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Part 1: Financial analysis (a) Evaluating Profitability Profitability analysis consists of tests used to evaluate profit performance during

the year. The results are combined with other data to forecast potential profitability (Hoggett & Edwards 199 !. "n other words# the ob$ective of profitability relates to a company%s ability to earn a satisfactory income so that investors and stoc&holders will continue to provide capital. "t is also closely lin&ed to its li'uidity because earnings ultimately produce cash flow.((eedles# )nderson# *ardwell & +ills 199 !

Profitability is determined by several ratio calculations as follows, -.eturn on owner%s e'uity -return on total assets -(et profit margin -/ross profit margin

Return on owners equity (ROE) : +easure of the profitability of stoc&holder%s investments. (et profit after ( ta0ation and preference dividends! 1 122 )verage (ordinary share capital 3 reserves! Return on total assets (ROA) : +easure of overall earning power or profitability (et profit before interest and ta0ation 1 122 )verage total assets Net profit argin : +easure of net income produced by each dollar of sales 1 122

(et profit before interest and ta0ation 4ales !ross profit sales /ross profit 4ales

argin: +easures the difference between sales revenue and cost of 1 122

(b) Perfor ance an" efficiency

Efficiency is calculate" by using t#e following ratios: -)verage inventory turnover period -)verage debtors settlement -)verage creditors settlement -4ales (asset! turnover Average inventory turnover : +easure of relative si5e of inventory. "nventories often represent a significant investment for businesses and this can have an adverse effect on cash flow or li'uidity )verage inventory held 1 6 7 *ost of sales Average "ebtor settle ent : +easure of average time ta&en to collect receivables (receive Payments! )verage debtors 1 6 7 *redit sales Average cre"itor settle ent : +easure of average time ta&en to cover outgoings (pay bills! )verage creditors 1 6 7 *redit purchases $ales ( asset turnover) : +easure of how efficiently assets are used to produce sales. 4ales )verage total assets (c) Resource use (") %iqui"ity 8i'uidity is the company%s ability to pay bills when they are due and cover any une0pected needs for cash. The ratios used to determine li'uidity all have to do with wor&ing capital or some part of it because all bills are paid out of a company%s wor&ing capital ((eedles# )nderson# *aldwell & +ills 199 ! The following ratios are used to determine a company%s li'uidity , -*urrent ratio -9uic& ratio or )cid test -*ash flows from operations

&urrent Ratio : +easure of short term debt paying ability. *urrent ratio: *urrent assets *urrent liabilities - "ndustry ;enchmar& is normally two to one 'uic( ratio or Aci" test : +easure of short term debt paying ability. "t is often argued that many companies cannot turn assets or inventory into cash rapidly. This test therefore is a more stringent test of a company%s li'uidity. )cid test: *urrent assets (e0cluding inventory and pre payments! *urrent liabilities -"ndustry ;enchmar& is one to one &as# flows fro operation : +easure of operating cash flow with current liabilities.

<perating cash flows *urrent liabilities

(e) Financial $tability ) $olvency

(f) !eneral co

ent an" conclusions