In this series we will simplify the interpretation of financial statements and appreciate the range of accounting ratios from financial statements.
Also, to understand what they mean in terms of evaluating the trading performance and financial strength of your business and why they matter to you, your management team and to other parties.
Of course, when evaluating the performance of a company it is best to take into consideration industry comparisons. This will vary from sector to sector and products from services.
Funders may be more interested in liquidity ratios and debt serviceability ratios, whereas investors may have additional interest in the potential growth of a business, the return on investment and perhaps earnings per share.
Suppliers may seek comfort from understanding the working capital cycle, creditor days of a potential/existing customer and credit rating often from credit agencies who gather their information from Companies House and your filed accounts.
Public and government bodies who put contracts out for tender may want to understand the past performance and future viability of a business before awarding a contract.
As we look at a few key ratios/calculations we will consider:
- What is it?
- Why it matters?
- Who cares?
Let’s start by looking at a nice easy, but useful calculation.
1. Growth Revenue Analysis
Highlights in percentage terms the increase in sales over the previous year(s) which could be the result of higher volume of sales or an increased selling price.
This calculation in the form of a percentage can be used over a number of years to demonstrate consistent year on year growth. (Note: this doesn’t consider the effects of inflation, which can be calculated for a higher degree of accuracy) Often ‘scale up’ businesses are identified as those who have achieved 20% growth over 3 years.
Both investors and lenders take notice of growth businesses particularly if this has been achieved over difficult trading conditions as experienced over the last 18 months. Equity investors need a scaling business that will continue on a high growth path to realise the returns they seek. Lenders take comfort in increased revenues as this form a key part of their credit appraisals. Invoice finance providers are keenly interested in businesses with increasing commercial sales as their facilities can work in parallel with sales.