FINANCIAL MANAGEMENT

Financial Management

Ratio Analysis

Introduction

Answer (A) Calculation of the Ratios

Ratio

Formulae

B & B Ltd

C & C Ltd

 

 

 

 

Gross profit

(Gross profit / Sales) x 100

26%

42%

 

 

 

 

Net profit before tax

(Net profit before tax / Sales) x 100

4%

9%

 

 

 

 

ROCE

(Net profit before tax / Capital employed) x 100

14%

21%

 

 

 

 

Current Ratio

Current assets / Current liabilities

1.173398

0.858332

 

 

 

 

Quick Ratio

(Current assets - Stock) / Current liabilities

0.602368

0.356908

 

 

 

 

Stock turnover

(Stock / Cost of sales) x 365

9.213767

28.72929

 

 

 

 

Debtor collection

(Debtors / Sales) x 365

5.279838

11.49285

 

 

 

 

Creditor payment

(Creditors / Cost of sales) x 365

16.13533

57.29549

 

 

 

 

Gearing

(Debt / (Debt + Equity)) x 100

45%

68%

Answer (B) Analysis of the Ratios against the Industry Average

Ratio

Industry

B & B Ltd

C & C Ltd

 

 

 

 

Gross profit

36.20%

26%

42%

 

 

 

 

Net profit before tax

4.20%

4%

9%

 

 

 

 

ROCE

18%

14%

21%

 

 

 

 

Current Ratio

1.3

1.173398

0.858332

 

 

 

 

Quick Ratio

0.7

0.602368

0.356908

 

 

 

 

Stock turnover

12 days

9.213767

28.72929

 

 

 

 

Debtor collection

10 days

5.279838

11.49285

 

 

 

 

Creditor payment

24 days

16.13533

57.29549

 

 

 

 

Gearing

17%

45%

68%

Gross Profit

The Industry average of this sector in relation to the Gross profit is 36.2%. This is quite a good return when compared to the other industries. The Company B & B Ltd achieved a gross profit of around 26 %. This is low in comparison to the industry. When compared to the other company which was C and C ltd, it achieved a gross profit of 42%. Thus we need to see that if this profitability is achieved over a long period of time or just in the last few years. Seeing this ratio we can say that C and C is leading the ratio.

Net Profit before tax

The net profit before tax for the industry was 4.2%. If we take a look at the other company in the industry that is B and B we can see that its net profitability before tax is 4%. This is a bit lower than the industry average of 4.2%. The Company C and C again took the lead in this ratio by achieving a profitability of 9%. Therefore it shows that the company has kept its operation and cost of goods sold at a lower level when compared to the industry and specific B and B company.

Return on Capital Employed

Return on capital employed lets the investor and other concerned parties know that what is the return of the company on the capital it has employed. If we look at the industry we can see that the industry average is around 18%. This is quite a good return; If we look at the other companies specific to this industry we can see that B and B was able to achieve 14% return. This is much lower than the industry (Friedlob & Schleifer, 2003, Pp 103- 109). If we look at the company C and C we can see that it was able to achieve much better rate of return that is 21%. Thus it shows that Company C and C is standing much better.

Current Ratio

The current ratio of the company lets us know that how much current assets of the company are there to pay of its current liabilities. The higher the better it is, but a very high stand show that the company has assets which are earning nothing for it. If we look at the industry its average current ratio is ...