Download assessing a business

ASSESSING A
BUSINESS
HIGHER LEVEL
Overview
 Who is interested in the accounts of a business?
 Profitability ratios
 Liquidity ratios
 Activity ratios
 Dividend policy
 How to structure your answer
Interested Parties
1. Management – performance of a company from
2.
3.
4.
5.
6.
one year to the next
Revenue Commissioners – calculating tax
based on profits made
Bank – repayments of loans and overdrafts
Creditors – can you make repayments for goods
bought on credit
Employees – can their wages be paid, job security
Investors – is it a good company to invest in
Profitability
 Gross Profit %/Gross Margin
Gross Profit x 100 %
Sales
1
 Net Profit %/Net Margin
Net Profit x 100 %
Sales
1
 Return on Capital Employed/Return on Investment
Net Profit x 100 %
Capital Employed
1
Liquidity
 Current Ratio/Working Capital Ratio
Current Assets : Current Liabilities
Ideal 2:1

Acid Test Ratio/Quick Asset Ratio
Current Assets – Closing Stock : Current Liabilities
Ideal 1:1
Activity
 Rate of Stock Turnover
Cost of Sales
Average Stock
= x times
 Period of credit given to debtors
Debtors
x
Credit Sales
365
= x days
 Period of credit received from creditors
Creditors x 365
Credit Purchases
= x days
SOLVENCY
Total Assets are greater than Total Liabilities
DIVIDEND POLICY
Dividend Paid
x 100 %
Issued Share Capital
1
DIVIDEND
Dividend is a percentage of profits which are given to shareholders. The
percentages is decided by the board of directors each year.
Layout of solutions
1.
State the formula
2.
Show the workings for the two years
3.
Show the correct unit with each answer e.g. ratio, %, times
4.
In your evaluation, outline the difference between the two years performance.
5.
For Liquidity ratios, outline the IDEALS
1.
Working capital ratio
2:1
2. Acid-test ratio
1:1