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 of a falling figure-whether it is related to sales, cost of goods sold or expenses- as all of these factors will impact upon the net profit margin.
It is the net profit every £1 made the profit is 6p which is not good for the business. This is very bad. They can make it better by reducing the expenses like they could spend less on the furniture. They could look for a building where they can pay less rent.
This will make a very bad impact on the business in upcoming future; the business might have to face some serious loss. It can lead down the whole activity of the business. Comparing the business in the market NEXT has made 13.82p which is better than this business but in the meanwhile Marks and Spencer has only made 3.91p which is bad. This means that this business has performed better than Marks and Spencer but they could not do better than NEXT.
- Return on capital employed (ROCE): this is calculated using the following formula:
Net profit before interest and tax * 100= 8978.64 * 100
Capital employed 30042.09
This ratio shows the percentage return a business is achieving form the capital (or money) 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.
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.
The business made 30p with every £1 which was fine. It cannot be classified as being good for the business as the business can do better in future by making smarter investments. The future just relies on the future investments; it does not depend on the present return on capital employed. Comparing the business in the market Marks and Spencer has 4.43p with every £1 which means that the performance of this business was a lot better than Marks and Spencer.
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.
The business did very good. They can pay the liabilities so that means in future the business is secure. There are no chances of the business facing any problems in the upcoming future. Comparing the business in the market Marks and Spencer had £2.1 and Tesco had £0.4 which means that the business did very well compare to both of the business. Tesco did not even stand anywhere near this business in the market. This is very good for the business.
- 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. This is because the stock is considered to be the hardest current asset to turn into cash quickly.
In this the stock is not included. It is very good because if they are asked to pay the current liabilities immediately they can pay them back. In the upcoming future the business should not face any problems due to this. This would help the business keep its performance well. Comparing the business in the market Marks and Spencer made £2.0 and Tesco made £0.2. The business did well on its own but while being compared Marks and Spencer did better than this business but its performance was a lot better than Tesco.
Efficiency ratios tend to be used to assets how well management is controlling key aspects of the business, primarily stock and finances. There are three efficiency ratios:
- Debtors’ payment period: this is calculated in the following formula:
Debtors *365 = 1500 *365 = 3.848067
Credit sales 142279.22
If you don’t know what percentage of sales was made on credit, then it is acceptable to use the sales figure as given in the profit and loss account. The ratio measures on average how long it takes for debtors to pay; it 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 in business-to-business, longer payment terms may be given. One business may also give different payment terms of different customers depending upon the size and importance of a customer’s business, reliability of payment and discounts offered.
This is how long it takes debtors to pay the business. 3 days is excellent this means it will take the debtors 3 days to pay back because the lower it is the better it is.
The business will do very well in future as the debtors will pay back in 3 days. In the upcoming future the business make a lot of profit due to this. While comparing the business in the market it will take the debtors of Marks and Spencer 10 days to pay back which means that the business is secure. It has done very well in the market as it takes over Marks and Spencer in the market.
- Creditors’ payment period: This is calculated using the following formula:
Creditors *365 = 9860 *365 = 47.61268
Credit purchases 75587.01
If you don’t know what percentage of purchases was 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 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.
47 days is very bad. It can lead bad consequences to the business in the future which means the debtors might claim the business to pay before that. Comparing the business in the market Marks and Spencer takes 228 which is very bad so while comparing the business in the market the business has not done that bad.
- 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.