MJ PLC

Financial Ratio 2019 2020

Gross Profit Margin 28.8% 30%

Operating Profit 12.22% 12.8%

Current Ratio 2.25:1 2:1

Acid Test 1.36:1 1.14:1

Settlement period for trade receivable 36.5 days 43.8 days

Settlement period for trade payable 21.7 days 36.5 days

Inventory turnover period 6.4 times 5.83 times

Return on capital employed 19.23% 22.22%

Interest rate cover 6 3.33

Gearing 42.31% 33.33%

Earnings per share £ 0.5 £ 0.6

Gross profit Margin

This expresses the relationship of gross profit to net sale (cash and credit) in percentage; this is

used to know the profitability of the business. Higher gross profit margin shows good

management. The objective is to determine the efficiency with which production and selling

operation are in the present study the gross profit ratio

Gross profit margin= Gross profit ×100

Revenue 1
Interpretation

It can be noted that the gross profit margin of MJ PLC showed an increasing trend during the

period of study because during 2019 the gross profit margin was 28.9% which kept the increase

to 30% in 2020. The average of the gross profit margin was 29.44% which can be regarded as

favourable and denote as efficient management.

Operating Profit

This establishes the relation between operating profit and net sale. The main objective of

computing this is to determine the operation efficiency of the management.

Operating profit ratio= Operating Income ×100

Revenue 1

Interpretation

It can be noted that the operating profit of MJ PLC showed a little increase trend during the

period of study, because during 2019 the operating profit ratio was 12.22% which kept the

increase to 12.8% in 2020. The average of operating profit ratio was 12.51% which can be

regarded as good and denoted efficient management and increasing trend should be maintained.

Current Ratio

This is the liquidity ratio that measures a company ability to pay short term obligation or those

due within one year.

Current Ratio= Current Asset

Current Liability

Interpretation

it can be denoted that the current ratio of MJ PLC showed that in 2019 the company could paid

2.25:1 of the short term liability and in 2020 the company paid 2:1 of the short term liability
which indicate the company, the lower the current ratio the less capable the company is of

paying its obligation because it has a larger proportion of short term asset value relative to the

value of its short term liability

Acid Test Ratio

The Acid-Test Ratio, also known as the quick ratio, is a liquidity ratio that measures how

sufficient a company’s short-term assets are to cover its current liabilities. In other words,

the acid-test ratio is a measure of how well a company can satisfy its short-term (current)

financial obligations.

Acid Test Ratio= Current Asset - Inventory

Current Liability

Interpretation

The higher the ratio, the better the company’s liquidity and overall financial health, the ratio in

2019 of 1.36:1 implies that the company owns £1.36 of liquid assets to cover each £1 of current

liabilities and in 2020 of 1.14: implies that the company owns £1.14 of liquid assets to cover

each £1 of current liabilities. However, it’s important to note that an extremely high quick ratio

(for example, a ratio of 10) is not considered favorable, as it may indicate that the company has

excess cash that is not being wisely put to use growing its business. A very high ratio may also

indicate that the company’s accounts receivables are excessively high – and that may indicate

collection problems.

Settlement Period for Trade Receivable

This measures the average number of days that credit customers usually make the payment to the

company. The short period of days identified the good performance of collection or credit

assessment, and the long period of days represents the long outstanding.
Settlement Period for Trade Receivable = Trade Receivable ×365days
Credit Sales 1

Interpretation

Based on the calculation above, we noted that the company took average 26.5 days to collect

cash from its customers for credit sales in 2019 while in 2020 the company took average 43.8

days to collect cash from its customers for credit sales. This means the company is taking more

days to collect in will slow business activities.

The collection period of credit sales is one of the most important keys performance indicators

that closely and strictly monitor the board of directors, CEO and especially CFO.

This is because of failing in the collection of credit sale or convert the credits sales into cash in a

short period of time will adversely affect the company at least two thinks.

First, long outstanding accounts receivable could potentially lead to bad debt and the effect is

adverse than the risk of late collection. This is because the company could not even get the cash

from sales of its goods or services but lose them as expenses. This will subsequently lead to poor

financial performance.

Second, the company needs cash not only to pay to suppliers for the services or products that it

purchases for running its operations but also to pay for its employees. Long collection days of

credit sales will lead to insufficient cash to pay for these things.

Settlement Period for Trade Payable

This measure the average numbers of days that company usually make the credit payment to the

supplier. The short period of days identified the good performance of collection or credit

assessment, and the long period of days represents the long outstanding.

Settlement Period for Trade Receivable = Trade Payable ×365days

Credit Purchase 1
Interpretation

Based on the calculation above, we noted that the company took average 21.7 days to payback

cash to its supplier for credit purchase in 2019 while in 2020 the company took average 36.5

days to payback cash to its supplier for credit purchase. This means the company is taking more

days to payback which will reduce trust.

Inventory Turnover Period

Inventory turnover, or the inventory turnover ratio, is the number of times a business sells and

replaces its stock of goods during a given period. It considers the cost of goods sold, relative to

its average inventory for a year or in any a set period of time.

Inventory Turnover Period= Cost of goods sold

Average Inventory

Interpretation

This denote that the inventory turnover period of MJ PLC in 2019 was rated at 6.4 times and in

2020 was rated at 5.83times, which means a lower turnover rate indicates weak sales and excess

inventories, which is challenging for the business.

Return on capital Employed Ratio

This ratio establishes the relationship between profit and capital employed and is calculated in

percentage by dividing the net profit by capital employed. It is also a measure of earning power

of the net assets of the business. It is calculated by formula as follows:

Return on capital employed Ratio = Net profit (PBIT) x 100

Capital Employed 1

Interpretation

It can be noted that the return on capital employed ratio of MJ PLC showed an increasing trend

throughout the period under study. In 2019 the ratio was 19.23% which increased to 22.22% in
2020 which shows efficiency of the management and signifies that the management of the

company made an optimum utilization of the capital funds. Such a situation can be regarded

satisfactory. The average of the ratio was 20.73% which is satisfactory and should be managed

properly.

Interest rate cover

The Interest Coverage Ratio (ICR) is a financial ratio that is used to determine how well a

company can pay the interest on its outstanding debts. The ICR is commonly used by lenders,

creditors, and investors to determine the riskiness of lending capital to a company. The interest

coverage ratio is also called the “times interest earned” ratio.

Interest Rate Cover = EBITDA

Interest Expense

Interpretation

It can be noted that in 2019 interest payments was 6 times with its operating profit and in

2020 interest payment was 3.33 times with its operating profit.

Gearing

Gearing is the amount of debt proportion to equity capital that a company uses to fund its

operations. A company that possesses a high gearing ratio shows a high debt to equity ratio,

which potentially increases the risk of financial failure of the business. 

Gearing serves as a measure of the extent to which a company funds its operations using

money borrowed from lenders versus money sourced from shareholders. An appropriate level of

gearing depends on the industry that a company operates in. Therefore, it’s important to look at a

company’s gearing ratio relative to that of comparable firms.

Interpretation

It can be noted that the gearing of MJ PLC showed a decreasing trend throughout the

period under study. In 2019 the ratio was 42.31% which decrease to 33.33% in 2020 which

shows reduction in the risk of financial failure of the business.

Earnings Per share

This is the portion of a company’s profit allocated to each outstanding share of common

stock.

This indicate a company’s ability to produce net profit for common shareholder

EPS = Net income – preferred Dividends

Weighted average shares outstanding

Interpretation
There was an increase in the earnings per share of the company from £0.5 per share to £0.6 per

share from 2019 to 2020 which indicate that the company has the ability to produce net profit for

common shareholder and there is growth in the company.

Effect of the increase on wages

Comparing MJ PLC with the Soft Drink Industry

Soft drink industry: Average financial 2019

Gross profit margin 28%

Operating profit margin 9.50%

Earnings per share £0.55

Sales revenue per employee £480500

Gearing 30%

Current ratio 1.8:1

MJ PLC: Average financial 2019

Gross profit margin 28.8%

Operating profit margin 12.22%

Earnings per share £0.5

Sales revenue per employee £500000

Gearing 42.31%

Current ratio 2.25:1

Comparing the soft drink industry and MJ PLC in 2019, MJ PLC is in pace with the industry on

the gross profit margin of 28% and 28.8% respectively, which means that MJ PLC management

is good and are in good position.

The operating profit margin of the company outperformed the industry which shows there is

more effectiveness and efficiency in management of 9.50% for industry and 12.22% for MJ

PLC.

The earnings per share of the industry and MJ PLC are the same which means there is

shareholder value.

The sale revenue per employee shows that MJ PLC is efficiently productive since RPE is

£500000 as opposed to £480500 of the industry.

The gearing shows that MJ PLC has a higher leverage and more risky than the industry with a

42.31% against 30% of the industry.

The current ratio shows that the MJ PLC in 2019 the company can pay 2.25:1 of the short term

liability against the industry of 1.8:1 of its short term liability, which means MJ PLC is less

capable of paying its obligation because it has a larger proportion of short term asset value

relative to the value of its short term liability.

Soft drink industry: Average financial 2019

Gross profit margin 28%

Operating profit margin 9.50%

Earnings per share £0.55

Sales revenue per employee £480500

Gearing 30%

Current ratio 1.8:1

MJ PLC: Average financial 2020

Gross profit margin 30%

Operating profit margin 12.8%

Earnings per share £0.6

Sales revenue per employee £500000

Gearing 33.33%

Current ratio 2:1

Comparing the Soft Drink Industry in 2019 and MJ PLC in 2020, MJ PLC has a better

management than the industry on the gross profit margin of 28% and 28.8% respectively, which

means that MJ PLC management is good and are in good position.

The operating profit margin of the company outperformed the industry which shows there is

more effectiveness and efficiency in management of 9.50% for industry and 12.8% for MJ PLC.

The earnings per share of the industry and MJ PLC are the same which means there is

shareholder value.
The sale revenue per employee shows that MJ PLC is efficiently productive since RPE is

£500000 as opposed to £480500 of the industry.

The gearing shows that MJ PLC has a higher leverage and more risky than the industry with a

33.33% against 30% of the industry.

The current ratio shows that the MJ PLC in 2019 the company can pay 2:1 of the short term

liability against the industry of 1.8:1 of its short term liability, which means MJ PLC is less

capable of paying its obligation because it has a larger proportion of short term asset value

relative to the value of its short term liability.

£000 £000 £000 £000

Revenue 5000 4500

Cost of sale (3500) (3200)

Gross profit 1500 1300

Operating Expenses (875) (750)

Depreciation (40) (50)

Total Expenses (915) (800)

Operating Profit 585 500

Interest (100) (150)

Corporate Tax (200) (100)

Profit After Tax (300) (250)

Dividend Proposed 0 0

Retained Profit 285 250

Number of Employees 10 9

Includes Wages 315000 260000

The wages should not be increase by 5% because the company will be on 6% down from 2019,

this is as a result of the change in 2019 to 2020 without wage increase which is going to be 20%

but if there is wage increase of 5% then the change in 2019 to 2020 is going to be 14% which

will lead to the profit drop by 6% in 2020.

The organization should also use the motivation theory, Maslow, A. H. (1943)
 Appendix

Calculation

Gross profit margin= Gross profit ×100

Revenue 1
2019

4500 – 3200 X 100

4500 1

28.88%

2020

5000 – 3200 X 100

5000 1

30%

Operating Profit Ratio = Operating Income

Revenue

2019

1300 – 750 X 100

4500 1

12.22%

2020

1500 – 860 X 100

5000 1

12.8%

Current Ratio = Current asset

Current liability

2019

1500
550

2.25:1
2020

1400
700

2:1

Acid Test = Current Asset – Inventory

Current Liability

2019

1250 – 500
550

1.36:1

2020

1400 – 600
700

1.14:1

Settlement period for trade receivable = Trade receivable X 365days

Credit sales
2019

450 X 365days
4500

36.5days

2020

600 X 365days
5000

43.8days
Settlement period for trade payable = Trade Payable X 365days
Credit Purchase

2019

190 X 365days
3200

21.7days

2020

350 X 365days
3500

36.5days

Inventory turnover period = Cost of goods sold

Average inventory selling price
2019

3200
500

6.4 times

2020

3500
600

5.83 times

Return on capital employed = Profit before interest and Tax

Capital Employed
2019

500 X 100
(1900 + 1250) – 550 1

19.23%
2020

600 X 100
(2000 + 1400) – 700 1

22.22%

Interest rate cover

2019

500
150

3.33

2020

600
100

Gearing period = Total Debt

Capital employed
2019

1100 X 100
1100 + 1500 1

42.31%

2020

900 X 100
900 + 1800 1

33.33%
Earnings per share = Net income – preferred Dividends
Weighted average shares outstanding
2019

250 – 0
500

£0.5 per share

2020

300 – 0
500

£0.6 per share

Wage increase

2020

300000 X 5
100

15000

300000 + 15000 = 315000

Share Revenue per employee = Revenue

Current Number of employee
2019

4500000
9

500000

2020

5000000
10

500000