Scribd
Upload
40 views1 page

Client: Subject: Interpretation of Financial Statements

The document provides formulas and explanations for various financial ratios used to analyze a company's financial statements. It includes capital ratios like return on capital employed and owners' equity to total assets. It also includes leverage ratios like debt to equity and interest cover. The ratios are used to evaluate the company's financial strength, efficiency, and ability to meet obligations from its capital structure. The document provides the calculations, significance, and what a high or low ratio indicates for various financial metrics.

Uploaded by

Michel Bryan Semwo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
40 views1 page

Client: Subject: Interpretation of Financial Statements

The document provides formulas and explanations for various financial ratios used to analyze a company's financial statements. It includes capital ratios like return on capital employed and owners' equity to total assets. It also includes leverage ratios like debt to equity and interest cover. The ratios are used to evaluate the company's financial strength, efficiency, and ability to meet obligations from its capital structure. The document provides the calculations, significance, and what a high or low ratio indicates for various financial metrics.

Uploaded by

Michel Bryan Semwo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
You are on page 1/ 1

Client: Prepared By: Date:

1/4
Subject: Interpretation of Financial Statements Reviewed By: Date:

Period:

FORMULA FOR CURRENT YEAR PREVIOUS YEAR


RATIOS COMPUTATION SIGNIFICANCE W/P REFERENCE COMPU- RESULT COMPU- RESULT COMMENTS
TATION TATION

1. Capital Ratios

(a) Returned on Capital Profit before interest and tax Explain the efficiency of the
Employed Shareholders equity + long management by comparing the
Note: the term term debts profit and resources used to
"Capital employed" is produce it. This may be used
not uniformally interpreted: Profit after to compare the efficiency of
sometimes it is applied to interest but before tax the business with other similar
indicate all assets less Shareholders equity business.
current liabilities and
sometimes to indicate
total assets and sometimes
to indicate owner's equity. However,
generally it indicates the owners
equity under the short term
finances are uitilized to acquire
long term assets.

(a) Owners' Equity to total Total Net Worth Indicates the ratio of assets
Assets Total Assets belonging to owners to total
assets. Reflects financial
strength of the business to
meet its creditors.

(b) Total Liabilities to Total Liabilities Indicates assets acquired out


Total Assets Total Assets of capital provided by creditors
in relation to total assets.

(c) Fixed Assets to Fixed Assets (net) Shows the extent of the use of
Fixed Liabilities Fixed Liabilities long-term debts and potential
borrowing powers of the
business.

2. Leverage Ratio

(a) Debt to equity Fixed interest bearing Reflects the relative compo-
securities (i.e., preference sition of ordinary shares and
shares and debentures fixed interest capital.
long term debts)
Share capital + reserves +
subordinated debts

(i) Low Geared Capital - when equity is more than fixed interest liabilities
(ii) High Geared Capital - when fixed interest capital is more than equity
(Equity Capital) capital.
(iii) Neutral Gearing - Equity and Fixed interest capital are equal (i.e. 1 : 1)

(b) Interest cover Operating profit


Amount of interest

You might also like