ASSIGNMENT P5, M2 & D2- RATIO ANALYSIS
Assignment P5: Ratio Analysis
Profitability is a measure of the profit of a firm in relation to another. This provides a fundamental measure of the success of the business. It also looks at how much profit the firm generates from sales or from its capital assets.
Gross profit percentage of sales:
This is the formula that shows the profit as a percentage of the income. For example, if the Gross Profit percentage of sales if high that means the business is doing well. And, if the Gross Profit percentage of sales is low that means the business is not doing well.
The percentage 57.7% represents the gross profit for SIGNature. The percentage is correspondingly above the half which means the business is doing well. Although there is only 7.7% more than the half, which signifies the management of the company needs to work hard to change the gross profit percentage, by the end of April 2011. Moreover, 57.7% is a good start for the gross profit for the company.
Net profit percentage of sales
The net profit margin is a profitability ratio which measures the profitability of the organisation. This indicator indicates the profit the company has made before the tax reduction. Using the net profit ratio it can be compared to the gross profit. If the gross profit is higher than the net profit it means that the business is spending more money on it operating costs.
The calculation shows that the net profit for SIGNature is only about 19.4% which shows the company is not making enough profits before the tax reduction. The gross profit margin is 38.3% higher than the net profit margin which clearly implies the organization is spending too much money on their operation costs.
ROCE- Return on Capital Employed
ROCE shows the return of money the business is expected to get after its capital investments.
The calculation shows a total of 121% which implies the company is likely to have a high income after its capital investments. This means the company should be able to sort their financial problems out as they are getting more income.
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Current ratio: It is an indicator of a firm’s ability to meet short-term financial obligations; it is the ratio of current assets to current liabilities. When the ratio is higher it is better for the company to pay of its short term liabilities. A ratio under 1 indicates that the business may struggle to pay off their short term liabilities.
This ratio signifies a figure of 4.52:1 which infers SIGNature will be able to afford their short term liabilities. This is positive as they don’t have any additional financial crisis. However, the management is not using their additional assets which the company might be making a mistake.
Acid test ratio/liquidity ratio determines whether SIGNature is able to pay off its short-terms debt obligations. Usually, if the value of the ratio is higher, then the company will be in the larger margin of safety which means the company will possesses to cover short-term debts.
The calculation shows a healthy result which signifies SIGNature to able to pay off their short term liabilities using their assets. However, there will be no essential needs to monitor them. Although, the ratio is expressively high, this proves the company is not using their additional assets.
Debtor’s payment period is this calculation which gives the company a measure of how long it may take the business to recover debts.
It will take SIGNature approximately a month to recover their debts. This shows that the company has a good relationship with their shareholder and this helps them to recover their debts as soon as possible.
Creditor’s payment period is the calculation which gives the organisation a measure of how long it will take the business to pay off its debts.
The creditors’ payment period for SIGNature shows 28 days. This reflects the company in a negative way. This indicates that they will not be able to pay off their debts in the required amount of time. Hence, it affects their relationship with other companies in a bad way.
Rate of stock turnover is the calculation which can be used to identify and to indicate the number of days which can be taken on average to sell the business’s stock.
SIGNature will take 17 times to have a turnover of stock in a year. This is a positive figure for the company. This is because they can try to increase the amount of times the turnover should take place.
D2: Write a conclusion to summarise the overall performance of Shauna and Ryan’s first year of trading
In this assignment, I will be evaluating all the ratios and explaining how it will impact on SIGNature.
The ‘Gross Profit Margin’ for the company is 57.7%. This is a good percentage as it is over 50% which signifies that the business has a higher amount of money which is available to spend on operating payments as well as the business retains. The company should aim to keep the firmness of increasing their sales turnover as well as aiming to decrease the cost of sales to make sure that they have a secure and successful future, preventing any financial crisis. The owners, Ryan and Sharma, can reinvest money into the business as they have enough money making it possible to do so. This may lead the business to expand nationally and globally later on. In contrast, the company will need to successfully advertise their products to ensure a gain of customers and further development.
The ‘Net Profit Margin’ for the business is 19.4%- this is an average percentage. This is because they may not have kept their operating profit up to the mark which would have left a satisfactory profit. In contrast to the gross profit margin, the net profit margin has decreased which clearly proves that the business is spending too much on its expenses. The owners cannot neglect this fact and have to take actions immediately to prevent financial crisis. This could be done by controlling their expenses which will increase the net profit margin percentage.
The ‘Return on Capital Employed’ percentage for SIGNature showed at 121.1%, which is huge. This simply indicates that the business is having more inflow of money than outflow. As it is SIGNature’s first year this percentage has been remarkably good. According to this percentage, the company has a bright and successful future. This means Ryan and Sharma needs to control their outflow’s carefully. The owners will be expected to find shareholders who will then invest money into the business leading to more money being produced. This will allow SIGNature to go nationally and later on globally. Moreover, the money can be used for the good of the company. For instance SIGNature can expand their business or advertising the products better.
The ‘current ratio’ for the first year of the organisation is at 4.52:1. This means that for each £1 of debt, the company is able to pay £4.52 back, of their assets to pay off their current liabilities. This implies that the company will be able to pay off their short term liabilities with their current assets very quickly.
The ‘acid test ratio’ for the company is at 3.75:1. This shows that the company is able to pay off their short term liabilities simply with their current assets even after their wish to take stock value out of the sum. This also implies that the business is easy to pay off their short term liabilities in the forthcoming period of time.
The ‘debtor’s collection period’ resulted in showing a figure of 34 days. This shows that the company will take 34 days to recover all debts from their partners. As they are receiving their money back in a good period of time (a month), this indicates a positive and strong relationship between the company and its partners. This will be good in the future as well, simply because they will remain financially stable even after lending their partners money.
The ‘creditor’s payment period’ for SIGNature is 28 days. This means that the organisation is able to settle the debts with their trade suppliers in under a months’ time. In comparison to the debtor’s collection period, the creditor’s payment period shows a better and stronger relation with the suppliers, simply because they are able to pay their money back quicker. In addition, this ratio also shows that the business will be able to pay off their debts as soon as possible in the future, meaning they will be able to control their finance and also prevent financial crisis.
The rate of stock turnover for SIGNature in the first year of business is at 17 times a year. This clearly shows that the company sells their stock at a minimum of once per month. As it is the first time of trading, achieving this figure is relatively good and shows high chances for development and expanding their business. Selling the stock will allow the company to make more profit which they may use to re-invest into the organisation.
To conclude, all the percentages are good and positive for the company, which clearly shows that the company SIGNature is doing well, showing potential for progress and achievement. However, there is one recommendation that I would make to Ryan and Sharma concerning the net profit margin. In order to improve on that percentage which is currently at 19.4%, the company should spend less money on their expenses and control their budget.