability
Analysis & Interpretation
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1.1 Gross profit margin
1.2 Operating profit margin

13. Analysis and interpretation
1.3 Net profit margin
1.4 Return on assets
1.5 Return on equity
Analysis & Interpretation
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14. Analysis and interpretation
2. Asset management
2.1 Total asset turnover
2.2 Accounts receivable
2.3 Inventory turnover
Analysis & Interpretation
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15. Analysis and interpretation
3.1 Dividend cover
3.2 Dividend yield
3. Market
3.3 Earnings yield
Analysis & Interpretation
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16. Analysis and interpretation
3.4 PE ratio
Analysis & Interpretation
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17. Analysis and interpretation
3.5 EVA
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•Wants to determine true economic profit
•EVA = Net profit after tax -(capital investment x
WACC)
•First calculate NOPAT: Net profit before interest
after tax
Non-current assets +
Net working capital

18. Analysis and interpretation
3.5 EVA example (Correiap 5-31)
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20.2 20.1
Capital employed 1 337 1 232
WACC 16% 16%
NOPAT(2002: 128 +
(100 * 0.72)
200 295
EVA -14 98

19. Analysis and interpretation
4. Liquidity
4.1 Current ratio
4.2 Quick ratio
Norm 2:1
Norm 1:1
Analysis and interpretation
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20. Analysis and interpretation
5. Debt management
5.1 Debt/Assets
5.2 Debt/Equity
*Use total debt unless the question gives you the industry
ratio as long term debt : equity
Analysis and interpretation
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21. Analysis and interpretation
5.3 Interest cover
5.4 Accounts payable period
Analysis and interpretation
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22. Analysis and interpretation
Return on equity
(ROE)
(FLMx ROA)
Financial leverage
multiplier (FLM)
(Assets/Equity)
Return on assets
(ROA) (ROCE)
(TAT x NP%)
Total Asset
Turnover (TAT)
Net profit margin
(NP%)
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Structured analysis: Du Pont
Detailed layout Correia p 5-28.

23. Analysis and interpretation
•Important:
–2 years needed minimum
–Compare / benchmark to competitor or industry
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24. Analysis and interpretation
How do I approach such a question?
Make sure you know what is required
•If specify -just do it
•If not specify:
•Know the table
•NB Do first relationships
•View points awards
Plan your answer
•Format (report)
•introduction
•give formula
•replace figures
•Say what you see
•Say what it means
•Conclusion
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25. Analysis and interpretation
•Format of my report??
–See e-fundi for details
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26. Analysis and interpretation
•Failure prediction models:
–Altman
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Score Criteria
Z > 2.6 Safe zone
1.10< Z >2.6 Grey orDanger zone
Z< 1.10 Distressor Fail zone

27. Analysis and interpretation
Analysis and interpretation
Limitations on ratio analysis
•Several major businesses are diversified in various industries
•Where an entity is a market leader the entity must be compared with other
market leaders
•Different accounting policies
•Different year-ends
•Financial statements may be "window dressed"
•Evaluation is subjective
•Is based on historical data and does not take the future into account.
•Monetary values
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28. Astrapak
(handout)
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29. Homework
–Vidbest
–Vigario Q 19-5
–Correia 5.12 & 5.13
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