# Analysis of Profitability, Liquidity and Performance

Good Essays
Analysis of profitability, liquidity and performance
The profit of a business is the difference between its revenues and its costs. It is important to consider two main types of profit:
1. Gross profit - this is calculated by deducting the cost of sales of a business from its sales revenue (turnover).
2. Operating profit - is calculated by then taking away overhead expenses from gross profit.

Given the above figures it is possible to analyse the profitability of Better Hotels Plc in the two years. To do this we need to calculate how much of every pound spent by customers in the hotels is profit. This is calculated in the following way:
1. Gross profit % (i.e. how many pence in each £1 of customer spending is profit). This is calculated by:

For Better Hotels in 2004 this is:

For Better Hotels in 2005 this is:

The profit margin i.e. operating profit % is calculated by:

For Better Hotels in 2004 this is:

For Better Hotels in 2005 this is:

By examining the profit figures you can see that Better Hotels is more profitable in 2005 than it was in 2004.
Gross profit % has gone up from 60% to 75%, and Operating profit % has increased from 30% to 40%.
Profitability
Using these profitability calculations you are able to compare business profits in one year compared with others, and also compare the profitability of different businesses.
Another important measure of how well a business is being run is how liquid it is. To do this you need to look at the current assets and current liabilities in the balance sheet.
The following shows part of the balance sheet for Better Hotels in 2004 and 2005:
Extract from Balance Sheet 31st Dec 2004 by examining the two balance sheets it is possible to see that in 2005, Better Hotels has a more liquid assets relative to current liabilities.
In 2004 the ratio of current assets to current liabilities was:
80:40 (i.e. £2 for every £1)
In 2005 the ratio was:
90:40 (i.e. £2.50 for every £1)
It is important for

## You May Also Find These Documents Helpful

• Good Essays

concerned about liquidity and safety. In fact these three namely liquidity, profitability and safety are the main objectives of a monetary policy. Banks have to earn profits because if they don’t, they would not work as all the shareholders would sell off the shares if proper dividends are not earned. Hence they have to earn profits for their shareholders and at the same time satisfy the withdrawal needs of its customers. The main problem here comes is sticking the balance between liquidity and profitability…

• 1090 Words
• 3 Pages
Good Essays
• Powerful Essays

Introduction There is a trade-off between liquidity and profitability; gaining more of one ordinarily means giving up some of the other. Liquidity means having enough money in the form of cash, or near-cash assets, to meet your financial obligations. Alternatively, the ease with which assets can be converted into cash. Profitability is a measure of the amount by which a company's revenues exceed its relevant expenses. It is obvious that excessively high levels of liquidity will not do any organization any…

• 910 Words
• 4 Pages
Powerful Essays
• Better Essays

Financial Analysis XXAC/280 Final Project Geetha Raja Labrisha Flott August 2013 Liquidity, Solvency and Profitability are the three aspects used to compare companies in a financial analysis. Their basic function is to reveal the stability of a company based on a comparison of at least two years of financial data with a company that sells products alike. The two companies must have similarities other than the products they sell; they must also be similar in…

• 1952 Words
• 8 Pages
Better Essays
• Good Essays

Report Introduction: Any successful business the owners is always calculate the performance of the company, comparing it with the company 's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company 's effectiveness, however, I will calculate the statement of financial performance and statement of financial position, so I need to look at more than just easily attainable numbers like sales…

• 839 Words
• 4 Pages
Good Essays
• Powerful Essays

LIQUIDITY AND PROFITABILITY OF OIL AND GAS INDUSTRY This Project Report is on Liquidity and Profitability of Oil and Gas Industry with all information about Private Oil and Gas Industries in India, Hindustan Petroleum Corporation Ltd. {HPCL}, Oil and Natural Gas Corporation Ltd. {ONGC}, Indian oil Corporation and RIL - Reliance Industries Limited Contents * Significance of the Study * Conceptualization * Industry profile * Company profile * Introduction of the topic * Focus…

• 1036 Words
• 5 Pages
Powerful Essays
• Best Essays

IMPACT OF LIQUIDITY RISK ON PERFORMANCE Abstract Liquidity risk arises when there is discrepancy between the demand of borrowers and the inabilities to meet these demands. Purpose The purpose of this paper is to analyse the liquidity risk and the impact of liquidity risk on performance of the manufacturing sector. Methodology Least square regression model is used in this study. Data of manufacturing sector is used to achieve the objective of this research paper. ROA and EPS are used as measures…

• 4573 Words
• 19 Pages
Best Essays
• Powerful Essays

“Liquidity and Profitability: An Empirical Analysis of Cement Industry of Pakistan” BY: ADNAN AHMED ACKNOWLEDGEMENT All prays to Allah Almighty who is the most beneficiate and the most merciful who is master of the day of “Decisions” and million times “Droods” and “Salams” to the Holy Prophet (PBUH) whose life is role model for us and for all. I am very thankful to my teachers, I under their kind control and guidance learnt a lot. May Allah bless them with success! ADNAN AHMED…

• 5538 Words
• 23 Pages
Powerful Essays
• Satisfactory Essays

Profitability Ratios Return on Capital Employed (ROCE) or Return on Equity (ROE) Numerator – the net profit or income, usually taken before tax. Capital Employed or Shareholders Equity - Designed to indicate the effective use of the shareholders capital in the business with respect ot the net profits that they have generated over the period of concern. Net Profit/Income Percentage or Return on Sales Helps to identify the impact of administrative, selling and distribution costs on profit…

• 498 Words
• 2 Pages
Satisfactory Essays
• Powerful Essays

behavior---------------------------------------3 3 Evaluation of profitability analysis---------------------------------4 4 Conclusion and recommendation----------------------------------8 References--------------------------------------------------------------------9 Executive summary This report provides an evaluation of Woolworths in respect of ethical behavior and profitability analysis to fulfill an investor’s ethical requirement. The investigation…

• 1568 Words
• 7 Pages
Powerful Essays
• Good Essays

Director’s of CFT Ltd From: Accountant Subject: Financial Analysis of CFT Ltd Date: 4 October 2012 Liquidity ratio: It’s focus on the solvency of the business and includes two ratio- 1. Current ratio 2. Quick assets ratio If the liquidity level of a company is high then it means that the company has or can generate enough cash to meet its short term requirements for cash- it can easily pay its bills on time. On the other hand if the liquidity level is low then the company has difficulty in generating…

• 439 Words
• 2 Pages
Good Essays