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Ratio Analysis And Types Of Ratios

1153 words - 5 pages

This has most of the average / industry trends but some companies will be different like supermarkets (high stock / Not much debt and lots of cash sales)so some ratios might be void. Thanks :)! Good LuckRatio Analysis : Content* (1) analyse financial data; evaluate the results and formulate conclusions* (2) prepare a budget and explain how it would be negotiated and monitored.* (3) produce a financial proposal and present a sound business case to secure the required financial resources. The figures can be fictitious.BibliographyPart 1) Technique used: Ratio AnalysisThe following table shows the ratios for the year 2005:Ratio* Profitability ROCE - 68%* Gross Profit Margin - 66.5%* Net Profit - 11.3%* Direct Wages - 20%* Debtor payment days - 28 days* Current Ratio - 1.54:1* Acid Test - 1.1:1* Gearing - 52%Profitability RatiosThese ratios help us to judge how good the firm's profit performance is. The two key ratios to show profitability are:Return on Capital EmployedThis measures the level of profit of the business compared to the amount of capital that has been invested in it. It is effectively the return the business has made, and investors will want this to be higher than the rate of interest they could have got elsewhere. The budget is showing a healthy 68% return on capital which includes proposed bank borrowings.Profit MarginThis measures the level of profit compared to the turnover, it therefore shows the percentage profit on the sales. It can be measured as either a gross or net profit margin. The Gross Profit margin is 66.5% but the Net Profit margin is only 11.3% due to high wages and purchases costs. These could be reduced by bulk buying and negotiating special terms.Liquidity RatiosThese are ratios that measure the liquidity of the business. Business has to ensure that they are able to meet their commitments as when they fall due by converting sufficient assets into cash. A business should avoid a situation where a lot of cash or capital is tied up in high levels of stock. Current asset and Acid Test ratio shows that the business has more than enough assets to cover its liabilities and it is very liquid as the stock and debtors can be turned into cash quickly.Current RatiosThis ratio compares the current assets and current liabilities. Clearly a business needs to have more current assets than liabilities, and so at a minimum the figure should be more than 1. Here it is 1.54 which is slightly higher and thus ensures sufficient liquidity.Acid Test RatiosThis ratio takes a closer look at the business's liquidity. One of the current assets is stock, and this clearly not always easy to turn into cash. In fact the firm may have high stock levels because they can't sell all of it. So the acid test ratio takes the current assets and subtracts the stock. This is a test of immediate solvency. If the value of this ratio is much less than 1 the business may have a liquidity problem, as it may have insufficient assets to meet all its...

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