Figures were obtained from comparative balance sheets and profit and loss statements trot the last two years.
This information enabled the development to 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. Avery important ratio is the Return on Capital Employed (RACE). This shows the profit made in relation to the resources employed.Build-let Lad's RACE ratios for 2011 and 2012 were calculated as 22.
12% and 25. 64% respectively. This Increase In the RACE represents that Build-let 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-let Lad's ROE has almost double from 13. % 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 tort 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 ?¬1 5,813 n 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 organization'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 generate sales.The company's asset turnover ratio has decreased from 3. 94 in 2011 to 3.
65 in 2012. This decrease shows a reduction in the ability of asset utilization. The main reason is that non-current assets have increased by ?¬75,000, while current assets have also increased by ?¬9,637. Sales to Fixed Assets ratio measures the ability of a company to use its fixed assets to efficiently generate sales. The company's Sales to Fixed Assets ratio has decreased rustically from 5.
25 in 2011 to 1. 75 in 2012. This decrease shows a reduction in the ability of asset utilization.The main reason is because the non-current assets have increased by a staggering ?¬75,000.
The Stock Turnover measures how well a company coverts stock into revenues. The company's Stock Turnover ratio has decreased slightly from 56. 33 days in 2011 to 54. 51 days in 2012. The main reason for such a significant decrease is that although the average stock of 2012 is slightly higher, the cost of sales of 2012 is significantly higher, and more than off-sets. The Trade Credit Given ratio indicates whether debtors are being allowed excessive credit.
This ratio has decreased slightly from 44. 27 days in 2011 to 43. 53 days in 2012.A high figure may suggest general problems with debt collection or the financial position of major customers so the company has reduced this problem this year.
Advantage of trade credit available to it. This ratio has increased from 59. 26 days in 2011 to 64. 13 days in 2012. This meaner that this year the company has took advantage of trade credit when compared to 2011. Liquidity Ratio Analysis Liquidity refers to the ability of a firm to meet its obligations in the short-run, usually one year.
The Current Ratio measures the general liquidity and is an indicator of a company's ability to pay its debts in the short-term.The company's current ratios are 1. 36:1 in 2011 and 0. 95:1 in 2012. This decrease in the current ratio represents there has been deterioration in the liquidity position of the firm. These ratios are considered relatively low (ideally to be 2:1) representing that the liquidity position is not good and we will not be able to pay the current liabilities in time without facing faculties.
This variability in the current ratio occurs mainly due to variability in the composition of both current assets and current liabilities. Figure 2 below shows the trend of current assets and current liabilities over the 2- year period. 8 Figure 2 The Acid-Test Ratio is also an indicator of a company's short-term liquidity. It measures the company's ability to meet its short-term obligations with its most liquid assets. The company's acid-test ratios are 0. 70:1 in 2011 and 0.
44:1 in 2012. This decrease in the acid-test ratio represents there has been deterioration in the equity position of the firm. These ratios are considered relatively low (ideally to be 1 :1) representing that the liquidity position is far from satisfactory. The acid-test ratio has declined major because of the drastic increase in trade creditors.Capital Ratio Analysis The Equity to Total Assets ratio indicates the relative proportion of equity used to finance a company's assets.
This ratio has decreased from 0. 59 in 2011 to 0. 34 in 2012. The main reason for this decrease is the increase of ?¬75,000 in non-current assets. This ratio can take two outlooks - a low equity ratio will produce good results or stockholders while a high equity ratio provides security to shareholders in the event of the company being liquidated.
Fixed Assets to Equity ratio measures the contribution of stockholders and the contribution of debt sources in the fixed assets of the company.Ratios of 0. 75 and 2. 09 were calculated in 2011 and 2012 respectively. This increase is also brought about because of new non-current assets. A ratio greater than 1 meaner that some of the fixed assets are financed by debt and this is exactly why the 2012 ratio is 2.
09. Borrowing to Equity ratio indicates what reapportion of equity and debt the company is using to finance its assets. A ratio of 0. 70 was obtained for 2011 and a ratio of 0. 91 in 2012.
This increase was brought that a company has been aggressive in financing its growth with debt.Gearing Ratio measures the proportion of assets invested in a business that are financed by borrowing. Last year, the company did not have any long-term liabilities but in 2012, the gearing ratio was calculated as 1. 04.
On first thought, this ratio is very high but considering the company had Just taken the 10% Debentures, it is understandable. I m quite sure that in the next couple of years, the ratio will decrease as payments of the 10% debentures will start to be paid. An advice is that the company should improve this ratio by focusing on profit improvement mainly cost minimization.Fixed Interest Cover determines how easily the company can pay interest on outstanding debt.
The lower the ratio, the more the company is burdened by debt expense. When a company's interest cover ratio is 1. 5 or lower, its ability to meet interest expenses may be questionable. The company's fixed interest cover ratios were calculated as 16. 38 in 2011 and 4.
1 in 2012 which are very satisfactory. The main reason for this decrease is that in 2012, although the operating profit increased, the interest expense increased by a bigger margin.Investment Ratio Analysis Net Asset Value per Share is an expression for net asset value that indicates the value per share for a company. In general, a low NAVES is considered a better investment opportunity than a high NAVA. The company has increased its NAVES from 0. 61 in 2011 to 0.
71 in 2012. Dividend Yield provides a guide as to the ability off business to maintain a dividend payment. It also measures the proportion of earnings that are being retained by the business rather than distributed as dividends.Generally, the greater the dividend yield result in a greater risk for the company. Build-let Ltd achieved 0. 014 in 2011 and 0.
011 in 2012 resulting in a slight decrease. Earnings per Share measures the overall profit generated for each share in existence over a particular period. ?¬0. 08 and ?¬0.
19 as earnings per share were obtained in 2011 and 2012 respectively. An increase in the PEPS ratio is a good sign as a company with a high earnings per share ratio is capable of generating a significant evident for investors, or it may plough the funds back into its business for more growth.Price/Earnings ratio is an indication of how highly the market values the business. The company achieved almost identical figures of 31.
25 in 2011 and 31. 26 in 2012. Generally a high PIE ratio meaner that investors are anticipating higher growth in the future. Also, the average market PIE ratio is 20-25 times earnings; therefore our results are more than satisfactory. Dividend Cover is the measure of a firm's ability to pay its dividend. The bigger the dividend cover, the greater is the usability of earning a dividend.
Also, the greater the chance of an even higher amount. Generally speaking, a ratio of 2 or higher is considered safe, in the sense that the company can well afford the dividend. The company's ratios were obtained as 2. 34 2011 and 2. 89 2012.
Conclusion and Recommendations Ratios are Just one number divided by another and realistically do not mean much. Strategy is to compare the ratios to a benchmark such as industry averages. Once ratios are calculated, an analyst needs these benchmarks to find out where the company stands at that particular point in a specific industry.
