Financial Ratio Analysis of Two Companies

This report presents the financial performance of a company for two consecutive years. The company has increased its debt from $8700 to $14650, while its shareholder's equity has also risen from $26160 to $29165. The gearing ratio has improved from 0.33 to 0.50, indicating a more efficient use of debt and equity. Net income has decreased from $7905 to $7760, while annual interest expenses have increased from $790 to $1725. However, the company's interest coverage ratio has improved from 10.01 to 4.50, indicating its ability to manage debt. The net sales revenue has increased from $18270 to $24100, while total assets have risen from $37685 to $47495. The inventory turnover rate has improved from 2.78 to 2.82, and the company's dividend payout ratio is around 33-39%. The report also provides insights into working capital cycle, return on capital employed, and return on shareholders' fund.

FINANCE
1

Table of Contents
INTRODUCTION................................................................................................................................3
TASK A................................................................................................................................................3
1 Presentation of Performance to the Board....................................................................................3
i) Liquidity Ratios...................................................................................................................3
ii) Profitability Ratios..............................................................................................................5
Iii) Gearing ratio......................................................................................................................6
iv) Asset Utilisation................................................................................................................7
V) Investor Potential Ratio......................................................................................................8
2 Calculation of Working Capital Cycle..........................................................................................8
TASK B................................................................................................................................................9
1 Demonstrating the viability of investment by applying Investment Appraisal Techniques.........9
a) The Payback Period.............................................................................................................9
B) The Accounting Rate of Return..........................................................................................9
C) Net Present Value.............................................................................................................10
D) The Discounted Payback Period......................................................................................11
e) The Internal Rate of Return...............................................................................................11
2 Critical evaluation of the investment appraisal techniques........................................................12
TASK C..............................................................................................................................................13
1 Application and critical evaluation of Budgeting.......................................................................13
2 Critical evaluation of Break even Model....................................................................................15
CONCLUSION..................................................................................................................................16
RECOMMENDATIONS....................................................................................................................16
REFERENCES...................................................................................................................................17
APPENDIX........................................................................................................................................18
2

INTRODUCTION
Finance is the lifeline of the business. Financial analysis refers to critically evaluating
balance sheet through Ratio analysis. Various benchmarks or set criteria are utilised for examining
the financial statements. The selected company for the project is Prime town PLC, being engaged in
the manufacturing process of refrigeration equipment. The performance of an organisation is
measured by asset utilisation, liquidity, profitability, gearing and investor potential. Working capital
is a cycle for Prime Town PLC is evaluated to determine the time taken to convert the current assets
and current liability into the liquid form of cash. Further, more investment appraisal techniques are
used to assess the viability of the project and decisions based thereon to whether accepting or reject
it. Budgeting is an important financial tool applied for short term decision making and planning to
assess the obligations arising or cash flow generated. Moreover, Break even Model is critically
evaluated to better understand the applicability in different businesses.
TASK A
1 Presentation of Performance to the Board
To: Board of Prime Town PLC
From: Financial Analyst
Respected Board Members
This is to bring to the notice of Management that for evaluating the performance of Prime town
PLC, various ratio analyses are performed, and results are presented here below.
i) Liquidity Ratios
Liquidity ratios indicate the liquidity of the business assets in respect to its current
obligations. It is analysed by different ratios.
 Current Ratio: Current Ratio refers to proportion of current assets of the business to its
current liabilities. It depicts the eligibility of current assets to pay off the current obligations
of Business (Lasher, 2013).
3

The current ratio of Primetown PLC was better in 2014 as compared to 2015. Moreover, in
2015 current ratio of firm declined from 2.05 to 1.92. However, current assets are covering the
current liabilities completely. Therefore, it can be said that company has good liquidity. The major
reason behind lowering the current ratio is an increase in current assets and current liabilities
however rise in current assets is more than current liabilities. However cash and cash equivalents
are nil in 2015 as compared to 1295 at the end of 2014.
 Quick Ratio: Quick ratio depicts the ability of quick assets to repay its current liabilities
immediately. Quick assets exclude inventory as it will take the time to convert inventory
into cash and cash equivalents. This implies that in the absence of inventory, a company can
repay its liabilities.
The quick ratio in 2014 was better in comparison to the same in 2015. It depicts that quick
assets in 2014 were more than in 2015 such as .87. The ability to repay current obligations has
reduced due to unavailability of cash in the year 2015. Also the significant rise in inventory is the
reason for the decline in Quick ratio. In the year of 2015, company had more current assets which
can easily be converted into cash. Hence, rather than maintaining high cash within the firm in
4

access of average limit company needs to focus on investing money in other options which are
available to it.
ii) Profitability Ratios
Profitability of the business indicates the profitability of the business in comparison to its
revenues over the period of one year. It depicts the profit portion of sales during the year.
 Operating Profit Ratio: Operating profit ratio indicates the operating margin or spread left
after considering the direct expenses related to production.
Operating profit ratio has been significantly declined despite the fact that sales have raised from
£182, 70,000 to £241, 00,000. This decline is due to the remarkable rise in Administration expenses
and bad debts. Administration expenses and bad debts have increased twice in 2015 which
adversely impact the operating profits. Therefore, the emphasis is to be laid on collection from
various debtors on a timely basis and also controlling the administration expenses.
 Net Profit Ratio: Net Profit ratio indicates the proportion of net profit after deducting all
the direct and indirect expenses from the revenues or sales.
Net profit ratio was adversely affected in 2015 due to the significant increase in the interest
payable as the loan stock has risen for £87, 00,000 in 2014 to £146, 50,000 in 2015. However,
revenue increased in 2015 so increasing expenditure level is one of the main causes due to which
5

net profit decreased from 31.17% to 20.56%. Controlling Measures should be taken to reduce the
expenses. Hence, due to having higher expenses and tax liability net profit margin of Prime town
plc decreased significantly. Thus, company is required to make changes in the existing strategic and
policy framework.
 Return on capital employed and return on shareholders’ equity
From the above mentioned table it has been analyzed that ROCE of Prime Town Plc decreased from
23% to 18%. On the other side, measure of return on shareholders’ equity also show decreasing
trend in the performance level. Hence, decreasing performance level or trend presents that in the
year of 2015 business unit failed to generate high net profit margin from the money invested by
shareholders.
Iii) Gearing ratio
Gearing ratios is the measure of determining the financial leverage of the firms. It depicts
the ratio of borrowed funds to the shareholder's equity in the firm.
 Debt Equity Ratio: Debt equity ratio indicates the proportion of debt to equity of the firm.
It indicates that how the assets of the business are financed by debt and how much by using equity
fund.
6

The debt equity ratio in 2015 is an ideal ratio and has increased significantly due to double fold
increase in debt. However, there is the increase in equity as well, but percentage increase in debt is
greater than equity, therefore, it led to ideal equity ratio in 2015.
 Times Interest: Times interest ratio depicts that how many times the operating profit can
cover the interest expenses of the company.
Times interest ratio declined in 2015 as compared to 2014 due to the significant rise in
interest expense as the term loans have risen significantly. Further, the operating profits have also
eroded due to rise in certain expenses.
iv) Asset Utilisation
Asset utilisation ratio calculates as how much revenue is generated by using every pound of an
asset of the company. It depicts the management's ability to efficiently use the assets.
 Total assets turnover ratio: This ratio depicts how efficiently companies has utilised its
total assets to generate the revenues for the company.
7

It indicates that every 1 Pound of assets is generating 0.38 pound of sales in 2014 whereas it
increased to .51 in 2015 which is positive indication of asset utilisation by the management. This
aspect shows that in the year of 2015 business unit has made optimum use of total assets as
compared to before times. Further, HR needs to organize programs for enhancing the motivation
and satisfaction aspect of personnel.
 Inventory Turnover Ratio: Inventory ratio depicts that how much efficiently the company
is utilising its inventory to generate sales.
 Inventory turnover ratio increased from 2.78 to 2.82 in 2015 as compared to 2014. There is
the rise in total sales as well as inventory during the year.
 Debtors and creditors turnover ratio
8


The above table of ratio analysis presents that receivable days inclined from 39.56 to 47.25 at
the end of financial year 2015. It shows that in 2015 Prime Town Plc has offered more credit period
to customers which are not good for the working capital position of firm. On the contrary to it, in
the payable days of firm were 90.01 and 62.88 days in the year of 2014 and 2015. Hence, by
considering the outcome of such ratios it can be said that company make payment to creditors
earlier rather than receiving money from debtors. This in turn negatively affects the working
capital aspect of firm to the significant level.
V) Investor Potential Ratio
Investor potential ratio depicts the ratios and figures which influence the decision of the
investor as well as potential investors regarding whether to hold investment or sell or buy the same.
 Dividend Payout Ratio: Dividend payout ratio determines the percentage of total earnings
distributed to the equity shareholders out of the total earnings for the equity shareholders
after interest and taxes (Gitman and Zutter, 2012).
9

Dividend pay-out ratio has increased in the year 2015 despite the fact that earnings have
significantly reduced. The main reason behind the increase in dividend payout ratio is the
availability of another source of finance instead of retained earnings, or the company does not have
some expansion plans in the following year, therefore, more profits are distributed to the investors
to raise their interest and satisfaction in the company.
2 Calculation of Working Capital Cycle
Working capital cycle is determined to calculate the days taken by the company to convert
its current assets and current liabilities into cash.
Table 1: Calculation of working capital cycle
Particulars 2014 2015
Days Days
Inventory turnover in days(365/Inventory
turnover ) 131.49 129.36
Debtor turnover in days[(closing debtors
/Total Credit Sales)*365] 39.56 47.25
Creditors turnover[ (closing creditors/Total
Credit Purchases)*365] 90.01 62.88
Working Capital Cycle( A+B-C) 81.04 113.74
Working capital cycle has increased to 114 days which implies that company will require
more time to convert its current liabilities and current assets into cash in the longer period. Debtor
turnover ratio has increased from 40 days to 47 days which demonstrates the time taken for
realisation from debtors. However, creditor's payment period has reduced therefore affecting the
fluidity of cash.
10

TASK B
1 Demonstrating the viability of investment by applying Investment Appraisal Techniques
a) The Payback Period
Table 2: Calculation of Payback Period
Machine
Amount in £000 Amount in £000
Initial investment -22000
1 4025( (6500-2475) -17975
2 4025 (6500-2475) -13950
3 4025 (6500-2475) -9925
4 4025 (6500-2475) -5900
5 4025 (6500-2475) -1875
6 4025 (6500-2475) 2150
7 4025 (6500-2475) 6175
8 4025 (6500-2475) 10200
Residual value 2200(22000*10/100) 12400
Payback period 5.47
Payback period refers to the time taken by an organisation to recover its initial investment.
The time taken by Reebok Limited to recover its initial investment of £22000, 000 is 5.47 years
which is reasonable and the project should be accepted.
B) The Accounting Rate of Return
Table 3: Calculation of accounting rate of return
(Amount in £000)
Project X Depreciation Net Profit
Initial investment 22000
1 4025 2475 1550
2 4025 2475 1550
3 4025 2475 1550
4 4025 2475 1550
5 4025 2475 1550
6 4025 2475 1550
7 4025 2475 1550
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8 4025 2475 1550
Residual value 2200 12400
Total 12400 Average Profit 1550
Average 12100
ARR 55.00%
Accounting rate of return indicates the net returns generated from the net cash inflows
generated during the life of the machine (Kelly, 2015). Reebok Limited generates 55% average
return every year which is a good indicator and machine should be accepted.
C) Net Present Value
Table 4: Calculation of Net Present Value
(Amount in £000)
Machine PV @ 5% Present value
Initial investment 22000
1 4025 0.952 3833
2 4025 0.907 3651
3 4025 0.864 3477
4 4025 0.823 3311
5 4025 0.784 3154
6 4025 0.746 3004
7 4025 0.711 2860
8 4025 0.677 2724
Residual value 2200 0.677 1489
Total 27503
NPV 5503
NPV refers to the Net present value which is calculated by deducting initial investment
from all the discounted cash flows generated during the life of the machine. Since the expected
discounted inflows are greater than initial investment, therefore, project is viable and should be
accepted as the machine will bring profitability in the company.
D) The Discounted Payback Period
Table 5: Calculation of Discounted Payback Period
Machine Amount in £000
Initial investment Amount in £000 -22000
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1 3833 -18167
2 3651 -14516
3 3477 -11039
4 3311 -7728
5 3154 -4574
6 3004 -1570
7 2860 1290
8 2724 4014
Residual 1489 5503
Discounted pay back 6.55
Discounted payback period refers to the time taken by discounted cash inflows to recover
the initial cash outflow of the company. Since the discounted cash flows will be able to cover the
initial investment within 6.55 years which indicates that machine is feasible and should be accepted.
Reebok Limited should accept the machine for eight years.
e) The Internal Rate of Return
Table 6: Calculation of Internal Rate of Return
(Amount in £000)
Machine
Initial investment -22000
1 4025
2 4025
3 4025
4 4025
5 4025
6 4025
7 4025
8 4025
Residual value 2200
IRR 10.48%
Internal Rate of Return refers to discounting rate at which NPV of the project is 0. Since the
IRR is greater than the cost of capital of the business which is 5%, therefore, machine is acceptable.
It measures the potential profitability of the machine and therefore its acceptance and rejection. All
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the techniques which are undertaken by Reebok Ltd are highly effectual. Thus, business unit needs
to consider NPV and IRR technique for making effectual business decisions. In addition to this, by
conducting sensitivity analysis Reebok Ltd can get information about the extent to which specific
project will prove to be more beneficial. In addition to this, by using CML and SML in line with the
capital budgeting tools and techniques company can find suitable investment proposal. In this way,
by taking into account all such tool business unit can employ money in the right direction.
2 Critical evaluation of the investment appraisal techniques
Investment Appraisal Techniques are techniques or methods used to critically evaluate the
machine or project to be undertaken and therefore deciding its acceptance or rejection. Capital
budgeting techniques play a crucial role in taking a decision regarding the profitability of accepting
the machine or rejecting the same. Some of the investment appraisal techniques are explained below
with the merits and demerits attached in addition to that.
 Net Present Value: Net Present value is the difference between discounted cash flows and
the initial investment of the project under consideration. This is one of the most crucial
methods for decision making. According to the view point of Dellavigna and Pollet (2013),
NPV gives importance to the time value of money is given as 1 Pound today will not be
equal to 1 Pound of tomorrow regarding value created. Moreover, high priority is given to
risk associated with the project and profitability. However, Kelly (2015) critically evaluated
that NPV is technical and therefore difficult to use and special knowledge and skills are
required. Furthermore, the cash flows, and discounted rate is all expected, and therefore
results cannot be considered accurate as high-level uncertainty exist.
 Payback Period: Payback period is referred as time in years within which the original cost
of the machine will be recovered through cash inflows flowing in the company in upcoming
years. As per the Bierman and Smidt (2012), Payback period is easy to use and calculate and
therefore simply understandable. Further payback period lays emphasis on the liquidity of
the company affected due to company decision of accepting or rejecting the proposal of the
machine. However, same is critically evaluated by Chen and Guariglia that in simple
payback period calculation time value of money is ignores. Time value of money is the
important factor influencing the value of the firm. Moreover, only cash flows up-to payback
period are considered and cash flows generated after the payback period are ignored and not
taken into account for decision making.
 Accounting Rate of Return: This indicated the average return expected on the proposed
machine. It depicts the profitability of the project. It is demonstrated by an author that since
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this method follows the concept of profitability, therefore it measures and give vital
importance to the profitability of the project or machine. In addition to ARR calculations are
quite simple and easy to understand therefore preferred. However it has been criticised by
Brigham and Daves (2012) is that it does not consider the time value of money which is
necessary and ARR ignores the cash flow from the project or machine, therefore, giving no
importance to liquidity of the machine in addition to it also does not consider the residual
value of the machine which is substantial part of initial outlay.
 Internal Rate of Return: IRR is the discounting rate at which present value of all the cash
inflows is equivalent to the initial cash outflow. Project or machine becomes acceptable of
the cost ODF capital is lower than IRR. As per Caglayan and Demir (2014), that IRR is the
beneficial tool as it takes into account the time value of money and therefore presents better
understanding moreover major merit of the IRR method is that it takes into consideration
cash flows of all the years of the machine under consideration. However critically evaluated
by Corsatea, Giaccaria and Arántegui (2014) that this method is time-consuming due to
unavailability of exact rate and lot of efforts and time are required for determining the IRR
rate. And one of the major drawbacks of IRR is assumed that all the cash flows generated
are reinvested into the project at an internal rate of the project whereas as per NPV it is
assumed that cash flows are reinvested at the cost of capital of the project.
TASK C
1 Application and critical evaluation of Budgeting
 Evaluation of budget as planning and control devices: - Financial manger of company set
budget for further action planning of the organization. By last production and distribution
services of resources, entity makes budgetary plans. Thus, analysis of transaction of
resources leads to create planning strategy. A budget helps to generate ideas for future
manufacturing and supplement activity. In addition to this, it remains the useful tool for
handle over production and development process of industry. Budget tools support managers
to perform better and play great role to achieve the high level effectiveness of firm.
Moreover, a clear vision and goals indicate to analyses to sustain its position in the
competitive market (Brigham and Ehrhardt, 2013). The importance of budget as planning: - Short term planning and decision are made
through analysing the past year's transaction activity. It remains as high-quality tool and
technique include forecasting and decision-making process. The budget as a strategy helps
business organisations for strategic planning and follow its planning strongly.
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 Provides analyses for further production and distribution activity: - Finance department's
manager creates an analysis for business activity. Preparation of budget is made last year's
financial position. It also includes manufacture and growth of the firm. Therefore, planning
strategy is prepared for further actions related to the transaction (Lasher, 2013).
 Generates idea to achieve better performance of industry: - Budget helps to gain
knowledge to reach out the better performance of the organization. Hence, analyses for
further good performance is planned through budgetary techniques. The budgetary system is a great concept to analyse for a better position of the company and
provides an idea for further activity. Critically, it is evaluated that analyses may be wrong.
Perception or thinking towards future activities obtains to oppose to planning. Furthermore,
forecasting can be fail due to changes in uncertain environmental factors. These factors
involve socio-economic, technological. Legal factors etc. These flexible factors disturb
organisation's plan and effectiveness. Thus, budgetary planning may fail due to these
reasons so the financial manager should focus on these factors during the preparation of the
budget and budgetary planning.
 Importance of budget as control device: - Planning to prepare budget signifies to control
over business transactions. After action planning and its implementation, industry focuses on
its evaluation. This process leads to getting exact present position of the organization in
monetary terms. Therefore, the budget remains helpful to monitor on resources supplement.
Excess and deficit in quantity and quality of resources are to be determined by this strategy.
Further, create the balance between production and distribution activity is possessed through
budgetary planning strategy. What a clear identification of activity as well control for future
activity is activates through the budget. Issues occur during business transactions can be
monitors and leads to achieve high efficiency of the entity.
On the contrary of budget significance, although the budget is the vital tool for controlling
evaluation and controlling process it indicates a failure during proper monitor over transactions.
Financial manger identifies to cover controlling activity of firms but sometimes their perception and
forecasts seems downwards or against planning. Moreover, there are some factors which are beyond
control so the manager cannot handle these factors and remains failure of budgetary planning.
2 Critical evaluation of Break even Model
According to the Gitman and Zutter (2012), Break, even model, demonstrates the single
point of sales where all the costs are covered by the sales revenue resulting into no profit and no
loss. In terms of production the level of production where total costs are covered. However, as per
16

the view point of Damodaran (2016), Break-even point is based on the certain assumption that all
cost can be separated into fixed and variable components is not realistic, and applicability is in
danger because there are more classifications of costs such as stepped fixed costs and semi-variable
cost. Furthermore as per the Buchanan (2014) assumption that fixed cost will remain constant at all
levels of output is not relevant and it changes with significant changes in the volume and also
economies of scale work on fixed cost in certain situations. The critical evaluation described by
another author on assumption that variable cost will fluctuate directly in proportion to the volume of
output depicts that economy of scale works and as the production level increases variable cost will
decrease per unit. Also learning curve is applicable, and other factors in the external market such as
inflation rates or price rise in raw material etc. influence the production in a great manner. Therefore
it can be said that break even is unrealistic and does not depict clear picture in the practical world of
Globalisation.
In accordance with the views of Corsatea, Giaccaria and Arántegui (2014) break-even
analysis lays emphasis on making clear distinction in the fixed and variable cost. However,
sometimes it is not possible for manager to make clear division in the fixed and variable cost. On
the critical note, Damodaran (2016) said that accounting manager has ability in relation to
categorizing cost into fixed and variable. Moreover, rent, salaries of personnel etc. are comes in the
category of fixed cost. In contrast to this, electricity, advertisement etc are considered as variable
cost. Hence, by recognizing the each cost level manager can perform break-even analysis more
effectively and efficiently. In addition to this, Dellavigna and Pollet (2013) criticized assumption of
break-even that it considers only variable cost at the time of determining the situation of no profit
and no loss. On the other hand, in the real life, both fixed and variable expenses are the part of total
cost. In comparison, marginal costing technique is highly effectual which in turn helps in assessing
the unit cost more effectively and efficiently.
CONCLUSION
Form the above report it can be concluded that various financial ratios predict the financial
performance of Primetown PLC and it has been evaluated that the year 2015 was less profitable as
compared to the year 2014 due to the significant increase in administration and bad debts. Also,
Woking capital cycle is adversely affected of Primetown PLC and demonstrated the effect of same
on the liquidity of the company. Furthermore, it depicts that Reebok Limited should accept the
machine under consideration as all the investment appraisal techniques support the acceptance of
the project. Moreover, Budgeting is critically evaluated as a planning and financial tool. Budgeting
is based on the past and historic aspects which can change as pert the scenario. Also going further it
17

is concluded that Break even is criticised by its unrealistic assumptions regarding ignoring the
stepped fixed costs and semi-variable cost. Therefore it is recommended to accept the machine by
Reebok Limited, and effective measure should be taken by Primetown PLC to reduce its cost by
incorporating proper controls.
RECOMMENDATIONS
 It is recommended to Prime town Plc to make control on the level of expenses. Moreover,
irrespective of the rise takes place in sales profitability aspect of the firm was decreased in
the year of 2015. Hence, effectual control on both direct and indirect expenses is highly
required for making improvement in the profitability aspect.
 In addition to this, by considering the outcome of quick ratio it is suggested to Prime town
to make focus on finding most profitable investment opportunities. During both the periods
such as 2014 and 2015 quick ratio exceeded ideal ratio such as .5:1. Hence, by doing this,
company can enhance its profitability position or performance to the great extent.
 Further, Prime town should make focus on offering high dividend to the shareholders which
in turn helps it in attracting the large number of customers.
 On the basis of receivable days, it is recommended to business unit to make modifications
in its credit policy. Besides this, company should approach to supplier who offer or grant
credit to them for longer duration. Hence, by making suitable changes in all such aspects
business unit can ensure significant improvement in its working capital aspects.
 For building and maintaining faith in the mind of investors company is required is build
highly competent framework. By this, business unit would become able to generate enough
profit margin.
18

REFERENCES
Books and Journals
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of
investment projects. Routledge.
Brigham, E.F. and Daves, P.R., 2012. Intermediate financial management. Nelson Education.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial Management: Theory & practice. Cengage
Learning.
Buchanan, J.M., 2014. Public finance in democratic process: Fiscal institutions and individual
choice. UNC Press Books.
Caglayan, M. and Demir, F., 2014. Firm productivity, exchange rate movements, sources of finance,
and export orientation. World Development. 54. pp.204-219.
Chen, M. and Guariglia, A., 2013. Internal financial constraints and firm productivity in China: Do
liquidity and export behavior make a difference? Journal of Comparative Economics.41 (4).
pp.1123-1140.
Corsatea, T.D., Giaccaria, S. and Arántegui, R.L., 2014. The role of sources of finance on the
development of wind technology. Renewable Energy.66. pp.140-149.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate
finance. 324. John Wiley & Sons.
Dellavigna, S. and Pollet, J.M., 2013. Capital budgeting versus market timing: An evaluation using
demographics. The Journal of Finance. 68(1). pp.237-270.
Gitman, L.J. and Zutter, C.J., 2012. Principles of managerial finance. Prentice Hall.
Kelly, J.M., 2015. Performance budgeting for state and local government. Me sharpe.
Lasher, W.R., 2013. Practical financial management. Nelson Education.
Online
Break-Even Point: Meaning, Assumptions, Uses and Limitations, 2016. [Online]. Available
through<http://www.yourarticlelibrary.com/accounting/break-even-point/break-even-point-
19

meaning-assumptions-uses-and-limitations/65309/>. [Accessed on 22nd December, 2016.]
Practical Money Skills, 2016. [Online]. Available
through<http://www.practicalmoneyskills.com/personalfinance/savingspending/budgeting/>.
[Accessed on 22nd December, 2016.]
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APPENDIX
Particulars 2014 2015
Amount in £000 Amount in £000
Current Asset 5795 7070
current liabilities 2825 3680
Current Ratio
(Current asset /
Current
Liabilities)
5795/ 2825 =
2.05
7070 / 3680 =
1.92
Current Asset-
Inventory 3275 3210
current liabilities 2825 3680
Quick Ratio
( Current Assets-
Inventory/
Current
Liabilities)
5795 – 3275 /
2825 = 1.16
7070 – 3210 /
3680 = 0.87
Operating profit 7905 7760
Sales 18270 24100
Operating Profit
Ratio (Operating
Profit/ Sales)
7905 / 18270 =
43.27%
7760 / 24100 =
32.20%
Net Profit (Profit
after Tax) 5695 4955
Sales 18270 24100
Net Profit Ratio
(Net Profit/ Sales)
5695 / 18270 =
31.17%
4955 / 24100 =
20.56%
Debt 8700 14650
Shareholder's
Equity 26160 29165
Debt Equity or
gearing Ratio
8700 / 26160 =
0.33
14650 / 29165 =
0.50
Net Income 7905 7760
21

(Operating Profit)
Annual Interest
Expenses 790 1725
Interest coverage
ratio or Times
Interest ( Net
income/Annual
interest expenses)
7905 / 790 =
10.01
7760 / 1725 =
4.50
Net sales
(Revenue) 18270 24100
Total Assets 37685 47495
Total Asset
Turnover (Net
Sales/ Total
Assets)
18270 / 37685 =
0.48
24100 / 47495 =
0.51
COGS 6995 11145
Inventory 2520 3950
Inventory
Turnover(
Cogs/Inventory)
6995 / 2520 =
2.78
11145 / 3950 =
2.82
Dividend 1900 1950
Total Earnings
Available for
equity
shareholders 5695 4955
Dividend Payout
Ratio
1900 / 5695
*100 = 33.36%
1950 / 4955 *
100 = 39.35%
Inventory turnover
in
days(365/Inventor
y turnover )
365 / 2.78 =
131.49
365 / 2.82 =
129.36
Debtor turnover in
days[(closing
39.56 days 47.25 days
22

debtors /Total
Credit Sales)*365]
Creditors
turnover[ (closing
creditors/Total
Credit
Purchases)*365] 90.01 days 62.88 days
Working Capital
Cycle( A+B-C) 81.04 113.74
Return on capital
employed (Net
operating profit /
(Total assets –
current
liabilities)
7905 / (37685 –
2825) * 100 =
23%
7760 / (47495 –
3680) * 100 =
18%
Return on
shareholders’
fund (Net profit /
shareholders
equity)
5695 / 26160 *
100 = 22%
4955 / 29165 *
100 = 17%
23