Financial Management and Control

FINANCIAL MANAGEMENT AND CONTROL

PART A
Answer 1.
PROFITABILITY RATIOS
Particulars 2017 2016
Gross profit 12200 9100
Revenue 23000 18000
Gross profit margin 53% 51%
Particulars 2017 2016
Net profit 4060 3220
Revenue 23000 18000
Net profit margin 18% 18%
Profitability ratio is a measure of financial metrics which is used to ascertain the ability of a
business to generate earnings which is relative to its operating cost, revenue, balance sheet
assets, which is used from its data from a specific point in time. So, the indication when the
company is doing well is depicted by the profitability ratio which has a higher value relative to
its competitor’s ratio or relative to the same ratio from a previous period. The marginal profit of
the company is measured by the it’s profit. It is usually measured in percentage. As we can see
that the gross profit of the company has increased when it is compared from the year 2017 to
2016. Although, the gross profit is increased, the net profit is decreased due to increase in
interest payable from 500 in 2016 to 1000 in 2017as the income tax is 30% constant. The
shareholders of the company always expect the company to earn higher profits such that the
wealth of the company is maximized. The net profit is affected by the higher interest rate.
LIQUIDITY RATIOS
Particulars 2017 2016
Current assets 5160 4150
Current liabilities 1100 1500

Current ratio
4.
69
2.
77
Particulars 2017 2016
Current asset 5160 4150
Inventories 2360 1800
Current Liabilities 1100 1500
Quick Ratio
2.
55
1.
57
Liquidity ratio is a very important class of financial metrics which is used to determine the
debtor’s ability to pay off the current debt obligations without raising external capital. The
margin of safety is also calculated through metrics which includes current ratio, operating cash
flowing ratio and quick ratio. It is the ability to convert the assets into cash quickly and cheaply.
The current ratio is calculated by dividing the ratio of current assets by the current liabilities
which as we see has increased from 2.77 in 2016 to 4.69 in 2017. The quick ratio is calculated by
dividing quick assets and current liabilities which has increased from 1.57 in 2016 to 2.55 in
2017. The current ratio measures the financial strength of the company to meet its short term
obligations (Adelaja, 2015). The quick ratio also measures the liquidity of the company but in a
stringent manner. Ideal ratio is 1:1. Therefore, the company is maintaining more than adequate
liquidity position. In other words, these ratios compare the combinations of relatively liquid
assets to the amount of current liabilities which is stated on an company’s most recently prepared
balance sheet. The examples of liquidity ratio are current ratio which compares the current assets
to current liabilities, quick ratio is the same as the current ratio but it excludes the inventories,
cash ratio simply compares just cash and readily convertible investments into current liabilities
(Alvarez, 2013).
GEARING RATIOS
Particulars 2017 2016

Total Debt 3500 2000
Total Equity 15760 12000
Total Debt to Equity
ratio
0.
22
0.
17
Particulars 2017 2016
Total Debt 3500 2000
Total Asset 19260 14000
Debt ratio
0.
18
0.
14
Gearing ratio represents a group of financial ratios which compares a form of owner’s equity to
the funds borrowed by the company. It is a measurement of the entities financial leverage which
demonstrates the degree of the firms activity which is funded by the share holders funds versus
the creditor’s fund that is the equity capital versus the debt financing (Atkinson, 2012). The debt
to equity ratio has increased from 0.17 to 0.22 which shows that the amount of debt in the capital
structure of the company has increased. The company is using debt for its operations more in
2017 when compared to 2016. An optimal gearing ratio is determined by the individual company
relative to the other companies within the same industry. The calculation of the gearing ratio is
done by the total debt by the total shareholders’ equity. This ratio is also expressed in percentage
which reflects the amount of existing equity which is a requirement to pay off all the outstanding
debt. A high gearing ratio is anything above 50% while a low gearing ratio is anything which is
below 25%. If the gearing ratio is anything in between 25% to 50% then it is considered to be the
optimal gearing ratio (Berry, 2009).
ASSET UTILISATION RATIOS
Particulars 2017 2016
Revenue 23000 18000
Net assets 15760 12000
Asset turnover ratio 1. 1.