Analysis
InJanuary and October, Timmy is facing the problem of negative net cash flow, i.e.-£2400 ad -£7300, respectively. Quarterly bills payment are causing this problem during these months, as a result of which cash inflows are lower than cash outflows. However, Timmy can eliminate this problem in the future by reducing costs, increasing sales, and seeking for bank overdrafts(Ljubić, Mrša and Stanković, n.d.).
Task 3.2
Method # 1
Taking the cost-plus pricing method into consideration:
Total cost = £35,000
Mark-up = 33.33% or 0.33
Cost of 500 units = 35000 x (1+0.33) = £46,550
Unit price (or Cost of 1 unit) = 46550/500 = £93.1= £93
Method # 2
Annual Net Profit = (Rate of return on capital employed/100) x Capital employed = (0.2/100) x 50000
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Using the results of the ratios, the financial performance of Brecon Burger Bar is analysed below in terms of profitability, efficiency, liquidity and capital structure. The increasing trend in the quick ratio from 4.7 to 7.7 during 2013 – 2014 shows that its quick assets are more as compared to its current liabilities. This shows that the firm is easily paying off its current liabilities. Similarly, the increasing trend in the current ratio reflects that the firm is easily paying off its current debts by using profits generated from its current operations. Likewise, the increasing trend in the asset turnover ratio means that the firm is using its assets productively. The rising trend in the gross profit margin shows that the firm is selling its inventory at a higher percentage of profit. Likewise, higher profit margin in 2014 as compared to 2013 means that the firm is earning more profits from its sales. Similarly, the rising trend in ROCE value means that it is earning higher profits for the invested capital. Moreover, the declining trend in debtor days means that it is collecting cash quickly from debtors. The similar declining trend n creditor days shows that the firm is taking utmost advantage of the available trade credit. Next, the declining trend in gearing ratio shows a low amount of debt to equity, which means lower financial risk to its business. Finally, lower stock turnover ratio reflects good inventory management within the firm(Finch,
Next I will need to find out the yearly net income from the investment. This will be gross ticket sales minus the total expenses. Deer Valley expects 300 skiers per day for 40 days at $55.00 per ticket, giving us $660,000 in ticket sales. In order to figure the total expenses I need to separate the fixed and variable expenses. Fixed expenses are those that will be there everyday the lodge is open regardless of the number of skiers. The Lodge is open 200 days per year and the cost of running the new lift is $500 per day for the entire 200 days giving us $100,000 in fixed costs. Variable costs are the expenses based on the number of customers. There is an additional $5 expense per skier per day associated with the new lift. If there are 300 skiers multiplied by $5 each multiplied by the 40 days that they are expected to be on the lift, we will have $60,000 in variable expenses. Fixed costs of $100,000 plus the variable costs of $60,000 will give us $160,000 in total expenses. The gross ticket sales of $660,000 minus the total expenses of $160,000 give us a yearly net income of $500,000.
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
By lowering selling prices across the board, Opossumtown, Inc. reduced its inventory turnover ratio, cutting the number of days to sell inventory from 174 days to 104 days; that is a 40% improvement. Opossumtown, Inc. also cut the number of days it takes to collect its credit accounts from 68 to 44 days, again that is 35% better than the previous year. The company is able to do this while cutting its debt ratio by 10% and increasing its current ratio by 25%, making it appear more favorable in terms of liquidity. As promising as this may look, this is not the whole picture. Opossumtown, Inc. shows an 11% decline in gross profit as well as operating income ratios, and a 3% decrease on the profit margin ratio. The decline of these ratios is a result of the company’s new strategy of decreasing the selling price and increasing its marketing and selling expenses. Opossumtown, Inc. made some noteworthy advancements with the implementation of its new plan for 2014. However, based on the assessment of the balance sheet, income statement and the ratios, the corporation did not achieve its goal to increase operating income by 6% and net income by 4%. Opossumtown, Inc. was only able to grow its operating income by a little more than half of one percent and net income by
This ratio helps in analysing the position of the company to satisfy its short term debts within a period of one year. The higher the current ratio would be the more the company will be in position to satisfy its short term debts.
Looking at the individual ratios seen in exhibit 1 and comparing it to the industry average shown in exhibit 2 gives a sense of where this company stands. Current ratio and quick ratio are really low and have been decreasing. For 1995, the current ratio is 1.15:1, which is less than the industry average of 1.60:1, however to give a better sense of where this stands in the industry, as seen in exhibit 3, it is actually less than the average of the bottom 25% of the industry. The quick ratio is 0.61 is less than the industry is 0.90. Both these ratios serve to point out the lack of cash in this company. The cash flow has been decreasing because, it takes longer to get the money from customers, but the company still needs to pay for its purchases. Also, the company couldn’t go over the $400,000 loan limit, so they were forced to stretch their cash.
The main contributing factor to the decline in the return on stockholders’ equity (25.37% to 8.73%) was the decline in the profit margin (11.79% vs. 5.08%). The decrease in asset turnover (1.11 to 1.00) made a small contribution to the decline, as did the decline in the debt ratio (48.4% to 41.8%).
Its receivable turnover is 13.4 times per year, which is higher than C-P 10.5. In addition, the average number of days from sale on account to collection for P&G is 27.2 days while for C-P is 34.8 days. Based on the efficiency ratio analysis, P&G’s inventory moves quickly from purchase to sale, which the inventory turnover ratio is 6.2 and the time for the purchased inventories to be on sale is on the average of 58.6 days while C-P’s turnover ratio is 5.2 and the average days to sell is 70.6. This shows that P&G takes a shorter time than C-P to sell their inventories. However, C-P has a higher ability to pay their short-term liabilities, whereby the current ratio is 1.08 as opposed to P&G
Comparing with the financial performance in 2012\13 (Morrisons plc, 2013), the overall revenue in 2013\14 reduced by 2.4% and ROCE decreased from 9.6% to 8.4%. Meanwhile, the operating margin fallen by 4.8% which doubled the falling trend of revenue. The change of margin is especially influenced by the sharply rise of administration expensive ratio, from 1.9% to 7.1%. These unfavourable results could be explained in two main aspects: overall industry environment and company business strategy.
Compared to the previous year, current ratio and quick ratio respectively rose 0.01 (from 0.63 to 0.64) and 0.04 (from 0.15 to 0.19), but both of them were lower than 1. It indicates that the firm’s current assets were just sufficient to cover for 0.64 of the firm’s short term liabilities, and the firm was just able to settle 19% of its current liabilities instantaneously.
The receivables turnover is based on the assumption that all sales are credit sales. The values of receivables turnover for 2004 and 2005 are 10.21 times and 8.83 times, respectively. This means that IQ’s efficiency is considerably declining in terms of cash collection. The decrease in receivables turnover is explained by the higher increase in average net receivables (71%) than the increase in net credit sales (25%).
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Efficient working capital management is necessary for achieving both liquidity and profitability of a company. A poor and inefficient working capital management leads to tie up funds in idle assets and reduces the liquidity and profitability of a company. Working capital management efficiency is vital especially for manufacturing firms, where a major part of assets is composed of current assets. For an intensive study of working capital management of Indian steel industry focus of the study is on major and significant players of the industry of public and private sector via Steel Authority of India Ltd., Tata Steel Ltd, JSW Steel Ltd. and Essar Steel Ltd. The objective of this study is to measure working capital managing efficiency of selected Indian steel companies for which different activity ratios are used in appraising the efficiency of selected companies. Cash Conversion Cycle (CCC) is a powerful measure for assessing how well a company is managing its working capital. It is used as a comprehensive measure for working capital management and to analyse profitability and performance of selected companies inter firm comparison is done to their judge performance. The ratios of ROCE, assets turnover and
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