Ratios

Topics: Generally Accepted Accounting Principles, Financial ratios, Financial ratio Pages: 6 (1997 words) Published: September 3, 2013
University of Malta
Faculty of Economics, Management and Accountancy

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BKF 2321: Accounting for Bankers 1 and 2
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Assignment 2012/2013 – Semester 2
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B. Com (Major in Banking and Finance) – Year III

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Ratio Analysis Report
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Student: Kevin Galea 205891 (M)
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Lecturer: Dr. Emanuel Camilleri

Introduction
The purpose of the following report is to aid Build-It Ltd in planning the direction that the company may want to go over the next few years. The report entails a financial analysis which will give the directors an understanding of how well the company is performing. Figures were obtained from comparative balance sheets and profit and loss statements from the last two years. This information enabled the development of percentage and ratio analysis (see appendices), which was then used to create the report.

Profitability Ratios Analysis
Profitability refers to the ability to make profit from the company’s business activities. It shows how efficiently the management can make profit by using all the resources available. A very important ratio is the Return on Capital Employed (ROCE). This shows the profit made in relation to the resources employed. Build-It Ltd’s ROCE ratios for 2011 and 2012 were calculated as 22.12% and 25.64% respectively. This increase in the ROCE represents that Build-It Ltd has strengthened marginally its profitability position of the firm. Although the company had an increase of €50,000 in long-term liabilities, this increase has been more than off-set by the net profit, which has more than tripled from €7,371 to €25,095. The Return on Equity (ROE) shows how much profit the company earned in comparison to the total amount of shareholder’s equity on the balance sheet. Build-It Ltd’s ROE has almost double from 13.50% in 2011 to 26.51% in 2012. This increase in the ROE represents that the profitability position of the firm has also improved, particularly due to increased sales. The Gross Profit Margin measures the company’s manufacturing and distribution efficiency during the production process. It is a measurement of how much from each euro of a company’s revenue is available to cover overhead, other expenses and profits. The company’s Gross Profit Margin has increased marginally from 26.10% in 2011 to 28.68% in 2012 with the main reason being that sales have increased by €43,313 while the cost of sales only increased by €27,500, resulting in an increase of €15,813 in gross profit. Net Profit to Sales measures how much of each euro earned by the company is translated into profits. The company’s Net Profit Margin has increased from 5.62% in 2011 to 14.38% in 2012. The reason for such a significant increase is that net profit has increased by €17,724 due to an increase in the gross profit and a slight decrease in operating expenses (elimination of the rent expense).

The Expenses to Sales ratio shows the efficiency of a company’s management by comparing operating expense to net sales. The smaller the ratio, the better is the organisation’s ability to generate profit if revenues decrease. This was also a positive ratio for the company as the Expenses to Sales ratio have decreased from 20.48% in 2011 to 14.30% in 2012. The reason for such a significant decrease is that the company recorded lower operating expenses while sales have increased.

Figure 1 below shows how all the profitability ratios were strengthened from 2011 to 2012 Good
Figure 1

Asset Utilization Ratio Analysis
The asset utilization ratio measures management's ability to make the best use of its assets to generate revenue. The Sales to Net Assets ratio measures the ability of a company to use its assets to efficiently...
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