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year 2004 & 2005.sss We can find below the detailed numerical analysis of the company for the year 2004 & 2005. 1. Return On Capital Employed (ROCE):
Net profit before interest and taxation ROCE = Share capital + reserves + long term loans * 100%
For the year 2005: 290 ROCE = (2000 + 1000 + (620-120) +700) * 100 % = 6.90%
For the year 2004: 440 ROCE = (1600 + 800 + (560-120) + 500) * 100 % = 13.17%
Return on capital employed (ROCE): is the best way to access profitability. It is the relation between capital employed and return on shareholders’ fund. ROCE is usually expressed in terms of percentage. It demonstrates how efficiently the company has used its assets to draw high returns. If the ROCE value is less than the rate at which the company borrows its funds, then the Shareholder’s earning reduces. ROCE value of Wild life Holidays Ltd calculated for the year 2005 and 2004 are 6.9% and 13.17% respectively. From the above result we notice that the company’s ROCE value has decreased in the year 2005 when compared to 2004 by 6.27% indicating that the company has borrowed more funds than the previous year (Dyson, 2004).
2. Return On Shareholders’ Capital: Net profit Return on shareholder capital = Ordinary Share capital + reserves * 100 %
For the year 2005: 180 Return on shareholder capital = (2000 + 1000 + (620-120)) * 100 % = 5.14%
Greater the value of return on share holder’s capital better is the company’s performance. Here the company’s return on shareholders’ capital has decreased drastically in the year 2005 when compared to the year 2004.38% and for the year 2004 is 19. Gross Profit Margin: Gross profit Gross profit margin = Sales For the year 2005: 400 Gross profit margin = 2600 * 100 % = 15.For the year 2004: 315 Return on shareholder capital = (1600 + 800 + (560-120)) Return on shareholders’ capital: is used to measure the overall profitability in terms of net profit and share holders fund. Gross profit is the percentage of revenue or sales left after subtracting the cost of goods sold. Shareholder’s funds include share capital. Gross profit margin for the year 2005 is 15. Return on shareholder’s capital is used to demonstrate if the company’s earnings has increased or decreased from a shareholders point of view.09% 3.64% which indicates that the company has made less profit in the year 2005 when compared to 2004. Net Profit Margin: Net profit Net profit margin = Sales * 100% . It is used to estimate the company’s profit in comparison with the company’s sales for a particular year. This shows that the company has made less profit indicating that the shareholders will have less interest in the company and shareholders’ investment in the company will decrease (Accounting for management. Higher the gross profit margin of the company better is the efficiency. 2008).38% * 100 % For the year 2004: 550 * 100 % = 19. Hence Wild Life holidays Ltd has lesser funds to pay for the additional expenses and future savings in the year 2005 (Atrill and Mcaney. equity and all the reserves. 2011) * 100 % = 11.64% 2800 Gross Profit Margin is one among the profitability ratios which is measured in terms of percentage. Gross profit margin = 4.
It tells us the average duration of time the stock is held by the company.25%. Trade Debtors’ Collection Period (in days): Trade Debtors Trade debtors collection period (in days) = Credit sales revenue * 365 days . Stock turnover period shows the relationship between the costs of average stock during a particular year.65 Days (Less than a day) 2250 Stock Turnover period is also known as “Inventory turnover ratio”. 0.25% 2800 Net profit Margin refers to the overall profit made by the company including the dividends. pay interests and taxes the company has to pay.92% and in 2004 is 11.92% * 365 * 365 = 0. Here we can see that the company’s stock turnover period is less. It is expressed in terms of number of days. Net profit margin shows how efficiently a company is controlling its cost.66 Days (Less than a day) Stock turnover period = 6. The net profit margin of the company in 2005 is 6.66days in 2004 and 2005 respectively.com. 5. Stock Turnover Period: Stock held Stock turnover period = Cost of sales For the year 2005: 4 Stock turnover period = 2200 For the year 2004: 4 * 365 = 0. 2011). Too low or too high inventory turnover period is not good for the company. just 0. It indicates how the company is managing its inventory and check if the inventory is not overloaded with goods that are not in demand.65. 2011).For the year 2005: 180 Net profit margin = 2600 For the year 2004: 315 Net profit margin = * 100% = 11. This shows that the company has made less profit in the year 2005 compared to the previous year and thereby not succeeded in converting its resources into profit efficiently (InvestorWords. * 100% = 6. Too low inventory turnover period indicated that the company has a lot of business opportunity but the management has not seized the opportunity (Docstoc.
This shows that in 2005 the company has not delayed in paying its suppliers thereby indicating that the company is in better position in terms of liquidity. 2004).01 days. Trade Creditors’ Payment Period (in days): Trade Creditors Trade creditors payment period (in days) = Cost of sales For the year 2005: 20 Trade creditors payment period = 2200 For the year 2004: 80 Trade creditors payment period = 2250 Trade creditor’s payment period shows the time taken by the company to settle with the suppliers from whom they have bought the goods on credit basis. it will help the company have better market reputation and build strong relationship with their suppliers and also expect better discounts (Atrill and Mcaney. Wild life Holidays Ltd has taken 13 days to pay the suppliers in 2004 whereas in 2005 the company has taken just 3 days to settle the payment. Wild Life Holidays Ltd’s Trade debtor’s collection in the year 2005 is 11. 2008). Lower the trade debtor’s collection period means that the company has succeeded in collecting the debts from their customers. The company’s credit sales increases if there is a delay in the payment. Trade debtors collection duration has decreased in the year 2005 compared to 2004. If payments done without any delay. * 365 days = 12 days 7. This shows that the company has managed to convert its credit sale into cash a bit more quickly than 2004 (Dyson.93 and in the year 2004 is 13. * 365 = 13 days * 365 = 3 days * 365 days 8. Current Ratio: Current assets Current ratio = Current liabilities .For the year 2005: 85 Trade debtors collection period = 2600 For the year 2004: 100 Trade debtors collection period = * 365 days = 13 days 2800 Trade debtor’s collection period demonstrates the average period of time (in days) the company takes to collect the debts for its customers. After the sale. Hence the risk is decreased for the company. the customers are given a provision to pay the company within a short duration.
38 times and in the year 2005 it significantly reduced to 0. Wild Life holiday Ltd’s acid ratio for the year 2004 is 1.stock Acid test ratio = Current liabilities For the year 2005: 110 Acid test ratio = 414 For the year 2004: 140 = 1.38 times = 0.28 times. 2011).35 times 104 Acid Test Ratio is also known as quick ratio or the liquid ratio. By excluding the stock. This shows that the company has less resources and the company is unable to pay the debts. 9.28 times Current assets . In the year 2004 the current ratio of the company was 1.For the year 2005: 114 Current ratio = 414 For the year 2004: 144 Current ratio = 104 Current ratio also known as “working capital” is used to measure if the company has sufficient resources to pay its bills for that particular year. Acid Test Ratio: = 1. As the current ratio decreases the company’s liquidity also decreases thereby indicating that the company does not have enough resources and is in debt. Hence this ratio is referred as liquid ratio. It represents the amount of cash the company presently has and the current assets that can be converted into cash in that year. Acid test ratio = = 0. we can directly relate the cash and cash equivalents to the debts that have to be paid in short term (current liabilities).27 indicating that the firm has less liquidity and in a bad financial position in 2005 compared to 2004 (Docstoc. It is a ratio that examines the current assets and current liabilities and omitting the stock figures from the current assets table.27 times .35 times and in 2005 it is 0.
80 times . Gearing Ratio: Long term (non current) liability Gearing Ratio = *100 Share capital + reserves + long term (non current) liabilities For the year 2005: 700 Gearing ratio = 2000+1000+ (620 – 120) +700 For the year 2004: 500 Gearing ratio = 1600+800+ (560-120) +500 Gearing ratio indicates how stable the company is in financial terms for a long term.10.67 times = 5. The company should try to repay back the loans which would save the money spent on interest and in turn helps to issue more shares (Dyson. This shows that the company has a lot of borrowed funds which results in paying more interest and no dividend to the shareholders. Interest Cover Ratio: Profit before interest and taxation (Operating profits) Interest cover ratio = Interest payable For the year 2005: 290 Interest cover ratio = 50 For the year 2004: 440 Interest cover ratio = 30 = 14. From the above figures we notice that wild Life Holiday Ltd’s gearing ratio of 2005 has increased from 15% to 17% (2004). Greater gearing ratio implies that the company has a lot of borrowed fund increasing the risk of paying dividends to the shareholders. *100 = 15% *100 = 17% 11. Gearing ratio compares the owners capital to the funds borrowed. It is used to measure the company’s leverage. 2004).
It is used to determine the company’s share value. 12.20 £ 1600 Earnings per Share is a relationship between the company’s profit earned and the number of shares issued.63 times = 1.63 times and in 2005 it decreased to 1.09 £ 13.67 times in 2004 and 5. Clearly shows that the company’s performance is lowered in 2005 compared to 2004 (Dyson. Here we notice that the interest cover rate is 14. Wild Life Holidays Ltd’s share value has decreased in the year 2005 compared to 2004.80 times in 2005 which clearly tells that the company’s profit made in 2005 is not sufficient to pay the required interest and the company’s reputation is at stake (Biz/ed. = 0. 2004). 2008). In this case the dividend cover ratio in 2004 was 2. Dividend Cover: Earnings per share Dividend cover = Dividend per share For the year 2005: 180 Dividend cover = 120 For the year 2004: 315 Dividend cover = 120 Dividend Cover ratio is used to check if the company can pay the dividends to the shareholders using the retained profits. 2011).50. If the interest cover ratio is high then the company will be able to pay the required interest figures. This indicates that the company has not made sufficient profit in the year 2005 which has resulted in lowering its share price (Atrill and Mcaney. = 2. whereas lower interest cover ratio indicate that the company is struggling and will have problems paying the interest. It is also used to calculate price-to earnings ratio. This shows that the company does not have sufficient amount to pay the shareholder’s dividends.50 times .Interest cover ratio is used to check if the profits made the company are sufficient enough to pay its interest obligations. Earnings per Share: Earnings available to ordinary shareholders Earnings per share = Number of ordinary shares in issue For the year 2005: 180 Earnings per share = 2000 For the year 2004: 315 Earnings per share = = 0.
92% 0. . Looking at wild Life Holiday Ltd’s gearing ratio. Therefore I would suggest Annie Max Ltd not to buy shares of Wild Life Holidays Ltd since its performance is low.38% 6.35 times 0.50 times Return on capital employed Return on shareholders’ capital Gross Profit margin Net Profit margin Current ratio Acid Test ratio Stock turnover period Trade debtors’ collection period Trade creditors’ payment period Gearing Ratio Interest Cover Ratio Earnings per Share Dividend Cover After carefully analysing Wild Life Holiday Ltd’s accounts for the year 2004 and 2005 using ratio analysis we can conclude that the company was successful in the year 2004 and made great profits.20£ 2. For any organization investing in buying a company’s share.65 times 13 days 13 days 15% 14. But the efficiency of the company has increased. The investment ratios also suggest that the company’s profits of to the number of shares have declined. Hence the company had low liquidity and was unable to pay the debts. that is 2005 the company started facing a lot of problems.14% 13. Company has made payments to the suppliers on time as well as received payments from debtors without any delay.09% 19.25% 1. The profitability ratios indicate that the company has made less profit in 2005 compared to the year 2004. the main aim is to receive high dividend cover and high interests.17% 11.28 times 0.Ratio analysis of Wild Life Holidays Ltd for the year 2004 and 2005 2004 13. we can notice that the company is unable to pay the high dividends to the shareholder’s as it has lots of borrowed funds and high interest level.63 times 2005 6.38 times 1. The liquidity ratios indicate that the company was not able to convert its assets into cash in the year 2005. and instead can use those funds to buy more stock or invest in any other business.09£ 1. In the next year.64% 11.27 times 0.9% 5.80 times 0.66 days 12 days 3 days 17% 5.67 times 0. However making early payments is of no help to the firm.
2011.com/retun_on_share_holders_investment_or_ net_worth.docstoc.uk/compfact/ratios/investor15. 2004.htm> [Accessed on 15 November 2011] Biz/ed.R. [online] Available at: < http://www.bized. England:Prentice Hall. [online] Available at : <http://www. [online] Available at: <http://www. Interest cover.html> [Accessed on 17 November 2011] .htm> [Accessed on 25 November 2011] Docstoc..com/docs/2853268/net-profit-margin-ratio> [Accessed on 25 November 2011] Dyson J. 6th edition.References Accounting for management. 2011.investorwords. 2011. Return on Shareholders investment or Net Worth Ratio. Net Profit Margin ratio. 2011.com. Accounting for Non_Accounting Students.co.com/3260/net_profit_margin. [online] Available at: < http://www. InvestorWords.accountingformanagement. Net profit margin.