Ratio Analysis

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Ratio Analysis

Ratios are a method of summarising and presenting financial

information in an easily understandable form. They are used to assist

us in assessing the performance of a business by identifying

relationships between different figures that are considered to be

significant. Ratios can be split into five groups, these five groups

are:

1. Cash Flow – These ratios measure the businesses ability to meet

financial commitments from cash flow.

2. Liquidity – These assess the businesses ability to meet the current

liabilities as they fall due.

3. Asset Management – These show the speed of funds through the

business operating cycle and how effectively working capital is

managed.

4. Stake – These compare the extent to which the business is funded by

its shareholders, lenders and creditors and indicates its ability to

service external debt.

5. Profitability – These ratios show profit margins, return on

capital and equity.

Ratio Analysis

Cash Flow

Cash flow is the lifeblood of any business. Therefore we begin our

structured analysis with cash flow ratios.

a) Overall Cash Cover

Notes for Overall Cash Cover :

Interest Cost is taken as Interest Received less Interest Paid (From

Cash flow Statement)

Dividends is taken as the Equity Dividends Paid (From Cash flow

Statement)

Short Term Debts is taken as the Bank and other Borrowings (From

Balance Sheet under the ‘Creditors: amounts falling due within one

year’ heading)

The Overall Cash Cover is a broad measure of the business’s ability to

meet all it’s short-term financial obligations from its core cash

flow.

The figure for 2004 shows that Allied Waste Disposal plc can meet its

short-term debts 2...

... middle of paper ...

...Ideally this percentage should be similar from year to year and is

comparable with other businesses in the same industry. It is be

controlled by the pricing policy of the business along with its

control of overheads.

The net profit figure for 2004 is 21.34%, this means that Allied Waste

Disposal plc is earning a net profit of just over 21 pence for every

£1 of sales after overheads has been deducted. This is a decrease from

last year, which showed a net profit of 23.99%.

This ratio measures the return on all capital employed against all net

income before tax and interest. A business’s performance should be

judged on ROCE, as it will not continue for long, without support,

unless this return exceeds at least the cost of borrowing.

The Return on Assets is a comprehensive ratio, which measures the

return on the total assets being used by the business

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