BUSF_A01.qxd

Chapter 3 • Financial statements and their interpretation

Looking at these ratios for Jackson plc for 2008 (see above), we have:

ROCE (19.0%) =OPM (16.1%) ×SRCE (1.18)

It can be quite helpful to look at sales revenue relative to various elements of the net

assets. For example, if there is a relatively small sales revenue to capital employed

ratio, further analysis can be undertaken to assess non-current asset turnover, current

asset turnover, and so forth. This may enable an analyst to make a judgement about

the reason for the low sales revenue to capital employed figure. This in turn may

reveal that the business has an abnormal balance between the various elements of net

assets, for example relatively high non-current assets.

Inventories turnover period ratio

×365 days

Jackson plc is a manufacturer that makes things to order and therefore has no

inventories of finished goods. Let us assume that all the inventories at the year end are

of raw materials (rather than work in progress).

The ratio for Jackson plc for 2008 is:

× 365 =62.0 days

This ratio indicates the average number of days for which inventories remain in the

business before they are taken into production. Good inventories management would

cause this figure to be as low as possible, consistent with there being sufficient invent-

ories available to meet production needs.

The inventories turnover ratio is the reciprocal of this, that is:

Settlement period for trade receivables (days trade receivables) ratio

×365 days

Assuming that all of the business’s sales are on credit, the ratio for Jackson plc for

2008 is:

× 365 =41.9 days

This ratio tells us how long, on average, following the sale on credit, credit cus-

tomers (trade receivables) take to meet their obligation to pay. A well-managed trade

96

837

Trade receivables

Credit sales revenue

Inventories used

Inventories

43

253

Inventories

Inventories used