Ratio Interpretation Receivables

Ratio Interpretation

Receivables

Don't use plagiarized sources. Get Your Custom Essay on
Ratio Interpretation Receivables
Just from $13/Page
Order Essay

For collection period, we require to identify the trade receivables

  • Look for the break down in the accounting note
  • Failing that we assume that the entire trade and other receivables are for trade
  • State that as the assumption in the appendix where you show the calculations
  • Discuss this lack of data in the limitations

Credit sales and credit purchases

  • Assume that the sales or turnover are made on credit and total purchases are on credit as well.
  • Cost of sales = opening inventory + purchases – closing inventory
  • What if the company does not show the cost of sales or gross profit at all in the income statement? It implies that some ratios would not be able to determine. For example, payment period and inventory holding period. In this case, concentrate more on the cash flow statements

Earnings per share (EPS)

  • No need to calculate as it is reported in the income statement
  • Classified into Basic and Diluted
  • Focus on the basic EPS for discussion on investors’ return

Dividend Cover

  • Earnings attributable to Shareholders (of the group i.e. excluding NCI)/Dividend for the year
  • Dividend for the year = dividend paid for the year + proposed dividend for the year

Group or Company?

  • Ratios must be based on the group’s financial data!

 

Introduction to the Company – necessary?

  • A brief introduction would be sufficient – normally not more than 100 to 150 words
  • Max word limit = 5,500 + or – 500 words

 

Sequencing of ratio interpretation

  • GPM
  • OPM
  • ROCE or ROSF
  • A top down approach would avoid repetition

 

Ratios involving Capital Employed

  • Capital employed = Total assets – current liabilities = Equity + long term debts (in the past)

 

Company with continued and discontinued activities/operations

  • If the result of the discontinued operations is significant, then we should calculate ratios based on continued operations’ results and the total (i.e. overall)

 

How to approach the ratio interpretation

  • Identify the trend(s)
  • Provide possible causes to this observed trend(s) with supporting sources
  • Assess the financial implication(s)