Answer to test 4 data on financial ratio analysis and conclusions 2012 1 
TEST 4
CONCLUSIONS ON FINANCIAL PERFORMANCE AND ANSWERS TO RATIO ANALYSIS
1) Financial ratios of ABC plc from 2009 to 2011 :
2009
2010
2011
Gross margin - %
59.0
54.5
53.6
Net margin - %
21.0
18.5
14.6
ROCE - %
68
45.8
29.9
Return on Shareholder’s Funds - %
84
49.8
28.8
Earnings per share - £
10.5
10.2
6.83
Dividends per share - £
3
2.2
1
Current ratio
1.89
2.15
2.32
Quick ratio ( Acid test)
0.84
0.95
1.18
Stock turnover time - days
178
167.9
175.5
Debtor payment time - days
36.5
36.5
45.6
Creditor payment time - days
169.1
146.0
154.4
Gearing
39%
30.5%
25.9%
Memo :
Year end capital employed
£205m
£295m
£385m
2) Conclusions :
Although sales have increased by 12% from 2009 to 2011
( £60m /£500m) , gross margins have decreased from 59% to 53.6% over the 3 years . Reasons for the decrease in gross margin are not clear but could include : change in sales mix to higher percent of lower margin products increase in raw material costs within cost of sales that ABC is unable or unwilling to pass on to customer because of competition = squeeze in margins because of competition
ABC wants to gain market share and is reducing its margins to enable it to gain share • Net margin (Return On Sales ) has decreased from 21% to 14.6% over the 3 years as : overall profit before tax has decreased by 18% ( £115m/£140m) over the period primarily because “other costs including depreciation” have increased by 36% over the 3 years
( £75m/£55m) and net interest has doubled from an expense of £5m in 2009 to an expense of £10m in 2011 gross margins have decreased as discussed above • ROCE has declined dramatically from 68% in 2009 to just under 30% in 2011 primarily because : profit before tax has reduced by 18% over the 3 years as discussed above capital employed has increased by 88% over the 3 years
( £385m/£205m) as retained profits have more than doubled total equity from £125m to £285m over the period. This increase
CONCLUSIONS ON FINANCIAL PERFORMANCE AND ANSWERS TO RATIO ANALYSIS
1) Financial ratios of ABC plc from 2009 to 2011 :
2009
2010
2011
Gross margin - %
59.0
54.5
53.6
Net margin - %
21.0
18.5
14.6
ROCE - %
68
45.8
29.9
Return on Shareholder’s Funds - %
84
49.8
28.8
Earnings per share - £
10.5
10.2
6.83
Dividends per share - £
3
2.2
1
Current ratio
1.89
2.15
2.32
Quick ratio ( Acid test)
0.84
0.95
1.18
Stock turnover time - days
178
167.9
175.5
Debtor payment time - days
36.5
36.5
45.6
Creditor payment time - days
169.1
146.0
154.4
Gearing
39%
30.5%
25.9%
Memo :
Year end capital employed
£205m
£295m
£385m
2) Conclusions :
Although sales have increased by 12% from 2009 to 2011
( £60m /£500m) , gross margins have decreased from 59% to 53.6% over the 3 years . Reasons for the decrease in gross margin are not clear but could include : change in sales mix to higher percent of lower margin products increase in raw material costs within cost of sales that ABC is unable or unwilling to pass on to customer because of competition = squeeze in margins because of competition
ABC wants to gain market share and is reducing its margins to enable it to gain share • Net margin (Return On Sales ) has decreased from 21% to 14.6% over the 3 years as : overall profit before tax has decreased by 18% ( £115m/£140m) over the period primarily because “other costs including depreciation” have increased by 36% over the 3 years
( £75m/£55m) and net interest has doubled from an expense of £5m in 2009 to an expense of £10m in 2011 gross margins have decreased as discussed above • ROCE has declined dramatically from 68% in 2009 to just under 30% in 2011 primarily because : profit before tax has reduced by 18% over the 3 years as discussed above capital employed has increased by 88% over the 3 years
( £385m/£205m) as retained profits have more than doubled total equity from £125m to £285m over the period. This increase