Financial reporting apps – now and the future
The October 2011 issue of CIMA’s Financial Management had a good article summarising the development to date of iphone/ipad/android apps for financial reporting. Since the advent of the internet, most public companies (and many other organisations) now publish their financial statements on their websites. Some just provide a static PDF file, while others offer more dynamic PDF files, Excel downloads and even XBRL formats. I suppose it is only logical that some firms are now providing a corporate reporting app, which not only make financial information more readily available, but also available in an offline format. According to the article, only a few companies have taken the “ground-breaking” step to develop and provide an app solely for financial information. Nestle launched the first such app (30,000 downloads), which incorporates news, financial reports, presentations and share prices. The article also mentions (just) two other firms, Shell (3,000 downloads) and Cemex – i think Tesco also have an app. There are obvious benefits of an app – reducing distribution and print costs, faster information dissemination – but the objective according to the article is to make the user’s experience far more interactive than web pages currently do. At present, given the infancy of such apps, interaction is their biggest downfall too. According to the author, only increased interactivity and a more user-friendly approach will increase the use of financial reporting apps. But, no matter what way these apps develop over the coming years, one thing is for sure – mobile communication will increase. Perhaps these early adopters of financial reporting apps may become the leaders in the field soon – only time will tell.
Happy Christmas
Just a short post to say I wish you all a very happy and peaceful Christmas and let’s hope 2012 brings joy and happiness too.
To keep it festive and light-hearted, here’s a line to end the year on (which I found here) – “year-end is approaching – keep calm and carry on reconciling”.
(Picture is the Leipziger Weihnachtsmarkt)
Keeping our accounting records for future history
I recently have been lucky enough to study accounting records at a company over a period spanning from about 1870 to today. It was a truly great experience, and history is not really one of my favourite topics. But having seen accounting techniques that we still apply today develop over time, it really gave me an appreciation for where present day accounting came from. The other thing that struck me was the level of detailed communication that went on between the accountants and various other parts of the organisation in the past. At the particular archive I was working in, volumes of typed-out reports and many hand-written ledgers, memos and other reports provided a wonderful picture of accounting over more than a century. What really struck though was how bad we are today at leaving a similar trail of history. Most accounting information is now electronically stored, which may be a problem in itself for any future researchers of accounting history. But a bigger problem is more likely to be the dispersal of information across modern organisations. While the main accounting records may be stored in an electronic, but archivable format, there’s normally vast amounts of related information stored in emails, documents and spreadsheets all across a company. This may make it impossible for any future business/accounting historians to follow the story of accounting within organisations today. So if you are an accountant, future accountant or a manager, why not think about how centralised your important accounting information is. It not only makes sense that important information be available to all now (and thus centralised), but it also leaves a more complete picture for the business itself to look over historic records – and of course makes it easier for future story-tellers/researchers.
Gearing ratio – 6 of 6 in series on financial ratios
In this last post on financial ratios, I will look at some ratios which are of interest to the providers of debt finance i.e. lenders like banks and investors who buy debt in companies instead of shares. We will look at two ratios, the Debt/Equity ration and Interest Cover.
The Debt/Equity ratio is calculated as follows:
Debt/Equity ratio: Debt
Equity
Debt is long-term debt, which is normally taken to mean long-term bank loans and other debt finance found under the non-current liabilities heading in the statement of financial position (balance sheet). Equity is the shareholders’ equity, or the capital provided by or attributable to shareholders (typically share capital, accumulated profits and other equity reserves). In general, if the gearing ratio is greater than 1:1, then a business is said to be lowly-geared; less than 1:1 makes it highly-geared. For a potential investor or lender, the higher the level of gearing the more risky the business may be. From a potential shareholder’s view, if more cash is needed to pay interest on debt, less is available for dividends. From a lender’s view, if the level of existing debt is high, repaying any additional debt may be problematic. However, high gearing is not necessarily a bad thing. Once monies borrowed are put to good use and earn a return greater than the rate interest paid, overall company profits grow. Managers use investment evaluation techniques to select investments (such as building a new production facility) which will produce returns beyond the cost of borrowing.
The next ratio, Interest Cover, is useful to lenders in particular. It is calculated as follows:
Interest Cover: Operating profit
Interest
The interest cover ratio simply tells us how many times operating profit (which is before interest, tax and dividends) covers interest. From a lenders perspective, a higher level of interest cover is preferred. If the interest cover is low, then a business might have trouble meeting interest payment on borrowings, which certainly would not bode well for repayments of the principal (the amount borrowed).
As in previous posts, let’s now calculate these ratios based on the financial statements of Diageo plc for 2010. The Debt/Equity ratio is as follows:
8177/4786 = 1.7:1 (data from p.108)
This means Diageo plc is a highly geared company. It is however quite successful and generally pays dividends to shareholders, so it most likely uses its debt well.
The interest cover is:
2574/844 = 3.04 times.
This means profit covers interest payments just over three times at current levels, which is reasonable.
Investment ratios – 5 of 6 in series on financial ratios
As we have seen in an earlier post the ROCE may be useful to shareholders, but there are a number of other ratios which they may find particularly useful as investors. These are Earnings per Share (EPS) and Price Earnings (PE).
EPS represents the profit per individual share. It as calculated as follows:
EPS: Profit after tax, interest and preference dividends
Number of ordinary shares in issue
The top portion of the EPS ratio represents the profit that is available for payout as a dividend. This does not at all mean it will be paid out, but it is the profit available to ordinary shareholders. Given that the bottom portion of the EPS is the number of ordinary shares issued, the EPS is not very comparable between two companies. However, the trend of the EPS of a particular company is an important indicator of how well the company is performing and it is also an important variable in determining a shares price
The PE ratio shows a company’s current share price relative to its current earnings – which assumes the company is a public company and its shares are available for purchases through a stock market. It is calculated as follows:
P/E ratio: Market price per share
Earning per share
It’s usually useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general, or against the company’s own P/E trend. It would not be useful for investors to compare the P/E of a technology company (typically high P/E) to a utility company (typically low P/E) since each industry has very different growth prospects. Care should be taken with the P/E ratio because the bottom part of the ratio is the EPS, which as stated above may not be that comparable between companies. There are some crude yardsticks for the P/E ratio as follows:
- A P/E of less than 5-10 means that company is viewed as not performing so well;
- A ratio of 10-15 means a company is performing satisfactorily;
- A ratio above 15 means that future prospects for a company are extremely good.
Again, as with all such yardsticks, these will vary by industry and depend on other factors which drive share price e.g. bad publicity, the general economic outlook.
As in previous posts, let’s use the accounts of Diageo plc from 2010 to calculate these ratios.
EPS = 1,762,ooo/2,754,000 = £0.64 per share (data from p. 107/150)
PE = 1060/64 = 16.6 times (share price from http://www.diageo.com/en-row/investor/shareprice/Pages/Shareprice-History.aspx. Based on the yardstick mentioned above, the PE for Diageo reflects sound future prospects.
Working capital management ratios – 4 in series of 6 on financial ratios
In this post, I’ll detail some ratios which can helps a business manage its working capital (working capital is current assets less current liabilities). A business can calculate a ratio for each of inventory, trade receivables, and trade payables which help interpret how well working capital is managed. In my previous post, I showed some ratios which help determine liquidity and solvency; with the ratios below, we have all elements of working capital covered (including cash) .
The first ratio is inventory turnover, which is calculated as follows:
Inventory turnover: Cost of sales
Average inventory
This ratio tells us how many times a year inventory is sold. You’ll notice the bottom line says “average inventory”, which might be a simple average of the inventory at the start of the year and the end of the year, or a rolling average. The reason for using an average is to try to remove seasonal variations.
The next ratio reflects how well trade receivables are managed:
Average period of credit given: Trade receivables x 365
Credit sales
This ratio tells how many days credit, on average, is given to customers. The top line is multiplied by 365 to give the answer in days. If you want it in months, multiply by 12 instead. If the period of credit given is getting longer, this could be problematic, as cash is not collected as fast by the business.
Now let’s see the average period of credit taken. This is very like the previous one, except it relates to suppliers. It is calculated as follows:
Average period of credit taken: Trade payables x 365
Credit purchases
One thing to note about this ratio is that it may not always be possible to obtain the credit purchases figure from published financial statements. The period of credit taken should not be too long either. If it is getting longer, it may be a sign of cash flow problems.
As in my previous posts, I’ll now calculate the above ratios using the figures from the 2010 annual report of Diageo plc.
The inventory turnover is: 4099 (3281+3078)/2 = (data from p.106/108) =1.2 times per annum. This means the company sells its inventory just over once per year. This probably seem really low if you think about how quickly beer and other alcohol sells in a retail sense. However, if we look at the detailed notes on inventory in the annual report, we can see that about 2/3 of the inventory is deemed “maturing” inventory.
The average period of credit given is: 1495 x365/9780 = 56 days (data from p.106/140). This seems a reasonable period of credit.
The average period of credit taken is: 843 X 365/4099 ) =75 days (data from p.106/148). Note that I am using the cost of sales figure as a substitute for the credit purchases figure – which is typically not available in published accounts. Again this figure seems reasonable and is longer than the period of credit given, which makes logical sense.
In summary from the figures above, the working capital of Diageo plc seems well managed.
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