9706 · 3.5.1
Analysis and Communication of Accounting Information
Welcome to the analysis and communication of accounting information. In this lesson, we'll move beyond simply preparing financial statements to interpreting them. Ratio analysis is a powerful tool used by investors, lenders, and managers to assess a company's performance and financial health. For Paper 3, you'll need to not only calculate ratios but also analyse them in context, understand their connections, and use them to provide clear, well-supported advice.
Need to know
What you need to know
- **Comparison:** Compare ratios against previous years (trend analysis) to identify improvement or deterioration. Compare against industry averages or key competitors to judge relative performance.
- **Context:** Are there any one-off events affecting the figures (e.g., a major asset sale, a recession)? What is the general economic climate?
- **Interrelationships:** Explain how ratios link together. For example, 'The company's decision to take on more debt (higher gearing) has increased its finance costs, which has reduced its interest cover and squeezed its profit margin.'
- **Stakeholder Perspective:** Tailor your analysis. A lender cares most about gearing and interest cover. A shareholder is more focused on EPS, dividend yield, and the P/E ratio.
- **Conclusion and Recommendation:** After analysing the data, you must come to a reasoned conclusion. Use command words like 'evaluate', 'advise', or 'recommend' as your cue to make a judgement and justify it.