investors

6.4 Interested Parties – Investors and Others

What are Interested Parties?

Interested parties are individuals or organisations that have a legitimate interest in a company’s financial performance and in the decisions it makes. The Cambridge IGCSE Accounting syllabus requires that students understand the following six groups:

• Owners & managers
• Trade payables & banks (creditors)
• Investors (shareholders, bond‑holders, venture capitalists, private‑equity firms, employee share schemes)
• Clubs & societies (e.g. school clubs, community groups)
• Government & regulators
• Community & environmental groups

Why Each Party Uses Accounting Information

Party	Key information they look for	Typical statements/ratios used
Owners & managers	Profitability, cost control, cash generation, return on capital	Income statement, cash‑flow statement, gross‑margin, net‑margin, ROCE
Trade payables & banks	Liquidity, ability to meet short‑term obligations, solvency	Balance sheet, current ratio, acid‑test ratio, cash‑flow from operating activities, bank‑reconciliation
Investors	Profitability, dividend policy, growth prospects, risk level, return on equity	Balance sheet (equity & debt), income statement, dividend‑payout ratio, ROE, D/E ratio, interest‑coverage ratio
Clubs & societies	Surplus/deficit for the period, accumulated fund balance, cash on hand	Receipts‑and‑payments account, statement of accumulated fund, cash‑budget
Government & regulators	Taxable profit, statutory compliance, filing deadlines	Profit & loss account (taxable profit), notes to the accounts, statutory returns
Community & environmental groups	Corporate social responsibility (CSR) disclosures, environmental costs, community investment	Notes on CSR, sustainability reports, environmental expense items

1. Owners & Managers

Definition

Owners (often the same as shareholders in a small business) provide the capital and expect a return. Managers run the day‑to‑day operations and use accounting information to plan, control and evaluate performance.

What they look for

• Revenue trends and cost of sales – to assess gross profit margin.
• Operating expenses – to control overheads.
• Net profit and retained earnings – to decide how much can be reinvested.
• Cash flow from operations – to ensure the business can fund growth without external borrowing.

Key statements & ratios

• Income statement – shows profit generation.
• Cash‑flow statement – highlights cash generation.
• Return on Capital Employed (ROCE) = Profit before interest & tax ÷ (Non‑current assets + Working capital).
• Gross‑margin = (Gross profit ÷ Sales) × 100 %.
• Net‑margin = (Net profit ÷ Sales) × 100 %.

Example (simplified)

ABC Ltd. – figures in £

• Sales = £500,000
• Cost of sales = £300,000 → Gross profit = £200,000
• Operating expenses = £80,000 → Operating profit = £120,000
• Interest = £20,000 → Profit before tax = £100,000
• Tax = £30,000 → Net profit = £70,000
• Non‑current assets = £400,000; Working capital = £150,000

ROCE = £100,000 ÷ (£400,000 + £150,000) = 0.18 → 18 %.

2. Trade Payables & Banks (Creditors)

Definition

Trade payables are amounts owed to suppliers for goods or services received. Banks provide loans and overdraft facilities. Both groups use accounting information to decide whether to continue supplying credit.

What they look for

• Current assets vs. current liabilities – to assess short‑term liquidity.
• Cash‑flow from operating activities – to see if the business can generate cash to repay.
• Debt‑service coverage – ability to meet interest and principal repayments.

Key statements & ratios

• Balance sheet – shows current assets, current liabilities, and total debt.
• Current ratio = Current assets ÷ Current liabilities.
• Acid‑test (quick) ratio = (Cash + Receivables + Short‑term investments) ÷ Current liabilities.
• Cash‑flow from operations (statement of cash flows).
• Debt‑service coverage ratio = EBIT ÷ (Interest + Principal repayments).

Example (simplified)

XYZ Ltd. – figures in £

• Current assets = £120,000 (cash + stock + receivables)
• Current liabilities = £80,000 (trade payables + short‑term bank loan)
• Current ratio = £120,000 ÷ £80,000 = 1.5
• Acid‑test ratio = (£70,000 cash + £30,000 receivables) ÷ £80,000 = 1.25
• EBIT = £150,000; Interest = £15,000; Principal repayment = £30,000
• Debt‑service coverage = £150,000 ÷ (£15,000 + £30,000) = 3.0

3. Investors

Definition

Investors provide capital in exchange for a right to a share of the profits (dividends), a right to interest (bond‑holders) or a share of ownership (shareholders). Their money enables the business to grow, and they expect a financial return.

Types of Investors

Investor type	Capital provided	How they receive a return	Typical level of control
Shareholders (equity investors)	Ordinary or preference shares	Dividends and capital gains	Voting rights, election of directors
Bond‑holders (debt investors)	Bonds or loans	Fixed interest and repayment of principal	Limited – covenants in the bond agreement
Venture capitalists	Equity in start‑ups or high‑growth firms	High dividends or sale of shares at IPO/exit	Active involvement – board seats, strategic advice
Private‑equity firms	Equity (often via leveraged buy‑outs)	Capital gains on exit, occasional dividends	Strong influence – may change management or operations
Employee share schemes	Shares granted or bought at a discount	Dividends and capital gains	Usually limited voting rights; align interests with company

How Investors Influence Company Decisions

• Capital allocation – Investors expect the money they provide to be used for profitable projects (e.g., expansion, research).
• Risk appetite – Shareholders may demand higher returns, pushing the company toward higher‑risk, higher‑return activities.
• Governance – Through voting rights and board representation investors can shape strategic direction and corporate policies.
• Performance monitoring – Ratios such as ROE, earnings per share (EPS) and dividend‑payout ratio are watched closely.

Where Investors Appear in the Financial Statements

Statement of Financial Position (Balance Sheet)

• Shareholders’ equity – ordinary share capital, preference share capital, retained earnings.
• Long‑term liabilities – bonds payable, notes payable.
• Other equity instruments – convertible bonds, warrants.

Statement of Profit & Loss (Income Statement)

• Dividends paid (shown in the notes – reduce retained earnings).
• Interest expense on debt.
• Gains or losses on the sale of investment securities (if disclosed).

Key Accounting Concepts & Ratios for Investors

• Dividend‑payout ratio – proportion of profit distributed as dividends.
  Dividend‑payout = Dividends ÷ Net Income
• Return on Equity (ROE) – profit generated for each £ of shareholders’ equity.
  ROE = Net Income ÷ Shareholders’ Equity
• Debt‑to‑Equity (D/E) ratio – degree of financial leverage.
  D/E = Total Debt ÷ Shareholders’ Equity
• Interest‑coverage ratio – ability to meet interest payments.
  Interest Coverage = EBIT ÷ Interest Expense
• Earnings per Share (EPS) – profit attributable to each ordinary share.
  EPS = (Profit after preference dividends) ÷ Number of ordinary shares

Practical Example

Company X – simplified data (all figures in £)

• Ordinary shares: 1,000,000 × £10 = £10,000,000
• Preference shares: 200,000 × £20 = £4,000,000
• Bonds payable: £5,000,000 at 5 % interest
• Net income for the year: £2,000,000
• Dividends declared – ordinary: £400,000; preference: £200,000 (total £600,000)

Calculations

1. Shareholders’ equity (excluding retained earnings) £10,000,000 (ordinary) + £4,000,000 (preference) = £14,000,000
2. Dividend‑payout ratio £600,000 ÷ £2,000,000 = 0.30 → 30 %
3. Preference‑share dividend treatment – paid before any ordinary dividend; therefore profit available for ordinary shareholders = £2,000,000 − £200,000 = £1,800,000.
4. EPS (ordinary) £1,800,000 ÷ 1,000,000 = £1.80 per ordinary share
5. Interest expense £5,000,000 × 5 % = £250,000
6. Interest‑coverage ratio (assume EBIT ≈ Net Income + Interest + Tax; tax ignored for simplicity) EBIT ≈ £2,000,000 + £250,000 = £2,250,000 Interest‑coverage = £2,250,000 ÷ £250,000 = 9.0
7. Debt‑to‑Equity ratio Total debt = £5,000,000 (bonds) D/E = £5,000,000 ÷ £14,000,000 ≈ 0.36

Interpretation (AO3)

• A 30 % dividend‑payout ratio suggests the company retains 70 % of profit for reinvestment – a balance between rewarding shareholders and funding growth.
• ROE can be calculated as £2,000,000 ÷ £14,000,000 ≈ 14 %; this is a respectable return for equity investors.
• A D/E of 0.36 indicates moderate leverage – the company is not overly dependent on debt, which is generally reassuring for both shareholders and bond‑holders.
• An interest‑coverage ratio of 9 shows ample ability to meet interest payments, reducing credit risk.

4. Clubs & Societies

Definition

Clubs, societies and other non‑profit groups raise money from members and external sources to fund activities. They keep a simple set of accounts to show whether they have a surplus or deficit for the period.

What they look for

• Cash receipts (membership fees, donations, fundraising).
• Cash payments (equipment, venue hire, events).
• Accumulated fund – the running total of surplus/deficit over the life of the organisation.

Key statements

• Receipts‑and‑payments account – a cash‑based statement showing inflows and outflows for the period.
• Statement of accumulated fund – similar to a balance sheet for non‑profit bodies; shows opening fund, surplus/deficit, and closing fund.

Example (simplified)

School Drama Club – figures in £

• Opening accumulated fund: £1,200
• Receipts: Membership fees £800; Ticket sales £500
• Payments: Costumes £300; Venue hire £200; Marketing £100
• Surplus for the year = (£800 + £500) − (£300 + £200 + £100) = £600
• Closing accumulated fund = £1,200 + £600 = £1,800

5. Government & Regulators

Definition

Government bodies (HMRC, Companies House, tax authorities) require companies to report taxable profit, pay corporation tax, and file statutory accounts.

What they look for

• Taxable profit – to calculate corporation tax liability.
• Compliance with accounting standards (IFRS/UK GAAP) – to ensure fair presentation.
• Statutory filing dates – to enforce legal obligations.

Key statements & disclosures

• Profit & loss account – provides the profit before tax figure.
• Notes to the accounts – disclose tax expense, deferred tax, and any tax reliefs.
• Directors’ report and auditor’s report – required for Companies House filing.

6. Community & Environmental Groups

Definition

These groups are interested in how a company’s activities affect society and the environment. They focus on corporate social responsibility (CSR) and sustainability.

What they look for

• Environmental costs (e.g., waste disposal, emissions penalties).
• Community investment (charitable donations, local projects).
• CSR disclosures – policies, targets and performance against them.

Key statements & disclosures

• Notes on CSR – often placed after the financial statements.
• Environmental expense line items in the income statement (if material).
• Sustainability report – may be a separate document but is referenced in the annual report.

Summary of Key Points

• Interested parties include owners/managers, creditors, investors, clubs, government and community groups.
• Each party uses specific parts of the accounts and particular ratios to assess performance, risk and compliance.
• Investors receive the most detailed treatment in the syllabus – they look at equity, debt, dividends, interest and a set of profitability and risk ratios.
• Understanding which information is relevant to each party helps candidates answer AO1 (knowledge), AO2 (application) and AO3 (analysis/evaluation) questions.

Link to Cambridge IGCSE Assessment Objectives

• AO1 – Knowledge: Define “interested parties”, list the six groups, describe the rights and typical returns of each investor type, explain the purpose of a receipts‑and‑payments account, and identify statutory reporting requirements.
• AO2 – Application: Locate investor‑related items in the balance sheet and income statement; calculate dividend‑payout ratio, ROE, D/E, interest‑coverage, EPS, current ratio and acid‑test ratio; prepare a simple receipts‑and‑payments account for a club.
• AO3 – Analysis & Evaluation: Discuss how a high dividend‑payout ratio may limit future growth; evaluate whether a given D/E ratio is acceptable for shareholders; assess the impact of a low current ratio on a supplier’s willingness to extend credit; comment on the relevance of CSR disclosures for community groups.