1. TISBETN Business Students’ Revision Day Patana School 1 March 2010. Analysis of Published Accounts Presenter: Peter Masters (The Regent’s School) Name: _________________

2. What you need to know…. How to interpret (ie make sense of and analyse) the performance of a business using ratios. Alternative ways of measuring success (eg Market Share) You almost certainly will be asked questions on this part of the syllabus! It is EASY to do!!

3. The trap… Many students simply state that because a business is making a profit, it must be performing well! Not necessarily true! Eg Microsoft last year had sales of around $60 billion – I don’t think they would be happy at all with a profit of $10 000!! Stating that Microsoft is performing well would earn zero marks!! You must compare numbers with something else which is related to it.

4. The trap continued… Think of a class test: if you scored a grade A you may well think you are performing well. But…. If everyone else in the class gained an A*, suddenly you don’t look so great! So, we can always compare performance with another (similar!) business. And maybe all your other tests were A*. Suddenly an A is looking quite miserable!

5. To sum up… When analysing accounts, always use ratios! Make sure you compare your results with other similar businesses (where possible) And also compare with previous years / time periods (where possible) You must show understanding through your comments about the ratios!

6. Profit and loss account for Blimey Ltd (a manufacturing business) for the year ended 31 December ($000) 20082009 Turnover57506100 Cost of goods sold41754750 Gross profit15751350 Marketing and admin expenses12501300 Net profit (before interest and tax) 325 50 Interest 175 225 Taxation 100 10 Profit after interest and tax 50 (185) Dividends 20 0 Retained profits 30 (185)

7. Balance sheet for Blimey Ltd as at 31 December ($000) 20082009 Fixed assets15001400 Current assets Stock 9101220 Debtors550 650 Cash 10 5 Total current assets14701875 Current liabilities Creditors 300 250 Overdraft 350 475 Total current liabilities 650 725 Net assets23202550 Share capital 250 250 Profit and loss account 320 350 Loan capital17501950 Capital employed23202550

8. Profitability / Performance Ratios ( Don’t get confused between ratios and margins!) These measure how good the business is at turning its sales into profits. There are three: Gross Profit Margin = Gross Profit/Sales *100 Net Profit Margin = Net Profit/Sales *100 Return on Capital Employed (ROCE) = Net Profit / Capital Employed *100

9. Profitability Ratios for XYZ Ltd Gross Profit Margin = Calculation: 2008:2009: Comments: 1) ______________________________________________________________________________________________ 2) ______________________________________________________________________________________________ 3) ______________________________________________________________________________________________ Net Profit Margin = Calculation: 2008:2009: Comments: 1) ______________________________________________________________________________________________ 2) ______________________________________________________________________________________________ 3) ______________________________________________________________________________________________ Return on Capital Employed = Calculation: 2008:2009: Comments: 1) ______________________________________________________________________________________________ 2) ______________________________________________________________________________________________ 3) ______________________________________________________________________________________________

10. Liquidity Ratios These measure the ability of the business to pay its short term debts / liabilities. They are possibly the most important ratios for a business – if they cannot pay their debts, this liquidity crisis may result in the business being forced to close! Current Ratio: Current Assets / Current Liabilities Acid Test Ratio: CA – Stocks / CL (note that stock is subtracted as it is the least liquid of the current assets. This makes the acid test a tighter test of liquidity.)

11. Liquidity Ratios for XYZ Ltd Current Ratio = Calculation: 2008:2009: Comments: 1) __________________________________________________________________ 2) __________________________________________________________________ 3) __________________________________________________________________ Acid Test = Calculation: 2008:2009: Comments: 1) __________________________________________________________________ 2) __________________________________________________________________ 3) __________________________________________________________________

12. Working Capital This is, of course, very closely related to the current ratio. This is concerned with the difference between the business’ current assets and current liabilities (not the ratio). This will tell us whether the business has enough liquid assets (assets easily turned into cash) after all of its short term debts have been paid, to pay for all of its day-to-day expenses. Students often think you look at Sales to see how much money the business has. WRONG! Remember that sales in the P&L is how much the business gained from selling its G&S over a period of time (typically a year). We want to know how much cash (and other liquid assets) the business has now. This is in the Balance Sheet under ‘Cash’. The calculation is therefore CA-CL. Remember, as a general rule, there should be around 1.5 to 2 times as much CA as there are CL (the current ratio rule). Now, calculate the working capital for Blimey Ltd in 2008 and 2009. Answers: Comments: _________________________________________________________________

13. Other measures of performance Market Share If Toyota sells 100 000 cars in Thailand in 2008 from total sales in Thailand of 1 million cars, its market share is 10%. If sales fall to 90 000 in 2009 and total sales remain at 1 million cars, its share has fallen to 9%. WHY?? Maybe it lost market share due to the success of other companies (eg Ford) offering better cars, or maybe Toyota had quality problems and people are hesitant to buy a Toyota. It could be either internal or external factors responsible – either way, Toyota would be concerned! Most businesses want to increase market share as it is an indicator of success. Market share can also be calculated using the value of sales, not the number of sales (unit sales) as done above.

14. Some limitations of using ratios… The information is only useful if it is accurate and can be believed (creative accounting… - rubbish in, rubbish out) Just because a business performed well last year does not necessarily mean it will do so again this year Comparisons with other businesses are only useful if the businesses are very similar NOW GO AND DO AS MANY PAST PAPER QUESTIONS AS YOU CAN!!! GOOD LUCK!!