MBA

CASE STUDY
LECTURE: FINANCIAL ASPECTS IN CASE STUDY

INTRODUCTION
OVERVIEW ANALYSIS
FINANCIAL ANALYSIS: RATIOS
RATIO ANALYSIS
USES OF FINANCIAL RATIOS
FIVE GROUPS OF RATIOS

INTRODUCTION
The assessment of financial position of a firm constitutes
an important aspect of the internal analysis and is very
important to analyses to determine the strengths and
weaknesses.
The overall performance of the firm will ultimately be
measured in financial terms.
A financial analysis will also reveal some of the
constraints in terms of formulating particular strategic
objectives and plans.
It is usual for a case study in strategic management to
provide financial information relating to the firm under
consideration and which students are expected to
analyse.

OVERVIEW ANALYSIS
To place a detailed financial analysis it is necessary to consider:
Trends in key figures over a number of years. Most important and
interesting trends are: Sales, profit, Net assets and dividends.
Overall trend should be noted and the percentage annual increase
or decrease in each should be calculated.
When interpreting trends overtime when inflation has occurred, care
should be taken. In order to assess the true underlying performance
of a company the reported figure should be converted to real figures
to eliminate the effect of inflation. One way of adjusting for inflation
is to deflate the reported figure by an inflation index which reflects
changes in the prices of goods for the industry to which the firm
belongs.

FINANCIAL ANALYSIS: RATIOS

Most of the information on which the financial analysis is based is

provided in the organisation's profit & loss accounts and balance
sheet.
These statements give absolute financial values, which will answer
the following questions:

Has a profit or loss been made?

Has it geared cash?

To understand more about the company from these statement we
need to answer the following questions:

Is the company being run efficiently in comparison with other

firms in the same industry or previous year?

Is the company able to continue trading and is it paying

creditors?

Would you recommend investing money in the business?

RATIO ANALYSIS
Ratio analysis is an extensively used method of
assessing the financial position of a firm.
Techniques can be used in two ways:
1.

2.

TIME SERIES ANALYSIS: To analyse trends over a

number of years and to examine the way in which
performance may have changed over time.
CROSS-SECTIONAL ANALYSIS: For comparison with
the industry average or with competitors at a single
point in time. This comparison allow a judgement to be
made about the firm's position within the industry.

USES OF FINANCIAL RATIOS

EXISTING SHAREHOLDERS
MEMBERS OF SOCIETY
MANAGERS OF A COMPANY
EMPLOYEES
POTENTIAL SHAREHOLDERS
LENDERS/INVESTORS
GOVERNMENT AGENCIES

FIVE GROUPS OF RATIOS

1.
2.
3.
4.
5.

LIQUIDITY RATIOS
GEARING RATIOS
ACTIVITY RAIOS
PROFITABILITY RATIOS
STOCK MARKET RATIOS

LIQUIDITY RATIOS
The balance sheet will show the immediate liabilities are at a certain
point in time. The test here is to see if the value of the current
assets of the business will cover the current liabilities. Liquidity
ratio is a determination of the firm's ability to pay off short term
obligations as they come due. Main ratios are:

1. The Current ratio = current assets/current liabilities

Current ratio indicates the extent to which a firm can meet
its short term liabilities firm its current assets without
having to raise finance by borrowing, issuing more
shares or selling fixed assets.
2. The Acid Test ratio: Current assets-Stocks/C Liabilities
Measures the firms ability to meet its short term liabilities
from its current assets without having to rely on the
sale of its stock.

GEARING RATIOS
Gearing Ratio measures the financial contribution of the owners of the
business through shareholders funds compared to he financing
provided from outside the firm borrowed funds. Main ratios are:
1.
Debt Ratio: Total borrowings/capital employed*100% - measures
the proportion of capital employed which is financed by borrowed
funds.
2.
Debt to equity ratio: Total borrowings/Shareholders fund*100%
-measures the amount of borrowing as a percentage of
shareholders fund.
3.
Interest cover: profit before interest and tax/Interest payable
measures how many times interest payments are covered by
operating profits.

ACTIVITY RATIO
AR indicates how efficiently management is using
the resources of the firm. Main ratios are:
1. Net Asset Turnover: sales/Net Asset
Measures how efficiently the net assets are
used to generate sales.
2. Fixed Asset Turnover: Sales/F.Assets
3. Stock Turnover: Sales/Stocks- measures the
number of times that stocks of finished goods
were sold during the year.

PROFITABILITY RATIOS
PR measures how efficiently the total firm is being
managed. Main ratios are:
1. ROCE = Operating profit/capital employed*100%
-measures the performance of the firm regardless of
the method of financing.
2. Return on equity= profit after tax/Shareholders
fund*100% -measures the profitability of the
shareholder's investment in the firm.
3. Operating profit margin =
Operating profit/Sales*100% -Shows how much 1 of sales
earn as operating profit.

STOCK MARKET RATIOS

1. EPS =Profit after Tax/Number of ordinary shares in
issues measures the earning generated for each
ordinary share.

2. Net Dividend Yield = Dividend per share/Market

price per share*100% -indicates the net dividends rate
of return to ordinary shareholders.