Report prepared for Peter Sharpe
Prepared on 1 June 2012
This report is made to provide suggestions to Peter Sharpe about the local Redcliffe gift shop and whether he should invest into it or not by using the following financial ratios: Gross Profit, Net Profit and Rate of Return on Owner’s Equity. The Gross Profit Ratio tells the business the relationship between gross profit and sales and the amount is used to cover the operating costs of the business. This ratio is calculated by finding the gross profit ratio and dividing it by the net sales, then multiplied by one hundred to put it as a percentage. Last year Peter Sharpe’s business had a gross profit ratio of 41.33% and in comparison to the industry averages for this type of business with at least 40%, it appears that the owner’s gross profit percentage is now below average, as it is now 37.93%. Upon being below industry average in gross profit, it can be seen that the business may receive a net loss if there are too many expenses to be paid for. The Net Profit Ratio is found by getting the net profit value and dividing that by the net sales, then multiplied by one hundred so it becomes a percentage. The net profit ratio reveals the remaining profit after all operating expenses of the business are paid. The average net profit percentage is at least 22% and with the business at 14.48% it is under the average and has dropped over 10% over the last year (25.33%). Rate of Return on Owner’s Equity is a very useful ratio for the business. Once this is figured out it can determine the rate of return for the owner. By getting the net sales and dividing that by the average owner’s equity, you will obtain this ratio. The average owner’s equity amount is found by using the beginning of the time period’s capital and the end of the period’s capital, then dividing that figure by two to find the average over that period of time. The rates of return over the last two years have been 21.84% and 11.98% respectively. As...
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