Interpretation of Financial Statements
Interpretation of Financial Statements
Interpretation of Financial Statements
18.1 Introduction
The shareholder
Management,
Economists and Analysts
Bankers and fund providers
Employers
Consultants
Creditors
Various governments.
The activity ratio measures to what extent the firm is able to utilize
its long – term (fixed) assets to generate sales. It also determines
the frequency or regulatory at which the firm is able to turnover its
short-term (current) assets. Specifically, it tries to measure how
often the firm disposes its stock and collects its debts (accounts
receivable).
This ratio also called debt utilization ratio measures the extent of
combination of debt and equity finance in the running of the
business.
Liquidity ratio tries to measure the ability of the firm to settle short
– term crystallizing obligations as they fall due. Is the firm liquid?
How liquid is the liquid.
Limitations of ratios:
Jay -Jay Nig ltd Statement of Comprehensive Income for the year
ended 31 Dec.2009.
(N) (N)
2009 2008
Current liabilities
The calculation financial ratios for JayJay Nig Ltd for 2009 and
2008 is illustrated as follows :
iii Price/ Earnings ratio: This ratio captures the number of times it
will take the firm to recover the current market value of the firm . It
also indicates the public perception by the public of the future
prospects of the company.
(i) Inventory Turnover: This ratio indicates the rate or the number
of times per period at which stocks are turned over or replenished
through sales
= Cost of sales
Average stock
(ii) Debtors Turnover: This ratio shows the rate at which debtors
paying up their bills.
Average Debtors 1
Sales
80,000/200,000 = 40
75,000/383,230 = 19.5
= Current Assets
Current Liabilities
Current Liabilities
2009 = 260000,-160000/128000=0.78:1
Where :