This then is the start: now these bare figures must be related to something to extract some meaning from them. For instance, the figure of the trade creditors as a percentage of turnover: the higher the percentage the longer customers are taking to pay. This means not only that the company must find expensive finance to bridge that gap, but that its cash and credit control are not very good.
Another significant figure is the relationship between borrowings and share capital. Borrowed money has to be repaid and the interest is due whether the company is making a profit or not. Equity – share capital – is never likely to be repaid and dividends are paid only when the company can afford them. If the profitability is greater than the cost of debt, the profit attributable will be geared up substantially. All the same, there are limits to how much a company may borrow, and borrowing makes a business vulnerable. The ratio between those borrowings and the equity money is called ‘gearing’ (‘leverage’ in the United States), and a company with shareholders’ funds of £150 million and borrowings of £75 million would be called 50 per cent geared. It varies a bit depending on external circumstances and the industry sector, but if it went to over 60 per cent the company would be called ‘highly geared’.
One aspect that is easy to study is the trends over time. All accounts provide the previous year’s figures and many provide summary tables for the previous five years. These will show, for instance, whether turnover has risen faster than the rate of inflation, and whether profits have risen even faster through increased efficiency, concentration on high-margin products and so on.