Financial ratios are important in that they aid in determining the financial performance of the company, they also help to identify the strength and the weaknesses of the company, financial ratios include debt ratio, sales turnover ratio, return on assets, and return on equity gearing ratio, current ratio and price earning ratio. All these ratios are important but in order to identify the strength and the weaknesses of the company we need to identify the profitability, efficiency and the leverage of the company.
The gearing ratio is a financial indicator of the relationship between long term liabilities and capital employed, it is an important indicator to investors, this is because shares in a financial year may earn dividends while in some years dividends may not be paid, it is also important to investors in that long term liabilities are in form of loans and that they need to be paid back with interest and if the ratio is not appropriate investors end up loosing finally share holders have voting rights while long term liabilities do not have the voting rights that are used in making decisions of the company.
Therefore the gearing ratio shows the relationship between long term liabilities and it is calculated by dividing long term liabilities by the shareholders equity. ...
Because we derive the gearing ratio by dividing the long term liabilities by the total share holder equity we substitute our values as follows:
Gearing ratio = 183,011/27106 = 6.75
Therefore our gearing ratio is 6.75, this means that the company finances more using long term debts than equity through sale of share, this means that the company has to pay interest earned by these liabilities while it would have been possible to raise capital through equity, therefore there is a problem of having to pay high interest levels for the debts and therefore the company needs to minimize the costs of debts by raising funds through the sale of shares.
The following table summarizes dividends paid over the past 3 years, form the table it is evident that dividends paid have increased over the years:
dividends paid (million pounds)
The following chart shows the dividends paid by the company in the past 3 years:
From the above chart it is evident that the companies dividends have increased, this is an indication that in 2008 the dividends are likely to increase, this is an indication that the bank has increased its profit levels and therefore it is likely that the dividends will increase in the future, therefore investing in this company is much more profitable due to the high anticipated divided levels in the future.
Cash flow statement:
We analyze the company's performance using the 2007 cash flow statement, according to this statement we will be in a position to analyze the financial position of the bank and also indentify the source of the high profits gained by the bank.
During the year 2007 there were major changes in the level of assets held by the company, the company