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Conor Cunningham M2 D2
To; Joan Thompson, Grand Event Designs

From; Cunningham Accountants

Ref; 99

Date; 01/03/2016

M2
1
...
This report will
contain a full analysis of her company’s current financial position in comparison with
companies in other industries
...
Ratios will be investigated throughout
...


2
...
Ratio analysis is an effective way to compare one business with another in the same
industry
...
There are three types of ratio;




Profitability
Liquidity
Performance

GP% Profitability GP/Sales*100

63,688/152,500*100 = 41
...
The average
ratio for this industry is 41
...
Joan Thompsons figure is very similar to the industry average
(41
...
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
...
This may be
concerning to Joan, as well as future investors
...

NP% Profitability NP/Sales*100

10,013
...
57%

The net profit margin measures the net profit in comparison to sales
...
57%, which is higher than the industry average figure of 6
...
This figure
is very similar to the industry average and is even a little higher
...
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
...
The
higher the net profit ratio, the better the company is performing
...
50/152,500*100= 35
...
The average
ratio for this industry is 30
...
Joan Thompsons figure is 35
...
This
shows that Joan’s expenses are too high (£54,730
...

In addition to this, the 2015 figure has increased from 2013 and 2014
...
Future investors will look at this ratio and see why the expenses are too
high
...

ROCE Profitability NP/ (Non-current assets + current assets) – (current liabilities – long
term liabilities)
11287
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50/19,611
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5%
ROCE is a fourth type of profitability ratio
...
The higher
the return on capital employed, the better it is for the business
...
Compared with the 16
...
5%
...
00 of capital invested Joan has a return of 31
...
This shows that Joan’s business is
making a more efficient use of capital invested
...


Current ratio/Working capital ratio CA/CL

15,937/14,313 = 1
...
52:1

Both the Current Ratio and the Acid Test Ratio determine how quickly the company can
convert their assets into cash
...
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
...
As such, current ratio can be used
to take a rough measurement of a company's financial health
...
11:1,
which is slightly low in comparison to the industry average of 2
...
Joan’s Acid Test Ratio is 0
...
00:1
...
This ratio also fell from the past

Conor Cunningham M2 D2
two years which suggests that it is becoming a problem and that her business is not
operating most effectively
...
5 Days

The inventory turnover is a measure of the number of times inventory is sold or used in a
time period such as a year
...
5 days
...
The industry average is 30 days which is a much more positive figure than Joan
Thompsons business is producing
...
This figure is too high and shows that Joan is not
selling stock quick enough
...
Joan must ensure stock is sold as quickly as possible to lower this
figure in the future or else her business is not operating as effectively and efficiently as it
should be
...
The higher the
ratio here, the poorer it is for the company as they are waiting longer for money to come
into the business
...
In 2015, it only took Joan 6 days to
receive debt from her customers
...
This means Joans credit control is much more efficient and it
is good for her business as money is coming in quickly which can be used to buy more stock
or for any other business activity
...
2 Days

The accounts payable efficiency is how quickly Joan is able to pay her suppliers for goods
and services (inventory)
...
The 2015 industry average is 35
days
...
2 days, which is a little higher than the industry
average and than her previous two years
...
In the future,
Joan should try to pay her creditors as quickly as possible so that this figure decreases and
becomes more positive when we compare it with the industry average
...

D2 BR
Ratios are useful because they allow lenders to see how the business is doing and allow
them to compare the business to other businesses and competitors in the same industry
...
They also allow a business to compare itself to competitors in the same
industry and as explained above, they can compare in terms of liquidity, profitability,
performance and returns on capital employed
...
For example, Joan’s Acid test ratio is too
low so she can see this needs to be improved in the future to improve her ratio
...
They show what has already happened in the business, not what is happening
or what is likely to happen financially
...

They also may give Joan a false impression of her business’ financial health as they are only
ratios
...
This is a problem for both Joan and future investors who are both mislead as to
the correct financial state of the business
...
0 Conclusion
Joan’s business is in a comfortable position for the year ending 2015
...
She has a
great return on capital employed
...
Joan’s business is
also a little slow in paying for credit purchases, but is very good in debt collection
...

4
...
This would help her decrease her expenses
percentage which is too high in comparison with the industry average for the year
...
If
she manages to make use of these recommendations, her business could increase its
profitability even further
...
0 Appendices
https://en
...
org/wiki/Accounts_payable
http://www
...
com/terms/w/workingcapital
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myaccountingcourse

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