Managing Finance and Budgets

1
Managing Finance and Budgets

• Seminar 4

2
Seminar Four - Activities

• Preparation read
• Chapter 7 (M A 2nd Edition)
• Or Chapter 6 (M A 1st Edition)
• Describe key concepts
• Analysing accounts
• Ratios
• Exercises
• M A (2nd Ed.) Exercise 7.3 (pages 239-240)
  and Exercise 7.5 (pages 241-242)
• Or M A (1st Ed.) Exercise 6.3 (pages 215-216)
  and Exercise 6.5 (pages 217-218)

3
Starting Points

• Describe what is meant by Financial Ratio
  Analysis, and outline the key steps in performing
  such an analysis.
• State some of the things we need to consider when
  we are examining accounts, and some of the
  factors which might affect such our analysis.

4
The key steps of financial ratio analysis
5
Key Ratios

• State the different categories of financial ratio
  that can be used in analysing accounts, and
  describe the purpose of each one.
• State some of the measures within each category.

6
Financial ratio classification
7
Profitability
8
Efficiency
9
The main elements comprising the ROCE ratio
10
Liquidity
11
Gearing
12
The effect of financial gearing
13
Investment ratios
14
Calculating and Using the Ratios (1)

• What are the criteria that an investor should
  look for when selecting a company in which to
  invest?
• McLaney Atrill Exercise 7.3 (6.3 1st ed)

15
Dividend yield ratios Source Financial Times 31
May 1997
6
5
4
3
2
Water
Electricity
Food retailers
Media
Retail banks
Oil exploration and production
1
Pharmaceuticals
Building and construction
Chemicals
Engineering
Tobacco
Distribution
0
16
Average P/E ratios Source Financial Times 31
May 1997
17
Calculating and Using the Ratios (2)

• What criteria should a supplier look for when
  deciding whether to supply a business customer?
• McLaney Atrill Exercise 7.5 (6.5 1st ed)

18
Average current ratio and average acid test ratio
for 1996 for UK listed companies in various
industrial sectors
19
Graph plotting current ratio against time
20
Calculating and Using the Ratios (3)

• What early-warning signs can be detected that a
  company may be heading towards insolvency and
  failure?

21
Mean ratios of failed and non-failed businesses
22
Mean ratios of failed and non-failed businesses
23
Scatter diagram showing the distribution of
failed and non-failed businesses