1. Principles of
Business
Introduction to Finance –
seminar 5

2. Overview
2
• Developing financial fluency
• Interpreting financial statements
- Profitabilty
- Liquidity
- Gearing
- Investors
• Budgeting

3. Learning outcomes
By the end of this session you should be able to:
3
• Analyse a company using financial statements
• Apply key ratios
• Understand the role and purpose of budgets
• Prepare a cash budget

4. Developing financial fluency
How to analyse financial statements:
4
Step 1: Scan through each financial statement, and identify:
- Large numbers
- Significant variances from prior year
- Inconsistencies (e.g. between revenue growth and movements in
costs of sales).
Step 2: Identify areas of the financial statements to focus on (eg. risky areas,
profitability, liquidity)
Step 3: Calculate appropriate ratios
Step 4: What do those ratios tell you?
- How do they compare to prior year or other organisations?
- How do they relate to qualitative information that you have?
- What are the implications for the company?

5. Key ratios
5
Profitability ratios
Return on Capital Employed
OPERATING PROFIT
TOTAL CAPITAL EMPLOYED (long term debt plus equity)
Asset Turnover
(Asset Utilisation)
SALES
TOTAL CAPITAL EMPLOYED
Return on Shareholder’s funds
OPERATING PROFIT
SHAREHOLDER’S FUNDS (EQUITY)

6. Key ratios
6
2. Liquidity ratios
Current Ratio
= Current Assets : Current Liabilities
Liquidity/Quick/Acid Test Ratio
= Liquid Current Assets (ie. Exclude inventory) : Current Liabilities
Ability to pay debts as they fall due:
= Cash Generated from Operations/Current Liabilities

7. Key ratios
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3. Gearing: debt/equity ratio
Total Capital Employed
Equity
for Ordinary
Shareholders
External Debt
including any
redeemable
preference
shares

8. Key ratios
8
4. Investor ratios
Dividend yield:
Dividend per Share net of base income tax rate
Market Value per Share
Earnings Per Share
Ordinary Shareholder’s Earnings
Number of Shares in Issue
PE Ratio
Market Price Per Share
Earnings Per Share

9. Seminar Exercise:
9
• You need to get into groups of maximum 3 people
• You will be allocated one of the following companies to analyse:
- Easy Hotel Plc
- Action Hotels Plc
- Intercontinental Hotels Group Plc
• You will need to:
1. Carry out an analysis of the company allocated to you in terms of
profitability, liquidity, gearing, and investor ratios
2. Prepare a 2 minute summary presentation of your key findings, including a
justified recommendation about whether to invest in the company or not

10. A final thought:
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1. How useful are financial statements?
2. What are the limitations of ratio analysis and financial reporting?
3. How could financial reporting be improved?