Case study 1. Explain which of these three companies has had the most consistently high performance?

Here are some example Return on capital employed figures for three companies in different types of business:

 

Company			YEAR
			3
JVC	13.8	15.3	33.3	23.7	19.4
Preference Stores	24.7	21.3	20.9	20.2	21.6
Czech Breweries	15.6	13.9	13.2	15.0	13.0

A relatively low ROCE will indicate that there are weaknesses in either the profitability or productivity of the business. These can be assessed by using further ratios.

 

TASK 2 A. Fill in the gaps with the proper words from the box.

Profitability ratios

a) gross profit margin	b) overall	c) profitability	d) sales
e) the cost of goods	f) in order to	g) reduction	h) a fall
i) assessing	j) profit	k) percentages	1) ratios

 

Here you are___1___the amount of___2___that has been or can be made on___3___The other factor in determining___4___profit will be volume of sales

- the productivity of the business.

 

____5___ /mark-up. These ratios are used to analyse the trading___6___of the business. They are very similar__7__which express the cost + gross profit = sales relationship in different ways.

Acceptable gross profit_8_vary from one type of business to another as can be seen from the survey examples.

 

Cash trade classification	Mark-up on cost (%)	Gross profit on sales (%)
Antique dealer
Bakers
Builders' merchants
Builders' and decorators
Butchers
Coal merchants
Confectioners and tobacconists
Chemists
Cycle and motorcycle dealers
Dentists
Driving instructors
Fish and chip shops
Florists
Footwear retailers
Grocers
Greengrocers
Jobbing plumbers
Milk retailers
Off licences
Opticians
Public houses
Restaurants
Radio and electrical retailers

As the ratios are based o n ___ 9 __, labour intensive businesses such as plumbers and driving instructors will have much higher gross profit margins.

___10___below expectations may be the result of number of factors such as:

• ___11___in selling prices

• poor buying

• poor stock control

All these are areas, which the management could look into _12

improve the performance of the business.

 

Case study 2. A business finds that its gross profit percentage has fallen from 25% to 22% in the current year. Define which of the following factors might have accounted for the decrease.

(a) fewer items had been purchased during the year;

(b) selling price were reduced during the year;

(c) pilferage of stock was high;

(d) fewer items were sold during the year;

(e) increased costs of purchases which were not passed on in selling price.

TASK 3. Translate into Russian.

Productivity ratios

This is the other factor, which determines overall profit. It can be regarded as the level of sales obtained from the assets employed by the business - obviously the higher this is the better from the viewpoint of the business.

Sales per employee is used to measure the productivity of the employee of the business. The effective use of labour is one of the key tasks of the management of the business, so this is an important ratio. It is also relevant to employees as it does reflect their efforts during the accounting period.

Assets turnover expresses the number of times the value of assets utilised by the business have been covered by sales.

Stock turnover is an important measure of the effective use of stock by the business. The adequacy of the ratio will depend upon the type of industry. For example, a supermarket is likely to turn over or sell its stock much more quickly than an engineering company carrying a wide range of components. If the turnover is declining them the reasons should be investigated. Possible factors would include:

 

• a lager amount of slow-moving or obsolete stock

• higher levels of stocks being held

• lack of control over purchasing

• a wider range of products being stocked

Note that the average stock is usually calculated as the total of the opening stock plus the closing stock divided by two.

Debtor turnover/debtor collection period assess the speed with which a business collects amounts owing from customers. The higher the turnover rate or the lower the collection period the more effective is this control of credit. The average day's sales is usually calculated by dividing sales by 365, the number of days in the year. Most firms operate on a normal credit period to customers of thirty days. An acceptable debtor collection period might therefore be something like fifty days. Very high collection periods would indicate that the credit control system needs to be improved and that either incentive should be given to customers or effective sanctions applied against slow payers.

 

Case study 3. Define the ratios which represents an improvement in the productivity of a business in the second year.

St year 2nd year

(a) Sales per employee $3,500 $5,000

(b) Asset turnover 4Times 3,9times

(c) Stock turnover 12 times 13,2 times

(d) Debtor Collection period 64 days 62 days

 

TASK 4. Translate into English.

Liquidity ratio

Способность предприятия оплатить свои долги текущими резервами показывают два коэффициента.

Коэффициент ликвидности показывает отношение всех оборотных активов к краткосрочным обязательствам и указывает на то, может ли

 

предприятие выполнить свои обязательства. Для нормальной работы предприятия требуется отношение 1,8: 1. Более высокий коэффициент предполагает вложение слишком больших средств в оборотные активы, в то время как низкий коэффициент является показателем опасности банкротства в случае необходимости быстрого платежа.

Запасы исключаются из оборотных активов для определения коэффициента срочной ликвидности. Это необходимо, так как на некоторых предприятиях продажа запасов может занять продолжительное время. Приемлемым является отношение 0,8:1.

 

 

TASK 5. Translate into Russian. Answer the following questions.

1. What shows the profit of shareholders in a business?

2. Who invests in a business on the long-term basis?

3. What rate of gearing is suitable for prospective lenders?

 

Investment ratio

The shareholder or prospective investor will be very interested in the return he is obtaining from his purchase of shares in a business. This is calculated by dividend yield. This relates the income from shares, the dividend, to the value of the investment in the business. Consequently, the result can be compared with interest rates from other types of investment. Another factor, which would also be considered, would be any increase in share price as this represents a capital gain to the shareholder.

 

Capital structure ratio

The long-term finance of a business will be provided by its shareholders and long-term lenders.

Gearing ratio is an assessment of the extent to which a firm is financed by long-term loans. It is a very important ratio for prospective lenders as many like to

 

see the owners/shareholders providing at least half the overall capital of a business. They may not be prepared to lend if further lending would push the gearing ratio too high.

An important factor affecting lending decisions is the ability of a business to satisfactory meet its interest payments. If the gearing ratio is very high, a business will have large interest costs to meet out of its profits. Interest cover ratio indicates the level of cover, which the business has achieved.

If the gearing ratio becomes too high or if interest rates rise and the interest cover reduces, the business must look at ways to improve the situation. Two of the methods used are:

• to raise more shareholders' funds by issuing shares and perhaps using some of this cash to repay loans;

• selling fixed assets and using the proceeds to repay loans.

A particular interest group will be most concerned with specific aspects of the accounts and will therefore use the ratios relevant to those aspects (not all of these ratios would be used by everyone examining a set of accounts).

 

Case study 4. A bank manager has been asked to lend money to a small company. Explain which of the following ratios he would use first in examining the company accounts.

1. Return on capital employed.

2. Sales per employee.

3. Gearing ratio.

4. Net profit margin.

 

Case study 5. We must now have a look at the actual calculation of the ratios and start to see the way in which they can be interpreted. To do this we shall analyse the accounts of Newby Stores Ltd., from the viewpoint of John Slate as managing director.