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An example applying Robertson (1983) ratio model

For this blog I will provide relevant data and show how I combine the figures. I will then show the calculation of the individual ratios which are then combined to give a total score. A brief explanation will conclude this blog.

In Table 1 below I will provide the basic data required to calculate the total score for Robertson's model together with capital letters against each item. In the bottom section of Table 2, I show you how to combine certain of the figures, e.g. total assets is the sum of non-current assets plus current assets (A + C).

Basic Financial data 20102011
(A) Non-current assets 42,00044,000
(B) Inventories 40,00045,000
(C) Current assets 78,00079,000
(D) Bank overdraft 8,00026,000
(E) Trade payables 25,00030,000
(F) Current liabilities 36,00056,000
(G) Equity 59,00055,000
(H) Long-term loans 25,00012,000
(I) Revenues 155,000175,000
(J) Profit before tax 6,000-3,600
Combining the figures 20102011
(K) Total assets(A + C)120,000123,000
(L) Total debt(F + H)61,00068,000
(M) Current assets – total debt(C – L)17,00011,000
(N) Equity (shareholder’s fund)(G)59,00055,000
(O) Total borrowings(D + H)33,00038,000
(P) Equity – total borrowings(N – O)26,00017,000
(Q) Liquid assets(C – B)38,00034,000
(R) Liquid assets – bank borrowings(Q – D)30,0008,000

Table 1 Basic data

In Table 2 below, we show the final calculations to arrive at the total scores. For ratio R1 we take the revenues figure from row (I) and deduct total assets from row (K), the result is then divided by revenues from row (I) and multiplied by the weight for R1 i.e. 0.3 to arrive at a figure of 0.07 for 2010. Similar calculations are performed for the remaining ratios R2 to R5. The total score is the sum of ratios R1 to R5, giving a value of 0.99 for 2010

 Weight20102011
R1 (Revenues – T.Assets) ÷ Revenues0.30.070.09
R2 Profit before tax ÷ Total assets0.315-0.09
R3 (C.Assets – T.Debt) ÷ C.Liabilities0.60.280.12
R4 (Equity – T.Borrowings) ÷ T.Debt0.30.130.08
R5 (L.Assets – B.Borrow.) ÷ Tr.Payables0.30.360.08
Total Score 0.990.28

Table 2 Robertson’s 1983 ratio model

Interpretation is on the movement in the total score year-on-year. The suggestion is that a fall of more than 40% indicates a significant decline in the financial health of a company. In this case we can see that there is a decline well above the 40%.

The model then allows examination of each of the individual ratio components to identify where the decline has taken place. The analyst should then revert to using traditional ratio analysis to drill down and find the cause(s). In this case we can see that the decline is spread over ratios R2 to R5 i.e. profitability, liquidity and gearing.

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