FINANCIAL MANAGEMENT

Monitor PLC: Ratio Analysis



Monitor PLC: Ratio Analysis

Financial ratio analysis is a technique used by managers to help assess a company's financial strength. It is performed by identifying certain key financial statement accounts and putting those account figures through a number of statistical ratios. Ratios are analyzed to measure four financial characteristics: liquidity, leverage, profitability and efficiency.

Profitability

When evaluating a number of profitable companies and looking to find which one is more profitable, you must utilize profitability ratios. Profitability ratios test a company's ability to generate income.

Gross Profit Margin

Gross profit margin is a metric that defines the percent profit that a company makes for every dollar of goods produced. That is, the profit to the company after all material and labor production costs. Gross profit equals sales minus cost of goods sold, which are found on the income statement.

2008

2009

2010

2011

Competitor

Business Sector norm

Gross Profit%

30%

27%

25%

24%

29%

34%

Comparing a company's recent gross profit margin with historical periods identifies decreasing trends. A decreasing margin could mean the company is facing higher costs, price competition or both. Comparing a company's gross profit margin with competitors and the industry average reveals that company is not in competitive position among its peers. Monitor PLC's gross profit margin decreased from 30% (2008) to 24% (2011). Moreover, in 2011, Monitor PLC gross profit margin is less than its competitor (29%), and business sector (34%).

Net Profit

Net profit margin is the percentage of net income out of sales revenue -- the level of income a company is able to keep from sales after deducting all costs and expenses. Net income is an all-inclusive measure of a company's overall profitability that includes profits from both operating and non-operating activities, as well as any unusual gains and losses.

2008

2009

2010

2011

Competitor

Business Sector norm

Net Profit %

2.0%

3.3%

3.8%

3.4%

7%

9%

The historical net profit of Monitor PLC shows increasing and decreasing trend. The net profit was 2% in 2008, and went up to 3.3% in 2009, and 3.8% in 2010. However, in 2011, the net profit decreased up to 3.45. It shows company has improved in this area (except 2011). However, the company's net profit (3.4%) is still less than its competitor (7%) and business sector (9%).

Return on Capital Employed

Return on Capital Employed equals net after-tax profit minus any preference stock dividend divided by equity share capital times 100. The formula is more correctly stated as an algebraic equation: ROEC = [(net profit after tax - preference stock dividend, if any) / equity share capital] x 100. The result is expressed as a percentage.

2008

2009

2010

2011

Competitor

Business Sector norm

Return on Capital Employed

3.4%

3.2%

3.0%

2.7%

5.7%

6.4%

Comparing a company's recent Return on Capital Employed with historical periods identifies decreasing trend. Return on capital of Monitor PLC was 3.4% in 2008, and after three years it went up to 2.7%, which shows the company is earning less on its capital. On the other hand, the company's return on capital is less than its competitor and business sector. Return of competitors is 5.75 and business sector 6.4%, however, Monitor PLC's return on capital employed is only ...