2.
Due date: 9 am (AEST) Monday 19 May 2014
Weighting: 25%
Assignment
Ratio Analysis
3.
Ratio Computation
Calculate the ratios for 2010, 2011 and 2012:
Ratios are on page 2 of the assignment (see next slide)
Include your ratio calculations in the appendix
Group the ratios under the headings profitability, efficiency,
liquidity and capital structure
Calculate the ratios to 2 decimal points
IMPORTANT: Show the formula for each ratio. e.g.
Accounts payable turnover (days) = (Average Accounts
Payable/Credit Purchases) x 365
Use average figures where required – not year end figures
Requirements
4.
Ratios to be calculated:
1) Return on assets
2) Return on equity
3) Gross profit margin
4) Net profit margin
5) Asset turnover ratio (times)
6) Inventory turnover (days)
7) Accounts receivable turnover (days)
8) Current ratio
9) Quick asset ratio
10) Gearing ratio
11) Debt to Equity
Requirements
5. Discussion
What each ratio tells you about the business
Whether the ratio is favourable or unfavourable
Whether the ratio is improving or declining over the years
Whether the finance will be granted or not, with reasons
-discuss how the ratios influence the bank’s decision to
approve or decline the finance application
Discuss in general terms how the company can meet the
payment obligations if the finance application is approved
Requirements
6.
Present in business report format
Reports should be single spaced, with main headings
in bold type
Executive Summary
Introduction
Body – analysis, interpretation, evaluation,
discussion
Conclusion and/or recommendations
Report Structure
7.
750-1000 words (+/- 10 %)
Excludes:
Executive Summary
Graphs, Tables, Diagrams, Figures
Appendices
Table of Contents
Title page
Word Limit
8.
Follow submission requirements
Word limit: 750 – 1000 words (+/- 10%)
Make sure you read and follow all the instructions
carefully, for example:
Swinburne now uses Turnitin to provide
personalised feedback and allows you to check the
originality of your assessments.
Instructions on how to use this are found under the
Assessment tab, or copy this link into your browser.
To Avoid Penalties
9.
Requires more than mere ratio calculation
Emphasis on interpretation, evaluation, discussion &
reporting to show us your understanding
Reports will be assessed for clarity of expression,
correct grammar and correct spelling
Note:
10.
Concise - short sentences that get right to the point
Headings and sub-headings – improve readability
Tables, graphs – to visually present data & findings
Selective underlining/highlighting for emphasis
Follow the guidelines on the marking rubric and
stick to what is being asked. Include additional
information only if relevant.
Tips
12.
•This ratio indicates the amount of sales generated for
every dollar's worth of assets the business has.
•It is an indication of how efficiently the business is at
using its assets in generating sales or revenue – generally,
the higher the number the better.
Return on Assets
13.
• The profit generated by the business expressed as a percentage of shareholders
equity.
• This ratio measures the businesses profitability - how much profit has been made
with the money shareholders have invested.
• Ordinary Share Capital = Issued Capital
• Retained Earnings = Reserves
• TIP – The average will be the average of the whole year ((so beginning balance
which is end balance from previous year + ending balance of the year) / 2 )
Return on Equity
14.
• This ratio provides the percentage of total sales
revenue that the business retains after subtracting the
direct costs associated with producing the goods and
services sold by the business. The higher the
percentage, the more the business keeps for each dollar
of sales to service its other expenses and obligations.
Gross Profit Margin
15.
• This ratio reveals the overall profitability of the business
(before interest and tax have been paid)
Net Profit Margin
16.
• This efficiency ratio reveals how many times a year the business turns over its
assets – convert them into sales
• Note - this ratio is explained on p306 of your textbook, but not very clearly.
• It is different to the Asset TO Period which is Av Total Assets / Sales x 365
• We will provide a worked example in excel which shows the difference but
they work in reverse to each other – if assets increase the Asset TO Period
increases, and the Asset TO Times decreases
Asset Turnover Ratio
Times
Asset Turnover Times = Sales
Average Total Assets
17.
• This ratio gives investors an idea of how long it takes
the business to turn its inventory (including goods that
are work in progress, if applicable) into sales. Generally,
the lower (shorter) the ratio the better, but it is
important to note that the average ratio varies from
one industry to another.
Inventory Turnover
Period
18.
Accounts Receivable
Turnover (days)
• This ratio focuses on the time it takes for debtors to
pay their accounts. The ratio indicates whether
debtors are being allowed excessive credit. A high
figure (more than the industry average) may suggest
that you have problems with your debt collection
procedures or the financial position of major
customers. This ratio is important to businesses as
efficient and timely collection of customer debts is a
vital part of cash flow management.
19.
Current Ratio
• The ratio is generally used to give an indication of
the businesses ability to pay back its short-term
liabilities (debt and payables) with its short-term
assets (cash, inventory, receivables).
20.
• This ratio measures the businesses short-term liquidity.
• It tells you whether the business is able to meet its short-term
obligations using its most liquid assets. The higher the quick ratio,
the better the position of the business.
• This is a stronger measure of liquidity compared to the current
ratio as inventory can be harder to sell/convert to cash.
Quick Asset Ratio
21.
• The gearing ratio looks at the financial leverage of the
business. It compares the proportion of equity vs. debt
that the business is using to finance its assets.
• A high ratio often indicates that the business has been
aggressive in financing growth via debt. This can be an
issue due to interest expenses, especially in volatile
economic times.
Gearing Ratio
22.
Debt to Equity Ratio = Total Debt
Total Equity
• The debt-to-equity ratio looks at the financial leverage of
the business. It answers the questions, what proportion of
the businesses assets has been funded via debt?
• A high debt/equity ratio often indicates that the business
has been aggressive in financing growth via debt. This can
be an issue due to interest expenses, especially in volatile
economic times.
Debt to Equity Ratio
23.
Swinburne Guidance: Report Structure
Marking guide (Rubric) – attached at the end of the
assignment
eLAs will use this to grade assignment
Example report
Actual student report from previous period (different
scenario)
Additional resources
24.
To Pass:
Attempt at discussing performance
Some reference to ratios
Basic summary included
Report format mostly followed
Marking Guide
25.
For Distinction:
Comprehensive discussion - show solid understanding of
concepts and ratios
Good use of facts from company information to support
findings
Correct report format
Well written summary – clear and concise
Concise clear writing style
Excellent presentation – layout; use of graphs, etc.; easy to
read.
Include additional info (relevant)
Suggest other helpful information for more comprehensive
complete analysis
Marking Guide
26.
To Fail:
Inadequate discussion – merely describing results
Limited explanation
Little or no reference to ratios
Marking Guide
27.
You can also post your questions on
Black board.
Good luck!
QUESTIONS?