Professional Documents
Culture Documents
Course: MBA
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Contents
1 Introduction
• Profitability Ratios
• Gearing Ratio
• Employee Ratios
• Investor Ratios
• Corporate Ratios
4 Conclusions
5 Appendix
6 Bibliography
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1. Introduction
Over the period of time numerous academics have poured many different
methods to assess the financial stability of an organization. Financial ratio
analysis is the most widely used method. This includes following
categories: Profitability Ratios, Liquidity (Working Capital), Gearing Ratio,
Employee Ratios, Investor Ratios, Corporate Ratios.
o Gearing Ratio: This help measure the long term stability of the
organization.
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o Investor Ratio: This measures the reliability of the company for its
investors.
Interpretation:
The most important and evident figures here, increase in the ROTA,
indicating the company is utilising its assets to benefitting levels.
Looking closer in the accounts one can see the fixed assets have
increased by 23.4% and the intangible assets have significantly
decreased by 52.4%, which explains the increase in the figures.
Interpretation:
Evidently the profit margin for the Domino’s Pizza group has gone
up 1.19% during the year.
This figure states that the DPG made £ 16.24 PBIT for every £ 100 of
sales revenues which is in coordination with the views of the Chief
Financial Officer (CFO) of the company.
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The profit margin seems to reflect the sales increase of 17.34% and
increase in PBIT of 23.39%.
Interpretation:
This ration indicates the underlying risk factors for the investors; in
this case it is higher than the interest rates for non-risky
investments (Geoffrey Holmes, Alan Sugden 2004).
The ratio percentage agrees with the CFO’s review of the company’s
performance.
Interpretation:
The figures also show that DPG was slightly in better position in
2007 than in 2006 to repay its short term creditors from its total
assets.
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This ratio indicates the company’s ability to generate cash as need
to maintain operation and to assess the liquidity of the company
(Gene Siciliano, 2003)
Interpretation:
DPG has £ 0.93 of liquid assets for every £ 1 of its current liabilities.
In a isolated case if the company needs to pay its creditors right
away, DPG would have to seek a loan.
This ratio is also know as acid test (TVU MBA notes, 2008)
Interpretation:
The greater the stock turnover ratio, the greater the efficiency of
the organization to buy and sell goods / products (J. R. Dyson, 2004)
This ratio figure shows a drop in the turnover which is not a good
indicator; however the figure has dropped by 1.57%. An increase in
the stock levels by 22.3% and in the cost of sales by 18.27% would
help make the figures comprehensible. The increase in the prices of
the food raw materials during the year, mentioned in the executive
director’s report, could help us asses the situation with more
compassion.
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Interpretation:
This ratio suggests the amount of time taken by the debtors of DPG
to pay has increased by 0.24 weeks in comparison to 2006.
The increase in the debtors weeks is miniscule and does not affect
companies of this size and mass, however the shorter the debtors
weeks the better it is for any organization.
The debtors have increased by 28.4% which could help explain this
increase.
Interpretation:
Interpretation:
The figure also states the 23% decrease in the total borrowings.
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2007 18667 / 633 = £ 29489.73
Interpretation:
Interpretation;
Interpretation:
The figures do not completely agree with the CFO’s view, but are
lesser than his dictated percentage.
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Interpretation:
The norm is higher the price earning ratio the better the indicator of
company’s profitability.
This ratio is the most fundamental yardstick for valuing stocks (Jeremy J. Siegel,
2007). A quick glance at the years stock figures for DPG would reveal the prices have
fluctuated but stayed in the same range and have changed at a steady pace.
Interpretation:
The figures above show that the dividend per share has increased
by 1.34 or 30.45%, but the CFO states the increment to be of 43.8%
which is debatable.
Interpretation:
This figure measures the present rate of return on the stock (D. L.
Scott, 2003).
The figure indicates the yield has been same as 2006 making the
yield on the stock not very attractive for stock exchange bulls
market.
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2007 8.48 / 4.4 = 1.92 times
Interpretation:
It is the company’s ability to continue paying current dividend levels in the future to
its shareholders (M. W. E. Glautier, B. Underdown 2001).
The figures above show that DPG could pay 1.92 times the current
dividend of available profits then. However it should be noted that
the dividend cover has decreased by 0.07 or 3.51% for the year
2007 compared to 2006 indicating the probability of decline in
future.
RETURN ON EQUITY
Interpretation:
ROE is used for measuring the earnings by the company for its
shareholders from all the sources available to it (Hermanson,
Edwards and Maher, 2005)
The figures show that the ROE has increased by 21.61 or 16.15%
indicating that DPG has well utilised the investments of their
shareholders during the financial year 2006 -2007 thus giving them
a better return on their investment.
RA does not take into account the ‘risk’ factor of the investment.
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RA does not paint the complete picture of the profitability of the
company unless the analyst recognises the difference in ‘quality’ of
earnings.
Diversity of the companies that apply for GAAP may give rise to
anamorphic figures.
4. Conclusion:
Ratio Analysis has always been a great tool for evaluating and analysing a
company’s performance, despite its shortcomings. It stays as the best and
fairly accurate tool to measure a company’s performance. However
relatively new concepts like ‘quality’ and ‘speed’ need to be taken into
consideration from time to time.
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The RA for DPG suggests the company’s performance have been good for
the financial year 2006 – 2007. The Profitability Ratios advocate that the
company has performed very well in terms of using its resources for
generating profits. Except for things like the stock turnover, income
gearing and borrowing ratios, where DPG has slightly underperformed, the
company figures show good performance on all other ratios.
Employee Ratio shows that overall efficiency of the DPG has increased
making it a sound vehicle for future investments. The DPG is serious about
following its success paths as they are investing in quality of raw
materials used and also in the society where their business operate or
function.
Appendix:
1. Profitability Ratios:
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--------------------------------------------------------------
--------------- X 100
SALES
----------------------------------------------- X 100
CAPITAL EMPLOYED
--------------------------------------
CURRENT LIABILITIES
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2.2 LIQUID RATIO = CURRENT ASSETS - STOCK
----------------------------------------------------
CURRENT LIABLITIES
-----------------------------------------
STOCK
-------------------------------------------------
SALES
3. Gearing Ratios:
--------------------------------- X 100
EQUITY
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---------------------------------- X 100
PBIT
4. Employee Ratios:
----------------------------
No. EMPLOYEES
----------------------------
No. EMPLOYEES
5. Investor Ratios:
------------------------------------------
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EARNINGS PER SHARE
-----------------------
No. SHARES
--------------------------------------- X 100
---------------------------------------
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Bibliography:
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Bushman Melissa (2007), Association Content (10 Jan 2007) [Online]
Available at
<http://www.associatedcontent.com/article/111527/using_ratio_analysis_t
o_assess_financial.html?cat=3 > [Accessed on: 20.11.08]
Domino’s Pizza Information Pack (2008). Domino’s Pizza UK & IRL Plc
[Online] Available at
<http://www.dominos.uk.com/pdf/information_pack.pdf > [Accessed on:
19.11.08]
Luecke, R. (2003), Finance for Managers: Your Guide and Mentor to Doing
Business Effectively, Harvard Business Press, Harvard
Siegel, J. J. (2007) Stocks for the Long Run: The Definitive Guide to
Financial Market Returns and Long-Term Investment Strategies, McGraw-
Hill Professional, New York
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Siegel J. G., Shim J. K. (2000) Financial Management, Barron's Educational
Series, New York
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