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# You need to make judgement on each ratio- does it show the business is doing well? Explain why.

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Introduction

﻿M2: You need to make judgement on each ratio- does it show the business is doing well. Explain why? Profitability: Profitability is a measure of the profit of a firm in relation to another. It allows for a more comprehensive assessment of the performance of a firm by comparing one figure to another. There are three profitability ratios: * Gross profit percentage of sales: This is calculated using the following formula: Gross profit * 100 = 76692.21 *100 = 53.90261 Sales turnover 142279.22 This ratio looks at gross profit as a percentage of sales turnover, this ratio is often referred to as the gross profit margin. If gross profit margin falls from one year to the next or is thought to be too low, a firm may try to reduce the cost of its purchases. This may involve looking for a cheaper supplier, but the firm must try to ensure that this does not affect the quality the product. Alternatively, it may try to increase sales without increasing the cost of goods sold. ...read more.

Middle

For every £1 invested 30p is made as net profit. It is better than the interest in the bank but it still could be improved. It still could be improved by making smarter investments in the future. Liquidity: Liquidity ratios means how solvent a business is that is, how able it is to meet short-term debts. There are two liquidity ratios: * Current ratio: This is calculated using the following ratios: Current assets = 20462.09 = 2.075263 Current liabilities 9860 This ratio shows the amount of current assets in relation to current liabilities and is expressed as x: 1. For every £1 in current liabilities they have £2.07 in assets which is very good. If they are demanded to pay the current liabilities immediately they can pay them. * Acid test ratio/ liquidity ratio: This is calculated using the following formula: Current assets- stock = 20462.09 – 1000 = 1.973843 Current liabilities 9860 The acid test is thought to be a tougher measure of a firm’s liquidity. Like the current ratio, it shows the amount of current assets in relation to current liabilities, but it does not include stock. ...read more.

Conclusion

The ratio measures on average how long it takes a firm to pay for goods and services bought on credit; it is expressed as a number of days. 47 days this is very bad. The debtors might not even wait that long. They need to reduce the days. There is no reason for this to be high. * Rate of stock turnover: This is calculated using the following formula: Average stock * 365 = 5000 * 365 = 27.82563 Cost of goods sold 65587.01 This ratio measures the average amount of time an item of stock is held by a business, and is expressed as a number of days. If a business has a stock turnover of seven, this means that on average it holds each item of stock for one week. The rate of stock turnover is very much dependent upon the nature of the firm. For example you could expect a florist to have a much lower stock turnover than a fashion store or a car showroom. This means it will take 27 days to sell stock. That is good. This means the stock won?t go out of date. The less the amount of days are the better it is. ...read more.

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