General Queries Topic 8

Hi @trephena and the OT mentors,

I am very close to summarizing my financial analysis but I need some help on my Ratios. I have calculated and thoroughly analysed the following ratios for Airbus :

1 – Sales Ratio ( analysed the sales/orders/deliveries )
2 – For Profitability : Operating Profit Margin Ratio
3 – For Liquidity : Current Ratio
4 – Debt-to-Equity Ratio
5 – Dividend Payout Ratio

I know there are more common ratios that I am not calculating such as :

P/E Ratio, Return on Equity , ROE , ROCE .

Please can you guide me if my ratio are sufficient ? Am i missing something ? Will they object that I didnt cover something. please can you help on this.

Thanks so much @trephena,

Hi Irwin,
Many thanks for the reply.
However I fear I may have been unclear in the wording of my question.
After calculating any ratios that are also included in the annual reports, to what degree will I be expected to know the differences between the two. If I have calculated Roce at 3% and the annual reports states it as 5.5%, how detailed should my explanation be of the difference? Is it acceptable to ignore the difference (though this seems obviously wrong to me to do) and use my ratios? Or is it sufficient to merely quote the description of the calculation in the annual reports and then state that the numbers are not provided in enough detail in order to replicate them?
Many thanks in advance,
Regards
Will

Thank you very much for getting back to me.

Option 1 seems more straightforward and easier to achieve however I have a few further questions.

I forgot to mention that I could use the 2013 annual report which was prepared for a full 52 weeks ending 30 April 2013/12.This will enable me to compare full year results for both periods .However this was prepared under a different basis of accounting from the 2014 financials(which used purchase accounting) but I could explain this as a limitation.

About the ratios , you seem to think they wont be affected by the period lengths however when I calculated asset turnover for 2012-2013 using sales of 34 weeks(restated 2014 report) and sales of 52 weeks( 2013 report) I got significantly different results.

Finally in your last post you mentioned that the premerger financial analysis should only set the scene. Does this mean I shouldn’t do all the ratios for the premerger or they shouldn’t be too detailed? What ratios do you suggest I do for this topic.

Thank you very much for all the help you give to people like me.

Provided you have done and used some of your own calculations it is fine to go with your suggestion “is it sufficient to merely quote the description of the calculation in the annual reports and then state that the numbers are not provided in enough detail in order to replicate them?”.

State the issues you have found in your limitations and where you discuss the particular ratio concerned

Just refer the reader to the appropriate appendix ( Appendix 5)

The important consideration with labelling is whether someone can follow your work. Probably a number followed by title is most clear in this regard e.g. 1. Balance Sheet XYZ; 4. Income Stmt ABC. You.might co.sided having the ratio calculations on a separate tab e.g. 5. Ratios XYZ

Hi Trephena et al,
Many thanks, for this and the continued support from all at OT, I would be truly lost without your constant input!

With Topic 8 it is important to integrate the business and financial analyses. In order to do this adequately you need to look at the strategic decisions taken by the management (outlined in the CEO and directors reports) and reflected in the performance as revealed by the financial statements.

You therefore need to appreciate the importance of the application of the models and the role this plays in your evaluation and analysis (Part 3). The SWOT could be quite important in this respect. The ratio analysis is not done in isolation, rather it Is a tool to enable you to comment on financial performance. However you are expected to explain the trends not just make obvious statements about increases and decreases and how one company has outperformed the other. Part of the explanations will revolve around how manag)ement taking advantage of PEST factors have built on strengths, overcome weaknesses and made the best of opportunities.

You seem to be adopting part of the above approach but if in doubt I have tried to explain this in my article on Evaluation and Analysis on our homepage http://www.opentuition.com/obu

Remember by using clear graphs you don’t need to then repeat what the graph shows – this just wastes,words and becomes tedious. Focus only on drawing attention to what is significant. Bring in KPIs relevant to the industry if possible.

Depends! The thing is, the business and financial analyses are connected and what connects them is strategic decisions that impact on performance.

Management strategic decisions are based on the business environment and therefore logically the analysis and application of models influences everything e.g. building on strengths and utilising advantageous factors.

Doing the models first is therefore likely to lead to a much better financial analysis as you would be aware of influences and strategies that impacted the company. Doing a financial analysis without having done this is likely to lead to very shallow and generalised comments.

Whilst OBU does not prescribe doing models first so no what you have done is not wrong, it just is unlikely to lead to a good overall analysis. Markers expect to see links between the two as after all financial results are normally the consequence of strategic decisions. Doing the models as a total separate exercise after the financial analysis is therefore not a very good idea….

Hi Trephena,

I hope you are well and can assist me in clarifying few issues regarding ratio analysis.

1) ROCE – I’ve included commercial aircraft divisions PBIT which is provided in the segment reporting and the consolidated balance sheet figures for Capital employed (TA – CL). However, I feel this somewhat skews the figures and not a true ratio. Is this acceptable?

As the segement report also contains the total assets fig for commercial aircraft, would it be better to include this figure minus CL. CL fig for commercial aircraft would be taken as a % from the group CL fig. For e.g. aircraft divisions revenue makes up 70% of the total revenue. 70% of CL would be apportioned as aircraft divisions CL. Also, apply the same principle throughout other ratios where only consolidated figures are available.

Can you please advise?

2) For LT Debt figures, total non-current liabilities from the consolidated balance sheet has been used which includes provisions, deferred tax and income. Is this ok? or is better to try and extract the LT debt portion from these figures which can be quite tricky and complicated?

I am just aware that these my workings isn’t consistent enough to form a valid analysis. However, I’ve mentioned these issues on the paper and explained my workings.

Your advice would be greatly appreciated.

Thanks,
Nash

Business analysis is about application of models and looking at the overall direction and strategies of the company e.g. how revenue and market share have increased or acquisitions of other companies etc..

Business and financial performance are connected as the decisions of the management (found in the CEO and directors reports) impact on financial results.

Great, thank you for your advice. I’ll include the group figures for those as suggested. Should I also do this for PBIT figures or using the PBIT for the commercial aircraft division is ok?

The best models for this topic are SWOT and PEST and as I have said dozens of times on this forum you need to show linkages between these and the financial results. To do this look at the CEO /chairman /directors reports in the annual reports and read the comments and strategies.

Start the analysis with the application of models and that way you should be aware of how some of the factors from the models (business environment) have influenced management decisions and impacted on the financial results.

This should then make it easier for you to comment reliably on the figures and trends that you see. No you do not need to comment on each and every change – it is important trends and significant changes that you should explain

I wouldn’t have thought that the purchase of 4 new aircraft would affect inventory directly- surely these are capital expenditure? However it might affect spares etc and this might rise considerably more if they have purchase aircraft of a new type as they might need different parts and more spares would probably be needed to cover the number of aircraft and this would increase inventory – is this what you meant?