by humzah2013hotmailcom (student)

D2:

You need to look at each ratio and decide if it is good or bad. You need to think about:

• How it will impact upon the future performance of the firm.
• How it compares to other businesses in a similar market.
• What the results would have been if predictions as shown in the cash flow had been true- whether the performance would have been better or worse.

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.

The gross profit made at every £1 made is 53p. It is okay, it is not that bad but the business could do better. It could be made better by looking for cheaper supplier but the quality of the product should be affected.

The business has made 53p on every £1 which is good. It will affect the business in future as this good but it is not that good if the business wants to do well in future they have to deal with this by looking for cheaper suppliers or else they might face any small loss in future. Comparing to the market Marks and Spencer has 43.3p on every £1 which is bad compare to this business. So if I compare this business in the market the business has done a lot better compare to Marks and Spencer.

• Net profit percentage of sales: This is calculated by using the formula:

Net profit             *100= 8978.64       *100 = 6.310577

Sales turnover                 142279.22

This ratio looks at the net profit as a percentage of sales turnovers. This ratio is often referred to as the net profit margin. If net profit margin falls from one year to the next or is thought to be too low, a firm may look to reduce its expenses, for example, by moving to cheaper premises or cutting staffing costs. Before taking any action, however the accountant must try to identify the cause ...