Interpretation of Accounts The following figures have been taken from the final accounts of Sully plc, a company involved in the construction industry for the year ended 31/12/2010 - Leaving Cert Accounting - Question 5 - 2011

Gearing is calculated using the formula:

ext{Gearing} = rac{ ext{Debt Capital}}{ ext{Capital Employed}} imes 100

Where Debt Capital is €240,000 (the debentures) and Capital Employed is:

$$ext{Capital Employed} = ext{Equity + Debt} = €692,800 + €240,000 = €932,800$$

Now calculate the gearing:

ext{Gearing} = rac{€240,000}{€932,800} imes 100 = 25.7 ext{ \\ }% ext{ \\ } ext{ (rounded to 1 decimal place)}

The Earnings per Share (EPS) can be calculated using the formula:

ext{EPS} = rac{ ext{Net Profit After Preferred Dividends}}{ ext{Number of Ordinary Shares}}

First, we find the Net Profit After Preferred Dividends:

Net Profit = €65,000 Preferred Dividends = 5%\ of \ 50,000 = €2,400

Net Profit after Dividends:

$$ext{Net Profit After Preferred Dividends} = €65,000 - €2,400 = €62,600$$

Now, with 550,000 ordinary shares:

ext{EPS} = rac{€62,600}{550,000} = €0.113

The Dividend Yield can be calculated with the following formula:

ext{Dividend Yield} = rac{ ext{Dividend per Share}}{ ext{Market Price}} imes 100

Given that the Dividend per Share is €4.55 and the Market Price is €0.90:

ext{Dividend Yield} = rac{€4.55}{€0.90} imes 100 = 505 \% ext{ (rounded to 2 decimal places)}

To calculate the period to recoup the share price:

ext{Period to Recoup} = rac{ ext{Market Price}}{ ext{Dividend per Share}}

Given that Market Price = €0.90 and Dividend per Share = €4.55:

ext{Period to Recoup} = rac{€0.90}{€4.55} = 0.1987 ~ 19.87~ years

In the Bank Loan Application section, consider the following:

1. Return on Capital Employed (ROCE) should be calculated to evaluate profitability.
2. Ensure liquidity is sufficient, avoiding any risks associated with insufficient cash flow. The liquidity ratio needs to be verified.
3. Calculate gearing to assess financial leverage and risk.
4. Address security by valuing tangible and intangible assets accurately. Review fixed asset valuation critically.
5. Discuss the overall purpose of obtaining the loan and ensure that objectives for expansion are clearly outlined.

Ratio analysis is a valuable tool but comes with several limitations:

1. Historical Data: Ratios are based on past data and may not reflect future performance.
2. Comparative Analysis: In industries with significant differences, comparing ratios may lead to misleading conclusions.
3. Window Dressing: Firms might manipulate figures to present a better financial position, skewing the ratios.
4. External Factors: Ratios do not account for external economic conditions affecting performance.
5. Complex Variables: Financial performance involves multiple factors, and ratios can oversimplify the analysis.
6. Subjective Interpretation: Different analysts can interpret the same ratio differently, leading to varied conclusions.