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Файл:Стандарты финансовой отчетности в корпоративном бизнесе. Учебное пособие на английском языке
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costs between buyer and seller) the money benefit to be derived from selling a
share, and the money sacrifice necessary to acquire a share. It may or may not
be a fact justified by rational appraisal and analysis, but it is still a fact. It can
be argued that, in a perfect world with perfect knowledge and foresight, the
market value would exactly equal the value calculated by discounting expected
flows. This would be consistent with the Efficient Markets Hypothesis in its
‘strong’ form, which assumes that market prices reflect both private and public
information.
More realistically, it can at least be suggested that active participants in
public share markets will have taken account of all available published information. At a minimum, it can be suggested that the market value of quoted
shares provides the one starting point that is objective for working out the
worth of a business or of an investment in it. However, the market has taken
account of the estimates of cash flows, and so this argument is somewhat circular.
Ratios and percentages
A number, in isolation, is not a very helpful piece of information. Comparison is the key. A ratio is potentially a very powerful tool, but it is also a
very simple one. A ratio is one number divided by another.
In many instances – perhaps only because of habit and experience –
a percentage seems most helpful and easy to understand. One simple but effective application of this technique is the idea of common size statements. This
involves reduction of the monetary figures in financial statements to percentages of relevant totals. For effective comparison in practice, a number of
years’ results need to be taken together, preferably five or more. Note, however, that the more years that are considered, the greater the risk of changes in the
accounting policies used over the period. Such changes will distort any trend
considerations. They should be looked for and eliminated as far as possible, if
necessary on a subjective basis.
A large number of ratios are looked at below. It should be stressed that
there are no absolute ‘rules’ on how to define the ratios. The whole purpose of
ratio analysis is to be useful, and so an individual analyst should adapt the
techniques used to maximize their relevance to a specific situation encountered.
Profit ratios
The income statement will be explored first, beginning with ratios constructed entirely from within the income statement itself.
Gross profit margin
The gross profit is the difference between the sales price and the cost of
the goods sold. The gross profit margin is an indication of the extra inflow
from an extra unit of sales. The formula is:
Gross profit margin = gross profit / sales
Net profit margin
The net profit is the difference between the sales and all the expenses.
The net profit margin shows the net benefit to the business per unit of sales.
The formula is:
Net profit margin = net profit before tax / sales
Expenses to sales
The expenses-to-sales ratio explains the movement between gross and net
profit margins. The formula for this ratio is:
Expenses-to-sales ratio = expenses / sales
Net operating profit
Calculating the Percentage of net operating profit to sales we use the
profit before deduction of the debenture interest:
Net operating profit margin = net operating profit / sales * 100
From a management perspective, the efficiency of operating (i.e. production and selling) activities is quite distinct from the question of the efficacy of
the financing structure. The improvement of each of these two functions is
independent of the other. It is likely to be helpful, therefore, to separate out the
results for analysis purposes. Note, however, that net profit ratios and net operating profit ratios are not mutually exclusive alternatives. They both provide
useful insights into the situation and progress of the business.
Profitability ratios
It is not sufficient to analyse the income statement and the profit position
in isolation. Business operation requires the use of scarce resources that are not
costfree and that need to be used as efficiently as possible. It is essential to
analyse the results of the operations in relation to the resources being used by
the business and controlled by the management of the business. This leads to a
variety of relationships and ratios that need to be explored. Strictly speaking,
when comparing an item from the income statement, which is a total of a
year’s activity, with an item from the balance sheet, the average balance sheet
figure for the year is required. In practice,closing balance sheet figures are
often taken as a reasonable approximation.
Asset turnover ratios
One approach to exploring the relationship between returns and resources
is to consider some or all of the assets as recorded in the balance sheet. Possibilities include considering total assets, net assets (i.e. assets minus liabilities)
or noncurrent assets alone. These could be related to, for example, sales, gross
profit, net profit or net operating profit. Using net profit or net operating profit
gives an indication of the rate of return being generated through the use of the
assets. For example:
revenue / fixed assets
revenue / net assets
revenue / total assets
net profit / fixed assets
net profit / net assets
net profit / total assets
Care has to be taken in applying ratios like these, for there are many influences on the asset figures used that are not related to business efficiency.
For example, a business that buys additional inventory without paying for it,
just before the balance sheet date, will show an increase in total assets but not
an increase in net assets. Therefore, the net asset picture better reflects the economic reality.
The figures used for non-current assets are notoriously susceptible to
changes in depreciation, valuation or asset-replacement policies. Nevertheless,
useful indications of trend can often be discovered from ratios like these, provided that the weaknesses and peculiarities behind the figures in each particular business are explored and understood – which, for the casual outsider, may
not always be the case.
Non-financial resource ratios
It is important to remember that much useful information about business
activities is non-financial. This not only applies to information about some of
the important outputs, such as chemical or noise pollution, but also to information about some of the inputs. Concentration on non-financial data may be
especially useful in relation to a resource input that is particularly scarce or
expensive. Sales per employee is a good example of this type of ratio, where
sales could be expressed in money terms or in non-financial terms such as the
number of units produced each year per employee. Another example is output
or sales per square metre of retail space. Whether non-financial ratios like
these are useful will depend on the particular situation and available information. However, they may permit useful comparisons of different organizational structures and different trends of development.
Return on equity (ROE)
Return on equity relates the return made for the shareholders with the finance made available by the shareholders. It can be calculated either before tax
deductions or after them, and it may well be useful to do both. If the issue to be
explored is the return potentially available for distribution to shareholders, then
clearly the after-tax position has to be taken. On the other hand, if an investigation of the efficiency of management in organizing the operations of the business is required, or a comparison of ROE with rates of return on other sources
of finance, then the deduction of tax is a distortion. In such cases, before-tax
returns may be more useful. The formula for return on equity is:
ROE = net profit / share capital and reserves
Return on capital employed (ROCE)
In terms of assessing the efficient usage of the resources provided to the
business, the ROCE is probably the most important single ratio. The capital
employed is normally defined as the owners’ equity plus the long-term bor-
rowings of the business. It seeks to embrace all the long-term finance made
available to the business. The ratio therefore investigates the efficiency of the
business as a whole, rather than from the point of view of any particular subset
of users, such as the owners.
In contrast to the ROE, the denominator of the ROCE ratio is larger by
the amount of a company’s long-term borrowings. It therefore follows that the
numerator of the ROCE will be larger than the numerator of the ROE by the
amount of the return that relates to those borrowings, i.e. interest. This interest,
being an expense of the business, has been deducted in arriving at net profit.
So, in order to arrive at the correct ‘return’ figure relevant to the ROCE calcu-
lation, the interest on the long-term borrowings must be added back to the net
profit figure. The formula for return on capital employed is:
ROCE = net profit before interest on long-term borrowings / owners’ eq-
uity plus long-term borrowings
Profit before tax is used because interest figures are given gross of any
tax effect, and to take after-tax profit and then adjust for interest net of tax
would require subjective adjustments to the tax charge. This figure is sometimes referred to as EBIT, which stands for earnings before interest and tax.
Gearing and its implications
The relationship between equity and long-term borrowings is known as
the gearing (or leverage) of the financial structure. There are two common
ways of calculating a gearing ratio:
(a) compare the debt (i.e. long-term borrowings) with the equity; or
(b) compare the debt with the capital employed (i.e. equity plus debt).
Formulae for the two gearing ratios are:
Gearing = debt / share capital plus reserves = debt / equity
or
Gearing = debt / share capital plus reserves plus dept = debt / equity
plus dept
Liquidity ratios
A number of ratios can be calculated that compare short-term assets with
short-term liabilities. Each ratio uses a different interpretation of just how
short-term the assets or liabilities should be. The shorter the term considered,
the more prudent, pessimistic or safe is the approach adopted. Each ratio in this
section shows the extent to which the particular definition of ‘short-term as-
sets’ chosen would allow (if the assets concerned turn into cash at their balance
sheet value) the repayment of the short-term liabilities in existence at that date.
Three common ratios are:
1. Cash ratio = cash plus marketable securities / current liabilities
2. Acid test (or quick assets) ratio = current assets less inventory / cur-
rent liabilities
3. Current (or working capital) ratio = current assets / current liabilities
It is important to remember that these ratios take a static view. They assume that the relevant assets are all that will be available to settle the current
liabilities, and that the assets will provide the cash amounts as recorded in the
balance sheet (even though inventory is normally recorded at cost, i.e. below
selling price). So, for example, the quick assets ratio assumes that all the debtors will pay, but excludes any cash sales from inventory. The safety or acceptability of any particular ratio for any particular business is related to the everyday operations of the business. Each industry will have a typical operational
and financial structure, which can be significantly different between different
industries, and calculated ratios should be compared with competitor or general industry figures, or with past trends, to enable meaningful comparisons to
be drawn.
Interest cover
Long-term liquidity is connected to gearing. The balance sheet perspective discussed there can be supplemented by considering the interest cover.
This is the number of times a business could pay its necessary interest charges
out of the available operating profits of the current year. The formula for interest cover is:
net profit before interest and tax / interest charges
Fu nd s’ man age me nt ra tio s
Insight into the liquidity implications of the operations of a business can
be gained by examining some of the constituent elements of working capital,
i.e. inventory, debtors and creditors. In each case the amount of the item is
compared with the flow related to it. These ratios can be expressed in a number
of ways, but probably the most easily understandable is to express the answer
in days.
Debtors’ collection
This ratio compares trade debtors (receivables) with sales. To calculate
the average debtor collection period in days, the formula is:
trade debtors / sales * 365
Arguably, cash sales should be excluded from the denominator, but information to enable this is unlikely to be available to an outside analyst. If necessary, total debtors will have to be used instead of trade debtors. Frequently,
the amount is taken from the closing balance sheet, but a more theoretically
valid ratio is obtained by using the average amount of each item over the trading cycle. A simple average of opening and closing balance sheet figures may
well be a better approximation to the true average than taking just the closing
balance sheet figure.
Creditors’ payment
A similar ratio can be calculated for creditors (payables). To calculate the
average creditor payment period, it is theoretically necessary to relate trade
creditors with annual purchases. However, the purchases figure is often not
available and then the cost of goods sold will have to be used as a surrogate. In
some income statement formats, cost of sales is not shown either, and so the
sales figure has to be used. Where cost of sales is available but the cost of purchases is not, the formula becomes:
trade creditors / cost of sales * 365
Inventory turnover
The inventory turnover ratio indicates the average time that inventory
remains in the business between purchase and sale. Since inventory is valued
at cost, it should be compared with cost of goods sold (which is obviously at
cost) rather than with sales (which are at selling price). Again, this assumes
that the data are available. The formula for the ratio is:
inventory / cost of goods sold * 365
Earnings per share (EPS)
‘Earnings’ is defined in IAS 33 as the net profit for ordinary sharehold-
ers, i.e. after any preference dividends.
EPS calculations, there may be two problems with the denominator (the
number of shares) in the calculation, where there are:
a) changes in the equity share capital during the financial year;
b) securities in existence, at the end of the accounting period, with no
current claim on equity earnings but that may give rise to such a claim in the
future.
Broadly speaking, the first problem is dealt with by calculating the average share capital outstanding during the year. The second problem is dealt with
by calculating EPS twice:
a) the earnings are related to the number of shares actually in issue at the
balance sheet date (the basic EPS); and
b) on the assumption that all the share conversions that would make EPS
lower had happened (the diluted EPS).
IAS 33 requires that listed companies should disclose the basic and the
diluted earnings per share, with equal prominence, on the face of the income
statement, for all periods for which the income statement figures are given.
EPS = profit after tax, less preference dividends / number of ordinary
shares
EPS = (net profit - preference dividends) / number of ordinary shares
Dividend cover
The dividend cover is the number of times that a company could pay the
intended dividend out of the available profits of the current year. This gives an
indication of how secure the future dividend payments are likely to be. As before, alternative possibilities exist as to the inclusion or exclusion of unusual
items in the calculation of the derived earnings figure.
The formula for dividend cover is:
earnings / total dividends on ordinary shares
The higher the ratio, the greater the coverage, or safety margin, of earnings over dividends. Note that it is perfectly possible for the dividend cover to
be less than one, or to be negative. Directors often choose to maintain annual
dividends in years when a poor result (even a loss) occurs, as a signal to the
market of an expected upturn in performance. The dividend can be provided
out of the retained profits from earlier years.
Dividend yield
The formula for dividend yield is:
dividend per share / market price per share
The ratio indicates the rate of return in terms of profit distribution that
would be obtained by an investor who buys one share at the current market
price. It can be compared with the ruling level of interest rates on investments,
but of course it ignores those undistributed profits that are nevertheless attributable to the shareholders (i.e. the rest of earnings).
Price/earnings (P/E) ratio
The formula for the P/E ratio is:
market price of one share / Earnings per share (EPS)
The P/E ratio can be said to represent how much (in terms of the number
of years’ earnings) it is necessary to pay in order to acquire a share. It is potentially a highly volatile ratio, which will be affected both by changes in earnings
per share (or in its definition), and by movements in the share price as quoted
on a stock exchange.
P/E is widely regarded as important, and in some countries is published
daily, for large quoted companies, in the financial pages of many newspapers.
Relationships between ratios
8.2. Benefits of using the IFRS
IFRS Ac counting
IFRS, or International Financial Reporting Standards, refers to a single
set of accounting standards used in multiple countries. The IASB, or International Accounting Standards Board, works to develop these standards, creating
a consistent approach to financial reporting globally. The IASB works with
investors, auditors and regulators in different countries to determine the needs
of each user and incorporate those needs in the standards. The advantages of
implementing these standards include consistent financial statement formats,
understandability and global comparability.
Financial St atement Fo rmat
Companies adhering to IFRS use a similar format for their financial
statements. Investors who compare financial statements from companies operating in different countries can place the statements next to each other. The
gross margin, operating income and net income fall in the same locations on
the statements. The balance sheet, the statement of cash flows and the retained
earnings statement also follow similar formats. The end user enjoys the advantage of evaluating financial statements which follow a similar format.
Underst andability
End users also enjoy the advantage of understanding the financial data
communicated whether it comes from one country or a different one. IFRS
accounting guidelines require that all companies follow the same guidelines.
When the end user understands these guidelines for a company in one country,
she can assume that all companies in compliance with IFRS follow the same
guidelines.
Global Co mparab ility
End users reap the benefits of comparing the financial statements from a
company in one country to a company in another country. He accesses the financial statements either as a hard copy or electronically via the Internet. The
end user compares the net income and calculates financial ratios for different
companies.
Control questions for self-examination
1. For what purpose carry out the analysis of the financial assets estimat-
ed at fair value with reference of its changes into profits and loss accounts?
2. For what purpose carry out the analysis of the investment financial in-
struments withheld before settlement?
3. For what purpose carry out the analysis of investments, available for
sale?
4. What forms information base for the analysis of the equity of the or-
ganization for IFRS?
5. Call the indicators characterizing a general condition and a capital
structure.
6. What forms information base for income-expenditure analysis of the
organization?
7. For what purpose during the analysis calculate the size of the profit
falling on one share on IFRS?
8. List tasks of the analysis of cash flows.
9. What basic distinctions between the amount of the got profit and size
of money?
10. What indicator is used for a profit quality evaluation?
Glossary
Accelerated depreciation – depreciation that is either at a faster rate than
would be suggested by an asset’s expected life or using methods that charge pro-
portionately more depreciation in earlier years. This is most commonly found in
the context of tax concessions designed to encourage investment.
Account – a record of all the bookkeeping entries relating to a particular
item. For example, the wages account would record all the payments of wages.
An account in the double-entry system has a debit side (left) and a credit side
(right). A business may have thousands of accounts, including one for each
debtor and creditor. Accounts may be collected together in groups in ledgers,
or books of account. ‘Accounts’ may also mean financial statements, such as
balance sheets and income statements.
Accountability – the major original purpose of accounting; so that the
owners of resources (now shareholders, for example) can check up on the managers or stewards of those resources (now boards of directors, for example).
Accountancy and accounting – terms used interchangeably by many
people. That is, accountancy tends to be associated with the profession, and
accounting with the subject matter, particularly in the context of education or
theory.
Accounting policies – the detailed methods of valuation and measurement that a particular company has chosen from those generally accepted by
law, accounting standards or commercial practice. These policies must be used
consistently from item to similar item and, generally, from year to year.
Accounting principles – encompass a wide range of broad and detailed
accounting rules of practice.
Accounting standards – technical accounting rules of recognition,
measurement and disclosure set by committees of accountants. The practical
use of the words seems to originate officially with the Accounting Standards
Committee in the United Kingdom in 1970.
Accounts payable – these are amounts owed by the business, usually as
a result of purchases in the normal course of trade from suppliers who allow
the business to pay at some point after purchase. The total of accounts payable
at the period end form part of current liabilities on a balance sheet.
Accounts receivable – expression for debtors. These are the amounts to
be paid to the business by outsiders, normally as a result of sales to customers
who have not yet settled their bills. Those that are fairly certain to be uncollectable are bad debts. The total of accounts receivable will be part of current
assets on a balance sheet.
Accruals basis of accounting – the standard practice of concentrating on
the period to which an expense or revenue relates rather than on the period in
which cash is paid or received.
Accrued expenses (or accruals) – expenses that relate to a year but for
which a bill will not be received until the following year. recognition of accrued expenses results from the need regularly to draw up financial statements
at a fixed time (for example, at the end of a company’s year). During a year,
electricity will be used or properties will be rented, yet at the year end the re-
lated bills may not have been received. Thus, at the year end, ‘accrued’ ex-
penses are charged against income by accountants even though cash has not
been paid nor the bills even received. The double entry for this is the creation
of a current liability on the balance sheets. This practice may apply also to
wages and salaries, taxes, and so on. An allocation of amounts to ‘this year’
and ‘next year’ may be necessary where a supplier’s account straddles two
accounting years. The practice is an example of the use of the matching concept. Similarly, some accounts of suppliers that are paid in any year may be
wholly or partly paid on behalf of the activities of the next year. In this case,
the relevant expenses for the year will have to be adjusted downwards by the
accountant, and a current asset called ‘prepayments’ recorded on the balance
sheet.
Accumulated depreciation – the total amount by which the accounting
value of a fixed asset has so far been reduced to take account of the fact that it
is wearing out or becoming obsolete (see depreciation).
Activity-based costing (ABC method) – the practice of relating as many
expenses as possible, often previously regarded as overheads, to particular
production activities.
Allowances – expression for amounts charged against profit for reductions in value (or impairments) of assets.
Amortization – depreciation of intangible assets.
Annual general meeting (AGM) – the meeting at which shareholders
may question directors on the contents of a company’s annual report and fi-
nancial statements; vote on the directors’ recommendation for dividends; vote
on replacement for retiring members of the board; and conduct other business
within the company’s rules.
Asset – a resource controlled by an entity, as a result of past events, from
which future economic benefits are expected to flow to the entity.
Associate (or associated company) – entity over which another has significant influence. According to IAS 28, a company will be presumed to be an
associated company if it is owned to the extent of 20 per cent or more and is
not a subsidiary or joint venture (see consolidated financial statements).
Auditing standards – rules for the practice of auditors, formalized in a
similar way to the technical rules of accounting standards. The rules contain
ethical guidelines as well as detailing the work to be covered by an audit and
the standard practice for the audit report.
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