ACCA Strategic Professional · Strategic Business Reporting (International)

Analysis and interpretation of financial and non-financial information and measurement of performance: formula sheet

Full chapter guide

Key formulas

Return on capital employed (ROCE): ROCE = profit before interest and tax ÷ (total assets − current liabilities) × 100; Investor and management measure of overall efficiency. Define it in your answer if the company uses a different version.
Gross and operating margin: Margin = profit ÷ revenue × 100; Use gross profit or operating profit. Shows pricing power and cost control.
Asset turnover: Asset turnover = revenue ÷ capital employed; ROCE = operating margin × asset turnover. Use this to explain why ROCE changed.
Current ratio: Current ratio = current assets ÷ current liabilities; Short-term liquidity. Of interest to lenders and suppliers.
Gearing: Gearing = debt ÷ equity, or debt ÷ (debt + equity), × 100; State which version you use. Lenders and investors assess financial risk.
Interest cover: Interest cover = profit before interest and tax ÷ finance costs; Lenders use it to judge ability to service debt.
Earnings per share: EPS = profit attributable to ordinary shareholders ÷ weighted average number of ordinary shares; Investor measure. Compare over time, not just at one date.
Dividend cover: Dividend cover = profit attributable to ordinary shareholders ÷ ordinary dividends; Shows how sustainable dividends are.
Gross margin: Gross profit ÷ Revenue × 100; Shows direct profitability. Check changes in price, mix and cost of sales.
Operating margin: Profit from operations ÷ Revenue × 100; Define profit from operations clearly (before finance costs and tax) and use the same definition every year.
Return on capital employed (ROCE): Profit before interest and tax ÷ (Total assets − Current liabilities) × 100; Capital employed is usually equity plus non-current liabilities. State your definition.
Asset turnover: Revenue ÷ Capital employed; ROCE = operating margin × asset turnover when the same profit and capital figures are used.
Current ratio: Current assets ÷ Current liabilities; No universal ideal figure. Compare with the sector and the prior year.
Quick ratio: (Current assets − Inventory) ÷ Current liabilities; Removes inventory as the least liquid current asset.
Inventory days: Inventory ÷ Cost of sales × 365; Use closing or average inventory consistently.
Receivable days: Trade receivables ÷ Credit revenue × 365; Use total revenue if credit sales are not given.
Payable days: Trade payables ÷ Cost of sales (or credit purchases) × 365; Purchases is better if given.
Gearing: Debt ÷ Equity × 100, or Debt ÷ (Debt + Equity) × 100; State which version you use. Decide whether lease liabilities are included as debt.
Interest cover: Profit before interest and tax ÷ Finance costs; Shows how many times profit covers interest. Low cover signals risk.
Earnings per share: Profit attributable to ordinary shareholders ÷ Weighted average ordinary shares; Basic EPS under IAS 33.
Price/earnings ratio: Market price per share ÷ EPS; Reflects market expectations of growth and risk.
Dividend cover: Profit attributable to ordinary shareholders ÷ Ordinary dividends; Or EPS ÷ dividend per share.
Adjusted ratio approach: Adjusted ratio = ratio recomputed after restating profit and capital employed to a common policy; Restate numerator and denominator consistently. Do not adjust only one of them.
Effect of revaluation on return on capital employed: ROCE = profit before interest and tax ÷ (total assets − current liabilities); A revaluation raises capital employed. For depreciable assets, it also raises depreciation charged within operating profit, so reported ROCE is normally lower than on the cost basis. Land is not depreciated, so only the denominator changes. Compare like with like.
Effect of depreciation change on profit: Change in profit = old annual depreciation − new annual depreciation; A longer life or higher residual value cuts depreciation and raises profit. It is a change in estimate under IAS 8, applied prospectively.
Cash quality check: Cash conversion = operating cash flow ÷ profit from operations; A persistently low or falling figure is a warning sign of aggressive recognition. It is a prompt to investigate, not proof.
Gearing: Gearing = debt ÷ (debt + equity); Definitions vary, so state yours. Lease liabilities and off-balance-sheet items affect comparability.
EBITDA: EBITDA = Profit before tax + Net finance costs (finance costs − finance income) + Depreciation + Amortisation; Not an IFRS-defined measure. Always state the definition you use. Some entities start from operating profit instead. Some entities also add back impairment. Label that figure adjusted EBITDA, because impairment is a separate adjustment and not part of EBITDA.
Adjusted profit: Adjusted profit = IFRS profit ± items management excludes (e.g. restructuring, impairment, fair value gains); Check each adjustment. Adding back tax effects may also be needed if starting after tax.
Reconciliation principle: APM − adjustments = nearest IFRS line item; ESMA guidance expects a reconciliation to the most directly reconcilable line item in the financial statements. IFRS 18 uses different wording for MPMs: the most directly comparable total or subtotal required by IFRS Accounting Standards.
Presentation checklist: Define · Label clearly · Reconcile · Not more prominent than IFRS · Explain usefulness · Comparatives · Consistency; Use as a memory list when asked about regulatory guidance.
Revenue threshold: Segment revenue (external + inter-segment) ≥ 10% × combined revenue of all operating segments; Meeting any one of the three 10% tests makes the segment reportable.
Profit or loss threshold: Absolute segment profit or loss ≥ 10% × the greater of (combined profit of all profitable segments) and (combined loss of all loss-making segments), in absolute amount; Compare the segment's absolute result with the larger of the two totals.
Assets threshold: Segment assets ≥ 10% × combined assets of all operating segments; Use segment assets as reported to the CODM.
75% coverage test: Total external revenue of reportable segments ≥ 75% of entity revenue; If not met, add more operating segments until it is, even if they fall below the 10% thresholds.
Practical limit: If the number of reportable segments exceeds ten, consider whether a practical limit has been reached; This is a guide in the standard, not a strict cap.
Entity-wide disclosures: Products and services, geographical areas, and major customers: where revenue from a single external customer is 10% or more of entity revenue, disclose that fact, the total revenue from each such customer and the segment(s) reporting it. The customer's name is not required.; Required even for entities with only one reportable segment.
Reconciliations: Segment totals of revenue, profit or loss, assets and liabilities (if reported to the CODM) are reconciled to the entity's IFRS amounts; Explain reconciling items such as head office costs and unallocated items.
Basic EPS: Basic EPS = (Profit attributable to parent's ordinary shareholders − preference dividends) ÷ weighted average number of ordinary shares; Use profit after tax and after non-controlling interest. Show the result in the currency unit per share, usually cents.
Weighted average shares: Σ (shares in issue × months outstanding ÷ 12); Time-weight each period. Apply bonus and rights adjustment factors to shares in issue before the event.
Bonus issue adjustment: Shares after bonus adjustment = old shares × (shares after the bonus issue ÷ shares before the bonus issue); For example, a 1 for 4 bonus issue has a factor of 5/4. Restate the whole period as though the shares always existed. Do not time-weight the bonus shares from the issue date.
Theoretical ex-rights price (TERP): TERP = (cum-rights price × old shares + issue price × new shares) ÷ total shares after the issue; Cum-rights price is the market price just before the shares go ex-rights.
Rights issue adjustment factor: Factor = cum-rights price ÷ TERP; Multiply shares in issue before the rights issue by this factor. Prior-year EPS is multiplied by TERP ÷ cum-rights price.
Shares issued for no consideration (options and warrants): Free shares = options × (1 − exercise price ÷ average market price); Only options with an exercise price below the average market price add shares. The numerator does not change.
Diluted EPS for convertibles: Diluted EPS = (earnings + post-tax interest or dividends saved) ÷ (basic shares + shares on conversion); Interest saved is multiplied by (1 − tax rate). Include only if the result lowers EPS.
Incremental EPS (ranking test): Incremental EPS = extra earnings ÷ extra shares; Rank potential shares from lowest to highest incremental EPS and add them in that order. Stop when EPS stops falling.
P/E ratio: P/E = market price per share ÷ EPS; Earnings yield is the inverse: EPS ÷ market price.
Dividend yield and dividend cover: Dividend yield = dividend per share ÷ market price; dividend cover = EPS ÷ dividend per share; Cover shows how many times the dividend is covered by earnings.
Six capitals: Financial, Manufactured, Intellectual, Human, Social and relationship, Natural; Learn all six and give a scenario example for each. Capitals are stocks of value that increase, decrease or transform.
Value creation process: Capitals (inputs) → Business model → Outputs → Outcomes (effects on capitals); Use this to structure answers. Outcomes can be positive or negative and internal or external.
Content elements: Overview and external environment; Governance; Business model; Risks and opportunities; Strategy and resource allocation; Performance; Outlook; Basis of preparation and presentation; They are linked, not a fixed list of separate sections. The report need not follow this order.
Guiding principles: Strategic focus and future orientation; Connectivity of information; Stakeholder relationships; Materiality; Conciseness; Reliability and completeness; Consistency and comparability; Use these as criteria when a question asks you to evaluate a report.
Fundamental concepts: Value creation; the capitals; the value creation process; These three underpin the whole framework.
IFRS S1 content areas: Governance + Strategy + Risk management + Metrics and targets; Use these four headings to structure any answer on what must be disclosed. IFRS S2 uses the same four for climate.
Climate risk types (IFRS S2): Climate risks = Physical risks + Transition risks; Physical: acute (storms, floods) or chronic (rising temperatures). Transition: policy, technology, market and reputation changes. Opportunities are disclosed as well.
Materiality test (ISSB): Material if omitting, misstating or obscuring could reasonably be expected to influence primary users' decisions; Primary users are investors, lenders and other creditors. This is the financial-materiality view.
Greenhouse gas scopes: Scope 1 = direct; Scope 2 = purchased energy; Scope 3 = other value-chain emissions; IFRS S2 requires disclosure of Scope 1, 2 and 3 emissions. Scope 3 is usually hardest to measure.
Integrated reporting capitals: Financial, Manufactured, Intellectual, Human, Social and relationship, Natural; Six capitals. Value creation is explained through how the entity uses and affects them.

Quick revision

Start every analysis by naming the user and the decision they face.
Always state the formula you use for a ratio, since definitions vary.
A ratio change needs a cause, evidence from the scenario and a consequence.
Compare with prior year, sector or budget; a single figure means little.
Accounting policy choices and estimates reduce comparability between entities.
Financial statements are historic and omit many value drivers such as people and brands.
APMs are not defined by IFRS, so check they are clearly labelled, reconciled and applied consistently.
Be sceptical of APMs that remove costs but keep gains.
IFRS 8 uses the management approach: segments follow what the chief operating decision maker reviews.
Basic EPS uses profit attributable to ordinary shareholders divided by weighted average ordinary shares.
Diluted EPS reflects the effect of potential ordinary shares, such as options and convertibles.
Integrated reporting focuses on value creation over time across the capitals; ESG disclosures inform investors on risks and impacts.

Common mistakes

Listing ratios with no interpretation Fix: For every figure, add a comparison, a cause from the scenario and what it means for the user.
Treating all stakeholders the same Fix: Start from the decision. A lender needs cash flow and cover. An investor needs returns and growth.
Listing calculated ratios with little or no comment. Fix: Allow at least as much time for explanation as for calculation. Each ratio needs a cause and a consequence.
Using inconsistent definitions between years or companies. Fix: State the formula once and apply it identically everywhere. Show the figures you used.
Comparing ratios across entities without checking policies Fix: Spend the first minute listing policy, estimate and GAAP differences. Mention them before interpreting any ratio.
Adjusting profit but not the asset base Fix: When you restate depreciation or revalue assets, change both profit and capital employed so ROCE is consistent.
Saying APMs are illegal or wrong. Fix: State that APMs are allowed and often useful, but must be presented fairly and not misleadingly.
Defining EBITDA without saying what it ignores. Fix: Add that it ignores capital replacement costs, financing and tax, so it is not a cash flow measure.
Using the legal entity or geographical structure as segments by default. Fix: Always ask what the CODM reviews. Segments follow internal management reports.
Computing the profit test against total profit instead of the larger of combined profits and combined losses. Fix: Add profitable segments and loss-making segments separately, take the greater absolute amount, then apply 10%.

Exam tips

Read the requirement for the named user. Marks are tied to that user's decision, so a generic ratio list scores poorly.
Use a short table-like layout in your answer: figure, comparison, cause, meaning. Keep sentences brief to save time.
Always bring in at least one non-financial measure from the scenario and link it to future financial results.
Add one limitation and one further information request. These show scepticism, which earns professional skills marks.
Finish with a clear conclusion for the user. An answer without a judgement loses marks even when the calculations are right.
Always identify the user and the decision. Link your conclusion to them.
Use the scenario clues. Examiners place events in the data to explain the ratio movements. Missing them loses marks.
State your formula and any assumption (for example, whether leases are in debt). Marks are awarded for a sensible, consistent approach.