Accounting Fundamentals: Financial Performance Analysis of Chocco plc

This project discusses the financial performance of Chocco plc based on accounting ratios such as ROCE, ROE, net profit margin, asset turnover, and more. It also suggests ways to improve the organization's revenue and efficiency.

FUNDAMENTALS

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
QUESTION 1 ..................................................................................................................................3
a. Profitability statement .............................................................................................................3
b. Balance sheet .........................................................................................................................4
QUESTION 2...................................................................................................................................5
a. Calculating ratios for Chocco plc for the period of 2020 and 2019 ........................................5
Financial performance analysation of organizations performance............................................12
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Accounting ratios are used for the calculation of the company's performance. There are
different ratios which explains about the different factors about the organization. The business
discussed in this product is Chocco plc. In this project the information about the financial
statements and the ratio's calculation is done. This project compares the performance of the two
years in which the organization operates.
MAIN BODY
QUESTION 1
a. Profitability statement
Particulars Amount (in £) Amount (in £)
Sales revenue 826650
Less: Cost of goods sold 578650
Gross Profit 248000
Less: Indirect expenses
Administrative expenditure 30000
Interest paid 4000
Directors remuneration 5000
Distribution costs 28000
Sales commission 3000 70000

EBT 178000
Corporation tax 68000
Net Profit 110000
(-) Preference dividend 30000
Earnings available to equity
shareholders
80000
(-) Ordinary dividend 20000
Retained earnings 60000
b. Balance sheet
Particulars Amount (in £) Amount (in £)
ASSETS
Fixed assets
Plant and equipment 632730
Current assets
Stock 329620
Debtors 171105
Cash and Bank 12900 513625
Total assets 1146355
LIABILITIES
Long term liabilities
4% Debentures 100000
Current liabilities

Creditors 171355
Outstanding commission 3000
Outstanding interest 2000
Tax payable 68000 244355
Shareholders’ equity
Ordinary shares 310000
10% preference shares 300000
Profit for the period 110000
Retained earnings 82000 802000
Total liabilities 1146355
QUESTION 2
a. Calculating ratios for Chocco plc for the period of 2020 and 2019
1- ROCE
Particulars Formula 2020 2019
Earnings Before Interest and Tax 846 720
Total assets 9736 10087
Current liabilities 2511 3046
Capital employed Total assets - Current liabilities 7225 7041
ROCE ratio EBIT / Capital employed 11.7% 10.2%

2- ROE
Particulars Formula 2020 2019
Net Income 431 366
Shareholders’ equity 3088 2912
ROE Net income / average shareholders’ equity 13.96% 12.57%
3- Earnings per share

Particulars Formula
202
0
201
9
Net income 431 366
Preferred dividend 0 0
Average common shares
outstanding 600 600
Earnings per share
(Net income - Preferred dividend) / Average common
shares outstanding
0.7
2
0.6
1
4- Net profit margin
Particulars Formula 2020 2019
Net profit 431 366
Revenue 6738 6441
Net profit margin Net profit / sales * 100 6.40% 5.68%

5- Asset turnover
Particulars Formula 2020 2019
Revenue 6738 6441
Total Assets 9736 10087
Asset turnover Net sales / Average total assets 0.69 0.64
6- Stock holding days
Particulars Formula 2020 2019
Inventory 708 659

Cost of sales 3235 3096
Stock Holding days (Inventory / COGS)*365 80 78
7- Debtors collection period
Particulars Formula 2020 2019
Debtors 1249 1287
sales 6738 6441
Debtors collection Period (Debtors / sales)*365 68 73

8- Current ratio
Particulars Formula 2020 2019
Current assets 2303 2355
Current liabilities 2511 3046
Current Ratio Current assets / Current liabilities 0.92 0.77
9- Gearing ratio
Particulars Formula 2020 2019
Total debt 4137 4129
Shareholders’ equity 3088 2912
Gearing ratio formula Long-term debt / shareholders’ equity 1.3 1.4

10- Inventory turnover ratio
Particulars Formula 2020 2019
Net sales 6738 6441
Inventory 708 659
Inventory turnover ratio COGS / average stock 9.52 9.77

Financial performance analysation of organizations performance
ROCE :
The return of capital employed is the ratio which helps in the measurement of the
company's performance. This ratio shows that the organization is generating profits with the help
of its capital. For Chocco plc the ROCE ratio for the year of 2019 was 10.2% and in 2020 this
ratio changed to 11.7%. This is a positive result for the company as its capital employed has
improved. However, for improving the capital employed for this organization it can utilize many
methods such as, by selling the old machinery which has lower production rates. This will
decrease the assets of the company and improve the over all ROCE (Parapat, 2018).. This is
known as removal of unnecessary assets. These old assets for the organization makes the
employed capital to be less facilitated towards the amount of production. Paying of the old
outstanding debts can also be considered to be a method of improving the capital employed in
the organization (Suwantari, Ariana and Suprapto, 2020)
ROE :
Return of equity ratio is the type of ratio which provides the investors an idea about the
how much money is generated by the company. This ratio is considered a lot while making
comparison between two or more organization. For Chocco plc the ROE ratio for the year of
2019 was 12.57% which accounted to 13.96% in the year of 2020. Improved return on
investment is considered to be a positive sign for the business. This means that more investors

will be interested in the business. However, ROE ratio of 15% to 20% is considered to be good
for a company. Thus, for gaining an upper hand in the organization it needs to improve its equity
ratio. The ROE of a company is improved when the profit margin of the organization is
increased. This organization should also try to decrease its total labour cost with the help of
strategies which can provide efficiency.
Earning per share :
Earning per share for an organization denotes the profit which the company makes per
outstanding share. Its calculation is done on the annual basis. This organization had the earning
per share of 12.57% which accounted to 13.96%. The increase in the earning per share is very
good for the organization. The earning per share can be increased by increasing the total revenue
of the company. With the help of decreasing the costs which the company incurs, the earning per
share can also be decreased. It is important for the organization because the more the revenue is
generated per share it means that the organization is utilizing its equity capital properly. It helps
the organization to increase their equity capital as the investors understand that this company can
generate more revenue from their invested money.
Net profit margin :
This is the measurement of the total income which is generated by the company as the
percentage to the total revenue. It is the ration of the net profit to the revenue of the company or
the business segment. This margin helps in illustrating the total amount of revenue which is
generated is the actual profit. The net profit margin for this organization was 5.68% which
accounted to 6.40% in the years 2020. This is a positive result for the organization which allows
the business to influence its investors that the cost management of this organization is very good.
It is important for the company to increase the net profit margin as that is the actual income of
the company and essential for its growth.
Asset turnover :
The asset turnover ratio is the measurement of the value of the sales of the company to
the relative value of the assets. Increase in the asset turnover ratio indicates that the company has
efficiency in its operations. The investors are very interested in this ratio as it explains about the
efficiency of the company. For this organization the assets turnover ratio in the year 2019 was

0.64% which then accounted to 0.69%. This increase in the ratio is good for the organization
however for improving this ratio more it needs to increase its total revenue and also liquidate the
obsolete assets. Increasing the efficiency in all the resources which influence the business of the
organization helps the company to increase its asset turnover.
Stock holding period :
This period denotes the amount of time which the investor holds on the particular
investment during the period of purchase and sale of the security. For Chocco plc this period in
the year of 2019 was 78 days and in 2020 it increased to 80 days. The increase in the stock
holding period is considered as to be bad for the organization. This is because the longer the
company holds on to the stock it is bad for their business. Quicker the organization can turn their
stock into revenue with the help of sales it is considered to be better for the organization. This
helps the organization with generation of revenue and decreasing the cost on goods sold. Shorter
periods means that the organization can use its resources faster and with more efficiency. The
investors decision depends on this period (Restianti and Agustina, 2018).
Debtors collection period :
The debtors collection periods denotes the average time which is taken for the
organization for the collection of its debts. The sales which the organization makes on credit are
main reason for its success. No organization can survive in the market with making sales on
credit. For Chocco plc this period in the year of 2019 was 73 and in the year 2020 this decreased
to 68 days. This is good for the organization as it is able to recover its debts rather quickly. It is
important for the organization to have expected amount of period which can help the
organization to reduce the total debtor's collection period. Negotiation of payments is an
effective way and offering of discounts for early payment is also considered to be an effective
way of decreasing the debtor's collection period.
Current ratio :
This ratio is a liquidity ratio which helps in the measurement of the company's ability to
pay the short-term obligations. It helps the investors in the analysation of how capable the
organization is in maximization of its profit with the help of its current assets in order to satisfy
the total debts. For Chocco plc this ratio in the year of 2019 was 0.77 which increased and

accounted to 0.92 in the year 2020. For a company the higher the current ratio is,it indicates that
the organization is liquid. It means that it can easily pay of short-term obligations which are
generally equity shares. Due to this the investors are keen on this particular ratio as it helps them
decide whether investing in the organization is safe or not (Brewer and et.al., 2017).
Gearing ratio :
Gearing ratio is a financial ratio which is used for making comparison between the
owner's equity to the debt and the funds which are borrowed by the organization. With the help
of the gearing ratio the measurement of the financial leverage which explains the degree of the
organizations operations are discussed. In this organization the Gearing ratio was 1.4 and it
accounted to 1.3 in the year 2020. The decrease in the gearing ratio indicates that the
organization has conservative financial management. It can be good and bad for the organization
as it affects the business of the organization. It helps the company to face inevitable downturns in
its sales and profit.
Inventory turnover ratio :
This ratio of an organization indicates the rate at which the organization sells and
replaces its stock of goods. For this company the calculated invetory turnover ratio was 9.77 in
2019 and it accounted to 9.52 in the year of 2020. For improving the inventory turnover ratio
this organization can try to make proper forecasting of the different factors of consideration.
Increasing the effeciency of the company by automation of certain process can also improve the
inventory turnover ratio. Effective marketing is considered to be the best way of improve the
inventory turn over ratio as it increase the sales of the organization (Sengupta, 2021).
CONCLUSION
With the help of this project it can be concluded that Chocco plc needs to improve its
revenue with the help of implementing new strategies. In this project calculation has been made
for the different accounting ratios. This project also helps with explaining the financial
performance of the organization based on the discussed ratios.

REFERENCES
Books and Journals
Brewer, H.R., and et.al., 2017. Family history and risk of breast cancer: an analysis accounting
for family structure. Breast cancer research and treatment. 165(1). pp.193-200.
Parapat, E.P.S., 2018. Effect of Company Financial Ratio, Price Earning Ratio on Stock Return
and Earning Per Share as Moderating Variables In Manufacturing Companies Listed
In Indonesia Stock Exchange. International Journal of Public Budgeting, Accounting
and Finance. 1(4). pp.1-13.
Restianti, T. and Agustina, L., 2018. The effect of financial ratios on financial distress
conditions in sub industrial sector company. Accounting Analysis Journal. 7(1).
pp.25-33.
Sengupta, A.K., 2021. THE CONCEPT OF LIQUIDITY AND THE DEPENDENCY
RATIO. INDIAN JOURNAL OF ACCOUNTING, p.23.
Suwantari, N.P., Ariana, I.M. and Suprapto, P.A., 2020. Accounting Analysis in Accounts
Receivable Management to Minimize the Risk of Uncollectible Receivables at ALS
Hotel and Resort. Journal of Applied Sciences in Accounting, Finance, and Tax. 3(2).
pp.117-124.