In this part of my report, I will explain in depth how these ratios are used to monitor the financial state of Domestic Dogs Homes. I will also assess the company’s performance generally.
Part 3: Analysing the financial performance of Domestic Dog Homes
Gross Profit Margin:
This ratio is used to assess a company’s financial performance by revealing the money left over from the revenues. Gross Profit Margin also serves as the source for paying additional expenses and future savings. According to Domestic Dog Homes’ profit and loss account, it has obtained a reasonably high percentage of gross profit which means that the company is doing well and will be able to control the costs of its expenses.
Net Profit Margin:
The Net Profit Margin indicates how much profit a company makes from every £1 it makes in sales. It is very advantageous to companies as the higher the net profit margin, the more control they have over their expenses and this also indicates that they are doing better than their competitors. Domestic Dog Homes’ accounts show that the percentage obtained for the net profit is too high (18.13%) which means that it is taking out too much profit from the company.
Return on capital employed (ROCE):
This ratio indicates the efficiency and profitability of a company’s capital investments; this means that the ROCE should always be higher than the amount of money the company borrowed. ROCE also signifies whether the company is earning sufficient revenues and profits to help it use its capital assets effectively. The accounts of Domestic Dog Homes illustrate that the company is performing fairly well as it has received a reasonable return.
This ratio measures a company’s ability to pay off its debts. In addition, it also shows how many assets a business has comparing to its liabilities. The higher the ratio the more capable the business is of paying off its debts and controlling its working capital. The result obtained from the balance sheet of Domestic Dogs Homes shows that the business is in an unstable condition when it comes to paying it off its debts. Therefore it would harder for Domestic Dog Homes to pay off its creditors.
The Acid test ratio reveals to a company whether it would be able to pay off debts immediately without having to sell any assets. If a business obtains an acid test ratio of less than 1 then it cannot pay back its current liabilities instantly. The figure for the acid-test ratio is more favourable than the one acquired for the current ratio. However it still means that Domestic Dog Homes should sell its stock in order to meet its liabilities.
Stock turnover assesses how well a company turns stock into revenues; it does this by measuring how well a business is making use of the part of its working capital that has been invested in stock. The stock turnover for Domestic Dog Homes is not good as it has more days to turn its stock over which makes the business will be less efficient.
An asset turnover measure a company’s efficiency of turning its assets into sales or revenue. The higher the result the better. It is said that organisations with low profit margins tend to acquire high asset turnover whereas those who have profit margins have low asset turnover. This gives businesses an idea about the pricing strategy to use. Domestic Dog Homes has obtained an asset turnover of 6.03 times which is good as for every £1 worth of assets, Domestic Dog Homes will be able to generate £6 worth of sales.
Debtor’s collection period:
This ratio indicates the duration it takes a company to collect debts from its trade debtors. The quicker the company gets its money back, the...
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