FINANCIAL ANALYSIS

Managing Financial Resources - Ratio Analysis

Managing Financial Resources - Ratio Analysis

Task 1: Calculation of Ratios

Return on Capital Employed

Return on Capital Employed

Formula: Profit Before Interest & Tax Divided By Capital Employed x 100

 

Year 1

Year 2

Year 3

Year 4

Year 5

Profit before interest & tax

64.5

90.4

114.4

108.7

102.1

Capital employed *

288.4

355.7

398.2

424.4

505

Return on Capital Employed

22.36%

25.41%

28.73%

25.61%

20.22%

* Capital Employed = Total Assets - Current Liabilities

Return on Sales

Return on Sales

Formula: Profit Before Interest & Tax Divided By Sales x 100

 

Year 1

Year 2

Year 3

Year 4

Year 5

Profit before interest & tax

64.5

90.4

114.4

108.7

102.1

Sales

911.4

1255.1

1493.8

1626.9

1663.7

Return on Sales

7.08%

7.20%

7.66%

6.68%

6.14%

Sales to Capital Employed

Sales to Capital Employed

Formula: Sales Divided By Capital Employed

 

Year 1

Year 2

Year 3

Year 4

Year 5

Sales

911.4

1255.1

1493.8

1626.9

1663.7

Capital employed

288.4

355.7

398.2

424.4

505

Sales to Capital Employed

3.16

3.53

3.75

3.83

3.29

* Capital Employed = Total Assets - Current Liabilities

Current Ratio

Current Ratio

Formula: Current Assets Divided By Current Liabilities

 

Year 1

Year 2

Year 3

Year 4

Year 5

Current Assets

280

328

361.3

346.2

485.1

Current Liabilities

297.9

392.3

408.7

415.1

478.9

Current Ratio

0.94

0.84

0.88

0.83

1.01

Acid Ratio

Acid Ratio

Formula: Current Assets Minus Stock Divided By Current Liabilities

 

Year 1

Year 2

Year 3

Year 4

Year 5

Current Assets

280

328

361.3

346.2

485.1

Stocks

21.6

38

39.8

19.7

24.4

Current Liabilities

297.9

392.3

408.7

415.1

478.9

Acid Ratio

0.87

0.74

0.79

0.79

0.96

Stock-Turn Ratio

Stock-Turn Ratio

Formula: Sales Divided By Stock

 

Year 1

Year 2

Year 3

Year 4

Year 5

Sales

911.4

1255.1

1493.8

1626.9

1663.7

Stocks

21.6

38

39.8

19.7

24.4

Stock-Turn Ratio

42.19

33.03

37.53

82.58

68.18

Debtor Ratio

Debtor Ratio

Formula: Debtors Divided By Sales * 365

 

Year 1

Year 2

Year 3

Year 4

Year 5

Debtors

224.3

276.5

290.2

307.6

385.7

Sales

911.4

1255.1

1493.8

1626.9

1663.7

Debtors Ratio

89.83

80.41

70.91

69.01

84.62

Task 2: Commentary on Trends

Return on Capital Employed

Return on capital employed ratio of the company shows a declining trend since last two years; however, before it there was an increasing trend. This ratio basically reveals the profitability and efficiency of the capital investments of a business, and is calculated by dividing profit before interest and tax divided by capital employed (i.e. total assets - current liabilities). Increasing trend of return on capital employed is favourable as it suggests that the firm has been generating more revenues per dollar of capital employed. However, decreasing trend of return on capital employed suggest lower profitability of the business (Periasamy, 2009, n.d). So in this case, company has been generating more earnings per dollar of its capital employed in early years, but since last two years the profitability of the firm has been declining, thus showing reducing profitability on investments. Hence, from the above trend it can be suggested that the efficiency and profitability of the capital investments of a business is declining, therefore the firm needs to maintain and control it. In order to improve return on capital employed ratio, company needs to generate more earnings on its investments, which can be done by investing in more profitable areas or having less assets but generating same profit as its competitors.

Return on Sales

Return on sales ratio of the business reveals a declining trend since last two years, however, before that return on sales ratio had been increasing. The ratio of return on sales is widely used for evaluating an operational efficiency of a business, and therefore, also known as operating profit margin of the business. This ratio is calculated by dividing the profit before interest and tax to sales (Porter & Norton, 2012, p.696). So, it is helpful for managers since it provides in-depth analysis into how much earning is being produced per dollar of sales. Therefore, declining trend of return on sales indicates looming financial troubles of the ...