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Interpreting financial performance using a range of ratios

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Introduction

Interpreting financial performance using a range of ratios Return on Capital employed Return on capital employed (ROCE) could be classed as one of the most important profitability ratios. It works out the relationship between the capital and net profit earned. Investors will wish for the percentage to be higher than it would if they had money within in a savings account as they all wish to make more money. The formula to work the ROCE for Whitbread plc is as follows: Net profit after interest Shareholders funds (Capital) X 100 = ROCE 2001/2 76.4 1888.5 = 0.04045 X 100 = 4.05% 2002/3 237.1 1990.6 = 0.1191 X 100 = 11.91 % By looking at the figures from Whitbread plc it is clear to see that there has been a large increase in the ROCE, from 4.05% in 2001/2 to 11.91% in 2002/3, it has more than doubled, and this means that every �10 invested in the business will earn Whitbread plc 4.05p. This is good for a business to have such an increase in ROCE as they have improved dramatically from the year before. Gross profit margin This ratio shows the relationship between the figure earned through sales and the cost of sales. ...read more.

Middle

The ideal ratio for a business would be 2:1, however it is now realised that there is not a 'best' current ratio for a business. Acid test ratio The purpose of this ratio is to see if a business has sufficient liquid funds to pay its immediate debts off, to do this ratio you deduct stock from the current assets as it is the least liquid. Current assets- stock Current liabilities For Whitbread plc it is as follows: 2001/2 213.2-28.1 = 0.4286 = 0.43:1 431.8 2002/3 230.4-23.9 474.4 = 0.43528 = 0.44:1 In 2001/2 Whitbread plc had 4.30 to every �10 of its immediate debts. In 2002/3 the figure shows a slight improvement by rising to �4.40 to every �10 they owe in immediate debt. Debtor collection period Debtor collection period is the time it takes for a customer to pay back its debts to the business in hand. The average time for a business to give customers for paying debts of is 30 days, other businesses such as brokers, have a variety of payment choices such as end of month (EOM) or if there credit rating is low, they may not have the right to have credit at all. ...read more.

Conclusion

The gross profit margin has risen slightly by 1.43%, this indicates that's Whitbread plc have been able to control its cost of sales compared to its increase in sale which was around 11%. Factors which could have caused this may have been that Whitbread plc has found a cheaper supplier, or ordering stock in higher levels of bulk, lowering the individual unit cost of certain products. The net profit margin has increased the most out of all of the figures i have seen for Whitbread plc; with a rise of 9.43% Whitbread plc must have taken a stricter control over its expenses as business. Improvements that I would recommend for Whitbread plc would to take more notice on their debtors, this can effect the overall profitability of the business as the average amount of time to pay back has risen to 27 days, also the amount for debtors has risen by �19.1M, this is a large amount which, if a sufficient credit control system was in place, could be amended. If this was to be done, Whitbread plc will notice a healthier cash flow for the future. ?? ?? ?? ?? Rosie Lyon, Level 3 Business enterprise, Finance Unit 4 ...read more.

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