Financial Ratios Analysis and Interpretation

This assignment analyzes the financial performance of a company by calculating and interpreting various financial ratios. It covers liquidity ratios (current ratio and acid-test ratio), efficiency ratios (asset turnover, stock turnover, debtors collection period, and creditors payment period), and provides insights into the company's effectiveness in utilizing assets, managing inventory, collecting receivables, and paying suppliers.

Financial statements
Income statement
This is also known as Profit & Loss Account.
1. Purpose
2. Content
3. Format
Purpose of preparing an income statement is to
measure whether the company has made a profit
or a loss for a particular period. The companies must
prepare this statement annually for every financial
year. For example, for the period ending 31st March
2018. Dalata Hotels Group PLC uses January to December
as its financial year for reporting purpose.
Content of an Income statement
1. Sales (Revenue)
2. Profit (Gross Profit, Operating Profit, PBT& PAT)
3. Expenses (Cost of sales, operating expenses, finance
Costs, and taxation.)
Different types of profits
1. Gross Profit = Sales – Cost of sales
£40M= £140M - £100M
2. Operating profit = Gross Profit – Operating Exp. (Admin Exp.)
£15M = £40M - £25M
Operating profit is the profit before interest and tax (£15M).
Profit Before Taxation = Operating Profit – Finance Costs (Int.)
£14M = £15M - £1M
Profit After Taxation = PBT – Taxation
£10M = £14M - £4M
PAT of £10M is the net profit attributable to the equity
Shareholders

Format of income statement
Income Statement For The
Year Ended 31st March 2018
£M
Sales Revenue 140
Less: Cost of sales (100)
Gross profit 40
Less: Operating (admin) expenses (25)
Operating profit 15
Less: Finance costs (1)
Profit before taxation (PBT) 14
Less: Taxation (4)
Profit after taxation (attributable to equity holders) 10
Balance sheet
In addition to an Income Statement, the companies are
Required to prepare a balance sheet on the last date of
Each financial year. For example, Balance-sheet
as at 31st March 2018.
Balance sheet is also known as statement of financial
Position (Balance sheet).
A balance sheet is based on a basic accounting equation
Which is also known as balance sheet equation.
A = C + L
£340M = £200M + £140M
1,101,088 = 737,393 +363,695
A = Assets = what are owned and controlled by the company.
Examples of assets are: Land and buildings, Plant & Machinery,
Furniture and fittings, Motor vehicles, office equipment,
Investments, debtors, cash in hand and at bank etc.
C = Capital or Equity = £200M = This is owners’ equity which
Solely belongs to the shareholders of the company.
L = Liabilities = £100 = are Owings to the 3rd parties such as

Banks – bank loan, mortgage, lease
Trade payables (creditors), tax payable
Statement of cash flows
This is a statement prepared by the companies to show
cash inflows, cash outflows, net cash flow, increase/
decrease in cash and cash equivalents and the year end
balance of the same.
There will be three net cash-flows (NCF) in a Statement of
Cash Flows:
1. Net cash flow from operating activities (£95.207Mor
net cash used in operating activities
2. Net cash flow from investing activities or
Net cash used in investing activities (-£134.794M)
3. Net cash flow from financing activities or
Net cash used in financing activities (-£23.310M)
VARIANCE ANALYSIS
What is a variance?
Variance = Standard cost – actual cost
If the answer is positive, it is favourable and
If it is negative unfavourable (in general).
Management accounting provides information
About positive and negative variances at the end of
A production cycle and the management to measure
The performance of the relevance staff and for the
Control purposes.
The analysis of the variances can help to identify the
causes of the variances and recommend remedial
actions to minimise the variances in the future.

3.1 Interpret financial accounts of Dalata Hotels Group PLC
- You must interpret at least the following three accounts/statements:
1. Income Statement (Profit & Loss Account)
2. Balance Sheet (Statement of Financial Position)
3. Statement of Cash Flows
using financial ratios (accounting ratios) on the following four areas:
a. Profitability
b. Liquidity
c. Efficiency
d. Financial position
Profitability Ratios
1. Gross Profit Margin (GPM)/Gross Profit Ratio
= (Gross Profit/Sales Revenue) X 100
For example, Gross Profit = $40M
Sales revenue = $200
= (40/200) X 100 = 20%
Interpret: For every $100 sales, the company made $20 gross profit.
2017 = 63.19
2016 = 62.19
Why did the GPM increase?
Because the percentage increase in Gross Profit (22%) is more than the percentage
Increase in Sales Revenue (20%)
Interpret further by giving possible reason:
1. Lower selling price
2. Lower purchase price
3. Increase in quantity sold due to decrease in selling price

2. Operating Profit Margin (OPM)
Operating profit is the profit before interest and tax.
OPM = (operating Profit/Sales Revenue) X 100
2016= 19.14%
2017= 24.94%
3. Net Profit Margin (NPM)
Net profit = Profit after tax (profit attributable to the owners of the company)
NPM = (Profit attributable to the owners of the company/Sales Revenue) X 100
2016 = 12.02%
2017= 19.60%
4. Return On Equity (ROE)
= (Net Profit/Total Equity) X 100
2016= 6.03
2017= 10.06
5. ROCE (Return On Capital Employed)
What is capital employed?
That is the total capital used in the business.
How much is the capital employed in DHG in 2017 ?
Total Equity + Total Non-Current Liabilities
ROCE = (Operating Profit/Capital Employed) X 100
What is ROCE for 2017?
2017= 7.73

6. Admin expenses to Sales ratio;
= (Admin Expenses/Sales Revenue) X 100
2017= 20.01%
2016= 19.26%
Liquidity ratios
What is liquidity?
The ability of the company to meet the short term financial commitments
when they are due.
The companies need to have a balance between liquidity and profitability.
1. Current ratio
2. Acid-Test ratio
The liquid assets are the assets that can be converted into cash without much loss
in a very short period of time. For examples, cash in hand, cash at bank, prepayments,
trade receivables etc.
Current Assets – Current Liabilities = Working Capital
What are the current assets?
Cyclical assets such as inventories, trade receivables, prepayments, cash in hand, cash at
Bank (cash and cash equivalents) .
What are the current liabilities?
The liabilities falling due within one year. For examples, short term borrowings payable
Within one year, trade payables, tax payable, bills payable etc.
Current ratio = Total Current Assets/Total Current Liabilities
2017= 0.46
2016= 1.44
Acid- Test Ratio = (Current Assets – Inventories)/Current Liabilities
2017= 0.87
2016= 0.35

Efficiency ratios
These ratios measure the efficiency of the company in utilising the assets to generate sales
and make profit. These are also known as resource utilisation ratios or assets utilisation ratios.
They are:
1. Asset Turnover
2. Stock Turnover
3. Debtors collection period
4. Creditors payment period
Asset Turnover
Asset Turnover = Sales Revenue/Total Assets or Net Assets
2017= 0.33
2016= 0.31
This ratio measures the efficiency of the company in utilising its total assets in generating sales.
Stock turnover
Purpose: Stock Turnover measures the efficiency of inventory management of the company.
The higher the ratio the better. The higher ratio means the company sells faster.
Formula: Cost of Sales/Inventory (or average inventory)
Calculation:
2017: 69.40
2016: 71.61
Debtors collection period
Also known as Debtors Collection Days or Trade Receivable days.
Purpose: This ratio measures the efficiency of the credit management of the company.
In other words, how fast the company collects receivables from credit
customers.
The shorter days the better

Formula: (Trade receivables/Sales revenue) X 365
2017= 8.79
2016= 8.68
Creditors Payment Period
This is also known as Creditors Payment Days or Trade Payable Days.
Purpose: This ratio measure how prompt the company is in paying back to its credit suppliers.
Formula: (Trade Payables/Cost of Sales) X 365
2017= 39.98
2016= 42.33
The lower days the better.
Also compare the trade payable days with trade receivable days and comment.
Debtors collection period is the time frame in which organisation is receiving their amount
which is paid in advance. Whereas, Creditors payment period is the time period in which creditors
are paying their due amount. CPP is way more than DCP that is 39.88 to 42.33 and 8.79 to 8.68,
which shows that the organisation is unable to collect their due amount on time.