UNIT 2

Topics: Financial ratios, Generally Accepted Accounting Principles, Profit margin Pages: 6 (2292 words) Published: February 10, 2014


To: Shareholders of Hot Fashions
From: 10/11/2013 HOT FASHIONS BUSINESS REPORT
Return On Capital Employed= 53.18%
Return on capital employed (ROCE) is the ratio of net operating profit of a company to its capital employed. It measures in percentage terms whatever the net profit is generated to overall value of the company in terms of capital employed. In the case of hot fashions, they have managed to generate a return on their capital employed of 53.18% net profit in one year. The business had a great strength as their return on capital employed is over 50%. For a business to gain more than 50% in one year is a could sign. This is due to bigger businesses such as next had a return of capital of 68% in a year and Hot Fashions is a small business and nearly reached to Nexts PLC’s return of capital employed. As well as, the return of capital employed for a clothing sector is 15%, and Hot Fashions business had a massive increase than that which displays they have done very well. However, the business should try a bit harder and aim to reach next percentage of 68%, although they’re a small business.

Gross Profit Margin= 38.88%
Gross profit margin measures how well a company controls its cost. The business looks at the proportion of money left over from revenues after accounting for the cost of goods sold. It shows us; every £1.00 made in sales how much is left as gross profit after the cost of goods sold has been deducted. This means Hot Fashions business for every pound of sales they made, they had a profit margin of roughly up to 39%. The business had a great strength as their gross profit margin is over 25%. This is good because the retail clothing industries gross profit margin is usually around 25%. For a business to gain more than 25% is a good sign. Looking at bigger businesses such as Nexts PLC’s gross profit ratio, theirs is also over 25% as their gross profit ratio is 32.55%. This displays that Hot Fashions business is above average in the retail clothing industries as well as, Nexts PLC’s business. This demonstrates that Hot Fashions are doing very good. On the other hand, Hot Fashions business needs to be careful with their gross profit margin. Gross profit margin can cause many problems if it’s too low or too high. If it’s thought to be low, the business may reduce the cost of its purchases. This may involve looking for a cheaper supplier, but the firm must try to ensure that this does not affect the quality of the product. Alternatively, it may try to increase sales without increasing the cost of goods sold. For Hot Fashions to keep track of their gross profit they need to ensure they avoid pricing problems and a loss of money from sales. This then would lead the business to carry on doing well and being successful.

Net Profit Margin= 8.49%
This ratio looks at net profit as a percentage of sales turnovers. This ratio is often referred to as the net profit margin. It shows for every £1 made in sales how much of it is left as net profit after all expenses have been deducted. Looking at Hot Fashions business their net profit percentage of sales is 8.49%, therefore means that for every £1 of sales made, 8p is left as net profit. The business had a great strength as their net profit margin is over 7.98%. The reason this is a good sign is because the retail clothing industries average net profit margin is 7.98%. However, the business also has weaknesses. Looking at bigger businesses such as Nexts PLC net profit margin it shows 14.99%. Hot Fashions should try to reduce its expenses and try hard to increase its sales. This is due to Hot Fashions had only increased by 2.49% from the average retail clothing industries. They should aim to increase to a higher percentage like Next PLC although Hot Fashions is a small business. If the Net Profit does increase the investor has a chance of receiving dividends, and more money is given back into the...
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