Harrod : Ratio Analysis

Topics: Financial ratios, Generally Accepted Accounting Principles, Financial ratio Pages: 5 (1567 words) Published: November 28, 2011
Ratio Analysis

Return on capital employed
Basically, it measures business performance. This ratio is used to calculate the return versus the money that is invested.

Gross profit margin
This ratio uses for measuring of profitability in selling, buying or producing goods before any other expenses are put into account. Therefore, any change in this figure can have an important result on the net profit margin of the year. Harrods’ gross profit margin can be divided into 2 parts which is the year between 2000-2003 and 2004-2006. Harrods has pretty much the same percentage of gross profit margin from 2000 to2003 is between 41 and 43% and from 2004 to 2006 is between 51-53%. This means gross profit margin had been increased by 10% over that period. That may be because of decreasing in the cost of sale between 2003 and 2004 which is a slight over 100 million pound or an increase in selling prices.

Operating Expenses margin
It can be seen that the Operating Expenses margin of Harrods had increased at least 10% over the period that is not a good sign of profitability. Because this ratio indicates how efficiently the expenses is being managed. Thus, the lower the operating ratio, the greater the profitability. In Harrods case, the cause might be because of Sales; it had been decreased since 2001 and may be for a few of reasons, such as poor maintenance or an ineffective advertising. Net profit margin

Basically, it is the amount of profit after all non- financing costs have been deducted. Net profit margin is built by the company as a percent of the sales left. Net profit margin of Harrods had been fluctuated with the lowest was 4.70% in 2003 and the highest was 13.51% in 2006. It seems that a high level of expenses in 2003 directly effect on net profit margin of Harrods which can means the company’s earning is not as good as before. Factors for example the intenseness of competition, the group of customer and the economic circumstance are influence. This ratio should be in the positive trend, the higher the better. Fixed Asset Turnover

This ratio can tell that how much the company would earn from the investment on fixed asset. For instance, 1 pound invested on fixed assets during 2006 generated 0.53 pounds in sales. The increase expenditures on non-current assets in 2006 likely relate to declined in fixes assets turnover. Although the ratio had declined, Harrods had almost remained the same on this ratio which can say that there had not much changed on fixed asset over the 7 years. Current ratio

Harrods is quite good ability to pay the short term liabilities which can be seen from this ratio, it was between 1.1 and 1.9 over the 7 years. As the liquidity is essential to run of a business, a higher current ratio or lower current ratio depends on type of business. Harrods is department store, inventories can move fast so ratio could be low.

Acid test ratio
From 2000 to 2005, Harrods seemed to have some problems of liquidity because it is not normal for the acid test ratio to be below one. This ratio is similar of current ratio, but excluding inventories and much more accurate. Stock days

Stock days ratio of Harrods was pretty up and down. The average was 68 days. The highest was 105 days in 2005 and it was almost twice times of the lowest which means Harrods was overload of finished goods in storage that can cause cash flow problems if those goods could not be sold in time because they had to pay short-term liabilities and those goods could become dead stock. Although, it mean Harrods got enough goods to continue selling up to 105 days, it is should be as low as possible and enough to satisfy customers’ demand. Stock days should not too high or too low. Debtor Days

From the figure of debtor days of Harrods, it was obvious that Harrods was attracting good creditworthy customers and/or there was efficiencies in credit control management. Having said that, The UK average is 60 days, the debtor payment period...
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