# POB Finance Week 2 Seminar 5

Pearson College London
2 Feb 2015
1 sur 10

### POB Finance Week 2 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 7 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: 10 1. How useful are financial statements? 2. What are the limitations of ratio analysis and financial reporting? 3. How could financial reporting be improved?