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Ratio analysis is all about comparing one figure to another. Ratio analysis also allows inter-firm and intrafirm comparisons.

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Introduction

P5 In this task I have been asked to perform a ratio analysis to measure the profitability, liquidity and efficiency if future fashion. Ratio analysis is all about comparing one figure to another. Ratio analysis also allows inter-firm and intrafirm comparisons. Inter-firm is comparing between two different firms. And intrafirm is comparing within the firm for example lat years profit sheet and this years profit sheet. Ratio will be used by people in future fashion such as managers and employees these are known as internal stakeholders. Profitability Profitability is a measure of the profit of a firm in a relation to another profitability, also profitability is comparing one figure to another therefore future fashion will do this to ding out the profitability of their profits. Gross profit percentage of sales The formula for gross profit is calculated using the following formula: Gross profit X3 Sales turnover This ratio looks at gross profit as a percentage of sales turnovers this ratio is often referred to as the gross profit margin. ...read more.

Middle

Before future fashion take any action future fashion should consult their accountant so they can identify any figures falling whether it is related to sales cost of goods or expenses as all of these will affect the net profit margin. Return on capital employed Return on capital employed is calculated using the following formula: Net profit before interest and tax X3 Capital employed This ratio shows the percentage future fashion is achieving from the capital being used to generate that return. Investors will often compare ROCE to the interest rate being offered in a bank or building society to see if their investment is working effectively for them in generating a return. Liquidity Liquidity ratios measure how solvent a business is also how able it is to meet short term debts. There are two liquidity ratios known as: Current ratio This is calculated using the following formula: Current assets Current liabilities This ratio shows the amount of current assets in relation to current assets in relation to current liabilities. ...read more.

Conclusion

The ratio measures on average how long it takes for debtors to pays is expressed as a number of days. Debtor?s payment period will vary from firm to firm depending upon the nature and price of items sold and whether the business deals with business to business or business to consumer sales. Creditors? payment period This is calculated using the following formula: Creditors X365 Credit purchases When you do not know what percentages of purchases were made on credit then it is acceptable to use the purchases figure as given in the profit and loss account. The ratio measures on average how long it tasks a firm to pay for goods and services bought on credit. Rate of stock turnover This is calculated using the following formula: Average stock X356 Costs of goods sold The ratio measures the average amount of time an item of stock is held by a business and is expressed as number of days. ...read more.

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