Analysing and Interpreting Financial Statements

Flashcards for key terms and concepts from 'Analysing and Interpreting Financial Statements' lecture.

Ratio Analysis

A tool for assessing the financial health of businesses by expressing the relationships among selected items of financial statement data.

Profitability Ratios

Ratios that express the profits made in relation to other key figures in the financial statements or to some business resources.

Liquidity Ratios

Ratios that examine the relationship between liquid resources held and accounts due for payment in the near future.

Efficiency Ratios

Ratios used to measure how efficiently certain resources have been utilized by the business.

Gearing Ratios

Ratios that examine the relationship between financing provided by owners and financing provided by loans.

Investment Ratios

Ratios that assess the returns and performance of shares in a business from the perspective of shareholders.

Current Ratio

Compares a company's current assets to its current liabilities, indicating liquidity.

Quick Ratio (Acid Test)

Measures a company's ability to meet its short-term obligations, excluding inventory from current assets.

Earnings Per Share (EPS)

Measures the profit earned for each ordinary share in issue during an accounting period.

Price to Earnings Ratio (P/E)

Compares earnings per share to the market price per share, indicating market expectations of a company's future performance.

Dividend Cover

Shows the number of times that ordinary dividends could be paid out of available profits during the accounting period.

Benefits of Ratio Analysis

Provides summary statistics, aids decision making, and allows comparison across businesses, periods and divisions.

Limitations of Ratio Analysis

Includes lack of uniformity in definitions, unrepresentative figures, different accounting policies, and potential for misinterpretation.