Helen Berry works for a Bath Spa Enterprises PLC as a junior accountant. Her duties include that of mentoring new accounting trainees. One of these has approached her and requested help with material on which he will be assessed in his forthcoming ACCA accounting examinations. He seems particularly confused with accounting ratios.
?I just can’t seem to get to grips with them, he moaned. I was wondering if you could give me some help. I just don’t understand the difference between profitability, liquidity, efficiency and investment ratios. I am never going to pass my examinations at this rate!
?You do seem to be getting yourself in a bit of a state, replied Helen. I tell you what I will do to try and help you.
First, to show you how some of these ratios are used I will try to put them into some context. I will obtain the Annual Report and Accounts of
one Public Limited Company from the FT electronic company reports service, https://www.orderannualreports.com/, and, using the Five Year Summary printed at the end of the company report (NB: if the report does not have a summary I will choose another), I will explain how the company is performing. I will limit myself to discussing turnover (often Revenue, or Sales Revenue), operating profit ratio (or where this is not available I will use profit before tax), earnings per share ratio, and the dividend ratio (if these are not available I will use whatever financial
ratios are given, and if none is given I will choose another report). I will use the summary because it is important to have a time series of a
reasonable length to make any sensible judgement on performance. Oh, and I will select from one industry group: Consumer Products – Food (A-L). I will then use these ratios to explain how the company has performed over the 5 years. This should at least make clear why we use ratios.
Once I have done that I will then offer an explanation of why they are categorised as:
Efficiency (activity) ratios
Where necessary I will offer a calculation to support my explanation.
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