Essay on Vertical Analysis On Gross Profits

Essay on Vertical Analysis On Gross Profits

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Vertical analysis
Competition Bikes witnessed an increase in gross profit margin in year 7 at 27.4 having risen from 26.6% in the year 6. This is an indicator of the increase in Gross Profit in relation to sales. Year 8 however witnessed a marginal decline in Gross Profit margin which was reported at 27.0%. The 0.4% decline in Gross Profit margin between year 8 and 7 signifies that there was a proportional increase the amount of sales revenue that was taken up by the cost of sales. As a result, it is in order to state that there was a proportional decline of the gross profit by 0.4% of the total sales revenue and an increase in cost of sales by 0.4%.
The total selling expenses in relation to sales remained constant over the three years. There the increase in operating expenses as a percentage of sales was significant. In year 6, the percentage was 23.8% and 25.1% in year 8. Based on the results obtained for the operating profit margin, we can infer that in year 7, there was a proportion increase in operating income from year 6 by 2.5%. The decline in operating profit margin from year 7 to 8 indicates a decline in the ability of the firm to control operating expenses resulting in year 8.
The net profit margin increased from year 6 to 7. However, it declined to 0.6% in year 8, down from 2.8% in year 7. This indicates that the ability of Competition Bikes in controlling financing expenses, more specifically interest charges, declined. A net profit margin of 0.6% in year 8 indicates that 99.4% of sales revenue in the year were taken up by sales, financing and operating expenses while 0.6% was retained as net profit. In contrast, a net profit margin of 2.8% in year 7 means that 2.8% of total sales revenue remained as net profit whil...

... middle of paper ...

...o indicates that a unit of equity in TWR contributes 0.081 as profit attributable to shareholders compared to 0.014 in Competition Bikes
In year 8, Competition Bikes witnessed a decline in price/earnings ratio. However, TWR had a higher price/earnings ratio. This is good for Competition Bikes, shareholders since it takes a shorter*** time to recover the market value of equity compared to TWR shareholders. In year 8, Competition Bikes witnessed an adverse decline in time interest earned. The high time interest earned of 4.24 for TWR indicates that the operating profit can pay interest charges 4.24 times compared to 1.77 in Competition Bikes.
Trend analysis
Over year 7 and 8, there was an increase in net sales compared to the base net sales in year 6. This signifies an increase in sales output a rate higher than the resulting return outwards, allowances and discounts.

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