unit 2 P7
P7 Ratios
Liquidity Ratios
Current Ratio
2013
Current assets = 1901
Current liabilities = 3115
CR = CA / CL
= 0.61
2012
Current assets = 2032
Current liabilities = 3136
CR = CA / CL
=0.64
The difference between the two years is 0.3p decrease. As Sainsbury’s needs to have a £2 to £1 earned, the price is behind in both years. This means that there is a 2 year crises at Sainsbury’s.
Acid test ratio
2013
Current assets = 1901
Inventories = 987
Current liabilities = 3115
ATR = (CA – I) / CL
= 0.29
2012
Current assets =2032
Inventories = 938
Current liabilities =3136
ATR = (CA – I) / CL
= 0.34
The difference between the 2 years is that Sainsbury’s has a better ratio in 2012 with Sainsbury’s earning £0.34p to every £1 that Sainsbury’s owe whereas in 2013, where they earn £0.29p to every £1 earned. This should be £1.50 to every £1 of debt. So in both years Sainsbury’s is falling behind in its ability to cope. This again shows the two year crises.
Gross Profit Margin
• This ratio shows how much gross profit the business makes for every £1 of sales
• i.e. the relationship between sales and the level of profit before overheads are considered
• The higher the percentage the better
• A ‘good’ GPM figure will vary between industries
• Improve ratio by increasing sales or reducing cost of sales
Gross Profit Margin = (Gross profit / Sales) x 100
2013
= 5.48%
2012
=5.43%
The higher the percentage resulting from the calculation is a better result. Sainsbury’s has had a 0.05% in its gross profit margin, this can be improved through the increase in sales of stock or reduce cost of sales.
Net Profit Margin
• Shows how much net profit the business makes for every £1 of sales
• Tells the business how efficiently it is controlling its expenses
• The higher the percentage the better
• Should be compared with GPM to identify where the problem lies
• Improve the NPM by increasing sales or cutting expenses
NPM = Net Profit / Sales x 100 (%)
Liquidity Ratios
Current Ratio
2013
Current assets = 1901
Current liabilities = 3115
CR = CA / CL
= 0.61
2012
Current assets = 2032
Current liabilities = 3136
CR = CA / CL
=0.64
The difference between the two years is 0.3p decrease. As Sainsbury’s needs to have a £2 to £1 earned, the price is behind in both years. This means that there is a 2 year crises at Sainsbury’s.
Acid test ratio
2013
Current assets = 1901
Inventories = 987
Current liabilities = 3115
ATR = (CA – I) / CL
= 0.29
2012
Current assets =2032
Inventories = 938
Current liabilities =3136
ATR = (CA – I) / CL
= 0.34
The difference between the 2 years is that Sainsbury’s has a better ratio in 2012 with Sainsbury’s earning £0.34p to every £1 that Sainsbury’s owe whereas in 2013, where they earn £0.29p to every £1 earned. This should be £1.50 to every £1 of debt. So in both years Sainsbury’s is falling behind in its ability to cope. This again shows the two year crises.
Gross Profit Margin
• This ratio shows how much gross profit the business makes for every £1 of sales
• i.e. the relationship between sales and the level of profit before overheads are considered
• The higher the percentage the better
• A ‘good’ GPM figure will vary between industries
• Improve ratio by increasing sales or reducing cost of sales
Gross Profit Margin = (Gross profit / Sales) x 100
2013
= 5.48%
2012
=5.43%
The higher the percentage resulting from the calculation is a better result. Sainsbury’s has had a 0.05% in its gross profit margin, this can be improved through the increase in sales of stock or reduce cost of sales.
Net Profit Margin
• Shows how much net profit the business makes for every £1 of sales
• Tells the business how efficiently it is controlling its expenses
• The higher the percentage the better
• Should be compared with GPM to identify where the problem lies
• Improve the NPM by increasing sales or cutting expenses
NPM = Net Profit / Sales x 100 (%)