Unit 4 M2 Ratio Analysis
M2: Analyse the performance of a business using suitable ratios
Ratio
Dessi-Designs
Gross profit margin
Dessi-Designs Result :
60%
Q1. Definition of Ratio
Gross profit margin is the difference between revenue and cost before accounting for certain other costs. Generally, it is calculated as the selling price of an item, less the cost of goods sold then multiplied by 100.
Q2. What result would your aunty and uncle want from this ratio?
The result they would want a high percentage because the higher the percentage the better it would be for the business, 60% means that for every £1 of sales they are given 60p gross profit.
Q3. With the result that your aunty and uncle got, why did they get it and what does this mean for their business …show more content…
(e.g. is this good or poor performance and why)
Compared to to the industry average Dessi designs performed well but not as good as the industry averages because their gross profit margin was 65%. This shows that the revenue of sales is at a steady speed and the cost of sales are much lower.
Q4. What financial decisions can your aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
With these results they can decide to expand because they have made a high profit and they can use the profit to make further investments in the business for example they can open more stores in different locations. The industry averages were 65% which is 5% higher than dessi designs percentage and for dessi designs to increase their net profit margin they should start selling diffent products that will attract new customers.
Net profit margin
Dessi-Designs Result :
40%
Q1. Definition of Ratio
Net profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends have been deducted from a company's total revenue.
Q2. What result would your aunty and uncle want from this ratio?
This result shows that after all the expenses are taken away the business still have money left over, 40% for the business means that for every £1 of sales they get a 40p net profit
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why)
The results show that the business are performing well because they have budgeted well because the higher the net profit margin the better it is for the business this may also attract some stakeholders and maybe investors that can see a good future with the business
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
The industry averages were 35% so this shows that dessi designs are performing well since they have a higher net profit margin figure. So this shows that dessi designs are managing well because they are only in their first year and they made 40% so this shows that they have the potential to do a lot better and they can expand.
Return on capital employed
Dessi-Designs Result :
8%
Q1. Definition of Ratio
Return on capital employed measures a company's profitability and the efficiency with which its capital is employed. Return on Capital Employed is calculated by net profit before interest and tax/capital employed x 100
Q2. What result would your aunty and uncle want from this ratio?
This result shows that they have a low ROCE and this is not good because the higher the ROCE is the better it is for the business also for every £1 a 8p ROCE is made.
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why)
If the ROCE is low this means that the business and shareholders are losing money, all businesses want a positive return on capital employed. In order for dessi designs to get a positive return on ROCE they should start spending less on supplies so they can sell them at a higher price.
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
From the results I think that dessi designs should find new suppliers that charge a lower price or start spending less on the supplies if they want to make profit and expand.
Current ratio
Dessi-Designs Result :
3:1
Q1.
Definition of Ratio
The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities.
Q2. What result would your aunty and uncle want from this ratio?
This ratio will provide them with information and with the information they can decide take make smart decisions because it takes both current assets and liabilities to mind. For example this will be able to tell them if they can pay debts back in a months time or if they need to borrow money to pay it back.
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why) The results are poor and it shows that they have too much stock that is not sold. The result 3:1 is high because it shows that for every £1 the business are in debt they have to pay £3 back
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand) Dessi designs should try to keep the ratio lower than 1.5:1 and in order for Dessi designs to keep running they should not purchase so much …show more content…
stock.
Gearing ratio
Dessi-Designs Result :
60%
Q1.
Definition of Ratio
Gearing ratio refers to the fundamental analysis ratio of a company's level of long-term debt compared to its equity capital
Q2. What result would your aunty and uncle want from this ratio?
This result shows that if the gearing ratio is above 50% it shows that the business are financed by loans and they have to pay it back with interest so they will want to decrease their gearing ratio
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why)
The result shows that the performances have not been good because it shows that they are mostly financed by loans and with loans they have to pay it back with interest which means that they are paying extra and making a loss.
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
If they want to expand they should try to lower the gearing ratio by getting a trustworthy person to invest in the business so that they are not relying on loans.
Creditor
Days
Dessi-Designs Result :
548 days
Q1. Definition of Ratio
Creditor days is the amount of days it takes the business to pay trade creditors.
Q2. What result would your aunty and uncle want from this ratio?
They result shows that the longer the amount of days is the better it would be for the company because it gives a measure of how long it takes to pay of its debts
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why)
Compared to the industry averages Dessi designs performance is far better because the industry averages were 60 days and dessi designs results was 548 days. However it is also too long because when businesses see that it takes them a long time to pay back debts they will not give them a loan.
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
With these results Dessi designs should just keep their consistency then they can improve. They can keep consistent by paying back debts at the right time and they can improve.
Ratio
Dessi-Designs
Gross profit margin
Dessi-Designs Result :
60%
Q1. Definition of Ratio
Gross profit margin is the difference between revenue and cost before accounting for certain other costs. Generally, it is calculated as the selling price of an item, less the cost of goods sold then multiplied by 100.
Q2. What result would your aunty and uncle want from this ratio?
The result they would want a high percentage because the higher the percentage the better it would be for the business, 60% means that for every £1 of sales they are given 60p gross profit.
Q3. With the result that your aunty and uncle got, why did they get it and what does this mean for their business …show more content…
(e.g. is this good or poor performance and why)
Compared to to the industry average Dessi designs performed well but not as good as the industry averages because their gross profit margin was 65%. This shows that the revenue of sales is at a steady speed and the cost of sales are much lower.
Q4. What financial decisions can your aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
With these results they can decide to expand because they have made a high profit and they can use the profit to make further investments in the business for example they can open more stores in different locations. The industry averages were 65% which is 5% higher than dessi designs percentage and for dessi designs to increase their net profit margin they should start selling diffent products that will attract new customers.
Net profit margin
Dessi-Designs Result :
40%
Q1. Definition of Ratio
Net profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends have been deducted from a company's total revenue.
Q2. What result would your aunty and uncle want from this ratio?
This result shows that after all the expenses are taken away the business still have money left over, 40% for the business means that for every £1 of sales they get a 40p net profit
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why)
The results show that the business are performing well because they have budgeted well because the higher the net profit margin the better it is for the business this may also attract some stakeholders and maybe investors that can see a good future with the business
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
The industry averages were 35% so this shows that dessi designs are performing well since they have a higher net profit margin figure. So this shows that dessi designs are managing well because they are only in their first year and they made 40% so this shows that they have the potential to do a lot better and they can expand.
Return on capital employed
Dessi-Designs Result :
8%
Q1. Definition of Ratio
Return on capital employed measures a company's profitability and the efficiency with which its capital is employed. Return on Capital Employed is calculated by net profit before interest and tax/capital employed x 100
Q2. What result would your aunty and uncle want from this ratio?
This result shows that they have a low ROCE and this is not good because the higher the ROCE is the better it is for the business also for every £1 a 8p ROCE is made.
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why)
If the ROCE is low this means that the business and shareholders are losing money, all businesses want a positive return on capital employed. In order for dessi designs to get a positive return on ROCE they should start spending less on supplies so they can sell them at a higher price.
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
From the results I think that dessi designs should find new suppliers that charge a lower price or start spending less on the supplies if they want to make profit and expand.
Current ratio
Dessi-Designs Result :
3:1
Q1.
Definition of Ratio
The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities.
Q2. What result would your aunty and uncle want from this ratio?
This ratio will provide them with information and with the information they can decide take make smart decisions because it takes both current assets and liabilities to mind. For example this will be able to tell them if they can pay debts back in a months time or if they need to borrow money to pay it back.
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why) The results are poor and it shows that they have too much stock that is not sold. The result 3:1 is high because it shows that for every £1 the business are in debt they have to pay £3 back
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand) Dessi designs should try to keep the ratio lower than 1.5:1 and in order for Dessi designs to keep running they should not purchase so much …show more content…
stock.
Gearing ratio
Dessi-Designs Result :
60%
Q1.
Definition of Ratio
Gearing ratio refers to the fundamental analysis ratio of a company's level of long-term debt compared to its equity capital
Q2. What result would your aunty and uncle want from this ratio?
This result shows that if the gearing ratio is above 50% it shows that the business are financed by loans and they have to pay it back with interest so they will want to decrease their gearing ratio
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why)
The result shows that the performances have not been good because it shows that they are mostly financed by loans and with loans they have to pay it back with interest which means that they are paying extra and making a loss.
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
If they want to expand they should try to lower the gearing ratio by getting a trustworthy person to invest in the business so that they are not relying on loans.
Creditor
Days
Dessi-Designs Result :
548 days
Q1. Definition of Ratio
Creditor days is the amount of days it takes the business to pay trade creditors.
Q2. What result would your aunty and uncle want from this ratio?
They result shows that the longer the amount of days is the better it would be for the company because it gives a measure of how long it takes to pay of its debts
Q3. With the result that your aunty and uncle got what does this mean for their business (e.g. is this good or poor performance and why)
Compared to the industry averages Dessi designs performance is far better because the industry averages were 60 days and dessi designs results was 548 days. However it is also too long because when businesses see that it takes them a long time to pay back debts they will not give them a loan.
Q4. What financial decisions can you aunty and uncle make from their result? (e.g. whether to continue in business or whether to expand)
With these results Dessi designs should just keep their consistency then they can improve. They can keep consistent by paying back debts at the right time and they can improve.