Ratio Analysis of Volume Book Distributors Ltd for the Years 2010 And 2011
The report is based on the company Volume Book Distributors Ltd. Ratio analysis was calculated for Volume Book Distributors Ltd for both the years 2010 and 2011. The ratios comprised of profitability, asset utilization and financial stability ratios. The first question consists of Part A, which has the Ratio Calculations, and Part B which has the Analysis and Interpretation.
We faced few limitations while preparing the financial ratio analysis. The limitations are given below, * Economic factors like inflation, unemployment rate, etc were not taken into consideration when calculating the ratios. * All the information needed to prepare the financial ratio analysis was not available. We only had only two years worth of financial data to calculate and interpret. * Only few of the industry averages for the ratios and percentages were given. * Some industry averages were given but similar companies in same industry follow different accounting policies. While calculating and interpreting the ratios and percentages, this information was not taken into consideration. C. RATIO ANALYSIS
Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment. Financial ratio analysis groups the ratios into categories which tell us about different facets of a company's finances and operations.
1. Profitability Ratios
Profitability ratios tell us whether a business is making profits - and if so whether at an acceptable rate. The overall measure of success of a business is the profitability which results from the effective use of its resources.
1.1 Growth in Sales: Measures the change in Sales of a business over the years.
Growth in Sales % = (Current year sales – Previous year sales)/ Previous year sales
The following table shows the Growth in Sales of Volume Book Distributors Ltd:
Year| 2010| 2011|
Growth in Sales | -5.66%| 20%|
The sales of Volume Book Distributors Ltd have increased in 2011 to 20% compared to -5.66% in 2010. This is a very good result for the business as it proves that the steps taken by the company’s management to improve sales are working. The 20% increase is a positive sign for the business and they should continue their path towards this target for continuation for growth.
2.2 Gross Profit Margin: The gross profit margin indicates the percentage of each sales dollar remaining after a firm has paid for its goods. Gross Profit Margin % = Gross Profit/Sales
The following table shows the Gross Profit Margin of Volume Book Distributors Ltd:
Year| 2010| 2011|
Gross Profit Margin | 29%| 35%|
From the above table we can see that the Gross profit margin has increased gradually from 29% in 2010 to 35% in 2011. This increase in gross profit margin attests that Volume Book Distributors Ltd is managing its sales efficiently.
2.3 Gross Profit Mark-up: This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products Gross Profit Markup % = Gross Profit/Cost of Goods Sold
The following table shows the Gross Profit Markup of Volume Book Distributors Ltd: Year| 2010| 2011|
Gross Profit Markup | 40.85%| 53.85%|
Similar to Gross profit margin, the gross profit markup is following the same pattern. It has increased from 40.85% in 2010 to 53.85% in 2011. This proves that Volume Book Distributors Ltd is also managing its cost of goods efficiently. This is a positive sign for the business, complimenting the management’s steps for properly organizing...