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Ratio Analysis. I am going to illustrate the financial state of Chester Private Hire Cars by explaining the accounting ratios and how are those used in order to monitor the financial position of the business

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Ratio Analysis I am going to illustrate the financial state of Chester Private Hire Cars by explaining the accounting ratios and how are those used in order to monitor the financial position of the business. The first area I am going to look at in order to compare two-year period financial state of the business is profitability. This area is all about the money which goes into the business. There are three calculations: Gross Profit, Net Profit, and ROCE. Gross profit it is amount of money the business has before the expenditure is taken away. The calculation shows how the business is managing its purchases of stock. Calculation for gross profit (YEAR 2006): GROSS PROFIT 250 X 100 = X 100 = 35.71% (36%) SALES 700 Calculation for gross profit (YEAR 2007): GROSS PROFIT 200 X 100 = X 100 = 25% SALES 800 This shows that for every £1 made in sales, 36p (2006)/25p (2007) is left as gross profit after the cost of goods sold has been deducted. The gross profit has fall over the year period of time by 10.71%. This means that the amount of money that goes in the business has been decreased. As a business they should reduce the cost of its purchases, they might find a cheaper supplier which would not affect the quality of the service that they are providing. ...read more.


and it would improve the business finances. If the figure is below 1.5 it makes the business hardly profitable as they are not able to pay its liabilities. So, if the current ratio has fallen to 1.59 it can be considered as a good practice. However, the business is in dangerous position, this is because if the bank demanded repaying the money borrowed using the overdraft, the company would not be able to cover these demands from current assets. Acid test ratio shows the assets which are compared to liabilities, so it shows how well a business can meet its liabilities without selling the stock. This does not include the stock, and these assets are considered to be the hardest current assets to turn into cash quickly. Calculation for acid test ratio (YEAR 2006): CURRENT ASSETS - STOCK 185 - 120 65 : 1 = : 1 = : 1 = 0.72 : 1 CURRENT LIABILITIES 90 90 Calculation for acid test ratio (YEAR 2007): CURRENT ASSETS - STOCK 175 - 125 50 : 1 = : 1 = : 1 = 0.45 : 1 CURRENT LIABILITIES 110 110 This shows that the business is in not good enough position to expand it. The number of stock sold is not always the same so the margin of profit will vary as well. Basically, the owners will not be sure if they are going to be able to pay all the liabilities at all of the times. ...read more.


If the ratio is greater than 1 it means that majority of the business assets are funded through the debts, if the ratio is lower it means that the business is not struggling with the debts. This ratio should be kept as low as possible and there might be some consequences if the business debt/equity ratio is still increasing. In conclusion, Chester Private Hire Cars seems to be falling and it is definitely not ready to expand. Overall, the business performance, profitability, and solvency are not that good. There are too many risks and dangers in order to expand. The business performance is getting worse and at this stage the business should set some special arrangements or a strategic plan in order to survive. This business will fall into the bankruptcy if there are not going to take any actions; owners should maintain the business more efficiency. The profitability should be improved in order to put the business in a strong position and the level of solvency needs to be improved as well - if this is not going to happen then the business is going to be struggling to pay all the liabilities. I would suggest that Chester Private Hire Cars makes sure that the business is ready to expand; considering all of those aspects the business is not yet ready to expand and the owners should take some actions and wait until the performance, profitability and solvency is improved. ...read more.

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