Analysing Financial Statements

Hi there,

One of my main areas of difficultly is analysing financial statements. I have repeatedly tried questions and thought I may have gotten the hang of it, however I have now seen in many past papers that the method behind producing the ratios is different than what I read.

For example Greenwood (dec08) has a discontinued operation held for sale within the current year and so is removed the asset from the ROCE calculation as it has ‘not contributed to the return for continuing operations’.
Harbin (dec07) purchased the whole of net assets from a company within its current year and again you were asked to compare to prior year. So I would have thought you’d remove this to produce a like for like comparison. But the answer did not.
Lastly Quartile (dec12) is comparing against sector averages. this has a deferred devolopment expenditure for which there will be future sales however no revenue yet. I thought this would have been excluded from the ratio calculations but again was not, however there was a comment within the answer of saying there may not be a like for like comparison due to it and so without the expenditure the net asset turnover would be X.

Could you please let me know when there should be a change in the calculation of ratios in terms of the figures you include or exclude. From my understanding you want to create a like for like comparison to whatever you are analysing against, be it a sector average or your prior year results. So if there is something ‘new’ within the year, such as a acquired company etc, you would exclude them from the working and then compare with prior year and perhaps mention that eg. With the acquired subsidiary the ROCE would be X.

Thank you