Gross profit x 100 = Gross Profit Margin
Sales
02/03 01/02
441.0 x 100 = 24.6% 466.3 x 100 = 23.1%
1,794.1 2,014.3
In 01/02 the Whitbread plc’s gross profit was 23.1% and their following year it was 24.6%. Looking at the figures above they haven’t really made that much improvement as they have only increased 1.5% than their previous year. Therefore, Whitbread plc might to sell their products a higher price or produce more for less money in order for them to boost their gross profit.
Net Profit Margin
The profit margin tells you how much profit a company makes for every £1 it generates in revenue. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better.
Net profit x 100 = Net Profit Margin
Sales
02/03 01/02
270 x 100 = 15% 74.4 x 100 = 3.7%
1,794.1 2,014.3
In 01/02 the net profit was 3.7% where the year after that 02/03 was 15%. By comparing the two figures above it seems as if they have improved extremely. The difference between those two years is 11.3% and that was a great achievement on Whitbread’s point of view. The reason why they have improved so immensely is because they have reduced their administration cost for nearly half of what they spent in their previous year. When the net profit is high it means you are making more profit on every product.
Current ratio
The current ratio is another test of a company's financial strength. It calculates how many pounds in assets are likely to be converted to cash within one year in order to pay debts that come due during the same year. You can find the current ratio by dividing the total current assets by the total current liabilities.
Current assets = :1
Current liabilities
02/03 01/02
230.4 = 0.94: 1 213.2 _ = 0.98: 1
244.0 218.6
The above current ratio is what I got for the two years given and looks as if Whitbread current ratio has fallen down by 0.4. That doesn’t look good on Whitbread’s point of view because it means that they went down £4 to every £100 than their previous year. They might want to get as close as possible because they don’t want to fall far from 1 as it will result them to struggle to pay their short term liabilities which isn’t good at all.
Acid Test
Another name for the "quick ratio". It is used to measure how easily a company could be liquidated, and therefore help financial institutions decide upon how credit worthy the company is.
Liquid Assets = :1
Current liabilities
02/03 01/02
230.4 - 23.9 = 0.85: 1 213.0 - 28.1 = 0.85: 1
244.0 218.6
Looking at my figures above it shows that Whitbread hasn’t made any improvements at all for their last year; it looks as if though they scored the same results as they did on their first year (01/02). Looking at that it doesn’t mean they are doing bad in any way but it would be better to get as close to 1 as possible for Whitbread.
Debtors Collection Period
The when calculated in terms of days is known as Average Collection Period or Debtors Collection Period Ratio. The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash.
Debtors x 365 days
Credit Sales
02/03 01/02
131.1 x 365 = 26.7 days 12.0 x 365 = 20.3 days
1,794.1 2,014.3
In 01/02 the debtor’s collection period was 20.3 days where as their next year was 26.7 days. By comparing those two figures it looks as if Whitbread’s debtors are taking 6.4 extra days to pay and that is not looking good for Whitbread because they could have used the money to invest in the business and make more profit on their next year but since their debtors are taking longer to pay they cant use the money and Whitbread would want to reduce that.
Creditor’s collection Period
Creditors are people or companies that the business owes money to in the immediate future. This shows the relationship between credit purchase and the level of creditors.
Creditors x 365 days
Credit Purchases
02/03 01/02
474.4 x 365 = 128 days 431.8 x 365 = 102 days
1,353.1 1,548.0
In 01/02 the creditor’s collection period was 102 days but their following year it rose 26 days meaning it was 128 days. It shows that Whitbread is struggling to pay their creditors back because it rose 26 extra days than their previous year and that is a lot of days. The reason could be because their debtors are also taking longer to pay therefore that is one way they can improve. By improving their debtor’s collection period will mean they can also improve their creditor’s collection period and they don’t want to be repeating this because if they get a bad reputation it will mean no one will be willing to credit them and that doesn’t look good on businesses, especially on Whitbread’s point of view
Stock Turnover
The stock turnover ratio shows how many times over the business have sold the value of its stocks during the year.
The higher the stock turnover the better, because money is then tied up for less time in stocks. A quicker stock turnover also means that the firm gets to make its profit on the stock quicker, and so the firm should be more competitive. However, it will vary between industries and so it is important to compare within an industry.
Cost of goods sold = number of times per year all the stock is sold
Average stock
02/03 01/02
1,353.1 = 52 times 1,548.00 = 60 times
26.0 26.0
In 01/02 the stock turnover was 60 times and their following year was 52 times. Looking at that it shows that their last year’s stock turnover was 8 times less than what they did on their previous year. By judging at their last year it shows that the stock turnover is taking them longer to sell than their previous year and the reason could be because their prices went up and they are making less sales or they are selling something different than their previous year which means its new to customers so its going to take time to make those sales.
B.)
Analyse the Financial Health of Whitbread PLC
I believe Whitbread PLC is doing well because despite ending with a negative figure on the first year they managed to get their balance back on track and id it seems as though if they will be improving on the following years.
Judging on their profit and loss account I would say its worth investing as we can see the improvement they made on the second year.
