Conor Cunningham M2 D2
To; Joan Thompson, Grand Event Designs From; Cunningham Accountants
Ref; 99 Date; 01/03/2016
M2
1.0 Introduction
This report was requested by Joan Thompson at Grand Event Designs. This report will
contain a full analysis of her company’s current financial position in comparison with
companies in other industries. The report will also give guidance to help Joan improve the
financial state of her business. Ratios will be investigated throughout. This report has been
requested for 01/03/2016.
2.0 Findings
Ratios
Ratios are used to interpret and asses the financial performance of a business at a given
time. Ratio analysis is an effective way to compare one business with another in the same
industry. Within each business, different ratios are used to determine how positive certain
areas are. There are three types of ratio;
Profitability
Liquidity
Performance
GP% Profitability GP/Sales*100 63,688/152,500*100 = 41.8%
The gross profit ratio determines the amount of profit earned on sales made. The average
ratio for this industry is 41.5%. Joan Thompsons figure is very similar to the industry average
(41.8%) which shows her company is showing a positive profitability return. However, this
figure is still lower than the two years previous which may show that Joan’s profit margins
are starting to decrease, suggesting that her business is not becoming stronger. Although
right now she is slightly higher than the industry average, if the business continues the way
it is going, her gross profit margin may fall below the industry average. This may be
concerning to Joan, as well as future investors. The higher the ratio means the company is
performing better.
NP% Profitability NP/Sales*100 10,013.50/152,500*100 = 6.57%
The net profit margin measures the net profit in comparison to sales. Joan Thompsons net
profit figure is 6.57%, which is higher than the industry average figure of 6.50%. This figure
is very similar to the industry average and is even a little higher. This shows that she has had
high sales and has made a positive net profit return. In comparison with the previous year,
this figure has actually increased, suggesting that her business is becoming stronger in terms
of the total number of sales. Joan should ensure that this figure increases next year so that
, Conor Cunningham M2 D2
her business looks stronger in the eyes of the bank and in the eyes of future investors. The
higher the net profit ratio, the better the company is performing.
Expenses% Expenses/Sales*100 54,730.50/152,500*100= 35.89%
The third profitability ratio shows the amount of expenses in relation to sales. The average
ratio for this industry is 30.00%. Joan Thompsons figure is 35.89%, which is too high. This
shows that Joan’s expenses are too high (£54,730.50) in comparison to her sales (£152,500).
In addition to this, the 2015 figure has increased from 2013 and 2014. This suggests that her
business’ expenses are becoming an issue and are too high which will have a negative effect
on her profits too. Future investors will look at this ratio and see why the expenses are too
high. This ratio is too high and this is evident as it is higher than her two previous years in
business and the current industry average.
ROCE Profitability NP/ (Non-current assets + current assets) – (current liabilities – long
term liabilities)
11287.50+12,700+8,500+2531+4906-(10,988+3325) – 6000
10,013.50/19,611.50*100 = 31.5%
ROCE is a fourth type of profitability ratio. This ratio measures how efficiently a company
can generate profits from the capital employed (total assets-current liabilities). The higher
the return on capital employed, the better it is for the business. Joan has an excellent figure
for ROCE. Compared with the 16.75% industry average in 2015, Joan’s business has a great
return on capital employed, with a percentage return of 31.5%. This means that for every
£1.00 of capital invested Joan has a return of 31.5%. This shows that Joan’s business is
making a more efficient use of capital invested. Additionally, in previous years her figure
was much lower showing that Joan’s liabilities were too high in comparison with her assets.
Current ratio/Working capital ratio CA/CL 15,937/14,313 = 1.11:1
Acid Test Ratio CA less Inventory/CL 15937-8500/14313= 0.52:1
Both the Current Ratio and the Acid Test Ratio determine how quickly the company can
convert their assets into cash. In this case, the higher the ratio the better. However, if the
ratio is too high, the business is operating inefficiently and may have too many assets which
are not being used most efficiently. The current ratio is mainly used to give an idea of the
company's ability to pay back its liabilities with its assets. As such, current ratio can be used
to take a rough measurement of a company's financial health. Joan’s current ratio is 1.11:1,
which is slightly low in comparison to the industry average of 2.00:1 (which is a positive and
recommendable figure). Joan’s Acid Test Ratio is 0.52:1, which is also too low when we look
at the industry average ratio of 1.00:1. Joan may have difficulty raising enough finance from
her assets which would allow her to pay off her liabilities. This ratio also fell from the past
To; Joan Thompson, Grand Event Designs From; Cunningham Accountants
Ref; 99 Date; 01/03/2016
M2
1.0 Introduction
This report was requested by Joan Thompson at Grand Event Designs. This report will
contain a full analysis of her company’s current financial position in comparison with
companies in other industries. The report will also give guidance to help Joan improve the
financial state of her business. Ratios will be investigated throughout. This report has been
requested for 01/03/2016.
2.0 Findings
Ratios
Ratios are used to interpret and asses the financial performance of a business at a given
time. Ratio analysis is an effective way to compare one business with another in the same
industry. Within each business, different ratios are used to determine how positive certain
areas are. There are three types of ratio;
Profitability
Liquidity
Performance
GP% Profitability GP/Sales*100 63,688/152,500*100 = 41.8%
The gross profit ratio determines the amount of profit earned on sales made. The average
ratio for this industry is 41.5%. Joan Thompsons figure is very similar to the industry average
(41.8%) which shows her company is showing a positive profitability return. However, this
figure is still lower than the two years previous which may show that Joan’s profit margins
are starting to decrease, suggesting that her business is not becoming stronger. Although
right now she is slightly higher than the industry average, if the business continues the way
it is going, her gross profit margin may fall below the industry average. This may be
concerning to Joan, as well as future investors. The higher the ratio means the company is
performing better.
NP% Profitability NP/Sales*100 10,013.50/152,500*100 = 6.57%
The net profit margin measures the net profit in comparison to sales. Joan Thompsons net
profit figure is 6.57%, which is higher than the industry average figure of 6.50%. This figure
is very similar to the industry average and is even a little higher. This shows that she has had
high sales and has made a positive net profit return. In comparison with the previous year,
this figure has actually increased, suggesting that her business is becoming stronger in terms
of the total number of sales. Joan should ensure that this figure increases next year so that
, Conor Cunningham M2 D2
her business looks stronger in the eyes of the bank and in the eyes of future investors. The
higher the net profit ratio, the better the company is performing.
Expenses% Expenses/Sales*100 54,730.50/152,500*100= 35.89%
The third profitability ratio shows the amount of expenses in relation to sales. The average
ratio for this industry is 30.00%. Joan Thompsons figure is 35.89%, which is too high. This
shows that Joan’s expenses are too high (£54,730.50) in comparison to her sales (£152,500).
In addition to this, the 2015 figure has increased from 2013 and 2014. This suggests that her
business’ expenses are becoming an issue and are too high which will have a negative effect
on her profits too. Future investors will look at this ratio and see why the expenses are too
high. This ratio is too high and this is evident as it is higher than her two previous years in
business and the current industry average.
ROCE Profitability NP/ (Non-current assets + current assets) – (current liabilities – long
term liabilities)
11287.50+12,700+8,500+2531+4906-(10,988+3325) – 6000
10,013.50/19,611.50*100 = 31.5%
ROCE is a fourth type of profitability ratio. This ratio measures how efficiently a company
can generate profits from the capital employed (total assets-current liabilities). The higher
the return on capital employed, the better it is for the business. Joan has an excellent figure
for ROCE. Compared with the 16.75% industry average in 2015, Joan’s business has a great
return on capital employed, with a percentage return of 31.5%. This means that for every
£1.00 of capital invested Joan has a return of 31.5%. This shows that Joan’s business is
making a more efficient use of capital invested. Additionally, in previous years her figure
was much lower showing that Joan’s liabilities were too high in comparison with her assets.
Current ratio/Working capital ratio CA/CL 15,937/14,313 = 1.11:1
Acid Test Ratio CA less Inventory/CL 15937-8500/14313= 0.52:1
Both the Current Ratio and the Acid Test Ratio determine how quickly the company can
convert their assets into cash. In this case, the higher the ratio the better. However, if the
ratio is too high, the business is operating inefficiently and may have too many assets which
are not being used most efficiently. The current ratio is mainly used to give an idea of the
company's ability to pay back its liabilities with its assets. As such, current ratio can be used
to take a rough measurement of a company's financial health. Joan’s current ratio is 1.11:1,
which is slightly low in comparison to the industry average of 2.00:1 (which is a positive and
recommendable figure). Joan’s Acid Test Ratio is 0.52:1, which is also too low when we look
at the industry average ratio of 1.00:1. Joan may have difficulty raising enough finance from
her assets which would allow her to pay off her liabilities. This ratio also fell from the past
