Dealer: Financial Ratios and Net Profit Essay

Submitted By Monal123
Words: 1812
Pages: 8

1.0 Introduction…………………………………………………………………
2.0 Profitability Ratios………………………………………………………….. 2.1 Gross Profit 2.2 Net Profit 2.3 Expenses 2.4 Return on Capital Employed
3.0 Liquidity Ratios 3.1 Current Ratio 3.2 Quick Asset
4.0 Other/ Activity Ratios
4.1 Collection Period for Debtors
4.2 Payment Period for Creditors
4.3 Stock Turnover
4.4 Fixed Asset Turnover
4.5 Total Asset Turnover
5.0 Investment Ratios
5.1 Earnings per Share
5.2 Price/Earnings
5.3 Dividend Cover:
5.4 Interest Cover:
5.5 Dividend Payout:
5.6 Gearing Ratio:
5.7 Return on Equity:
6.0 Review of the movement of the share
7.0 Conclusion

1.0 Introduction:
2.0 Profitability Ratio:
A Profitability Ratio is used to examine a company’s capability and ability to make profit as balanced out against its expenses and other costs gained throughout a specific period of time. There are four types of Profitability Ratios to consider. Most of these ratios, having a higher value in relation to a competitor's ratio or the same ratio from a former period is indicative that the company is doing well. Examples of profitability ratios are shown below using different formulas. 2.1 Gross Profit:
The gross profit shows the production efficiency relating to the price and unit volume at which the products and services the company has sold using the formula below:
Gross Profit × 100
The Gross Profit of Next Plc in 2011 it was 58.41%. This shows there was a slight increase in their sales and it shows their expenses are low. The reason being why their Gross Profit % is a little higher in 2011 than 2010 is because research shows that Next buys or has their products produced in Asia for a cheaper price and sell for ten times more the price. For e.g. a dress would cost Next £2.50 a piece to make would be sold at £25.00. Still making their selling price cheaper than other high street store. 2.2 Net Profit:
The net profit as a percentage of Sales Revenue using the formula below
Net Profit (before and after Tax) × 100
Looking at the Net Profit % of Next Plc, in 2011 figures show that their Net Profit was 31.93% higher than 2010 which was 29.67%. This indicates that Next have gained profit from 2010 to 2011 after reducing their expenses and becoming more efficient in managing there costs. 2.3 Expenses:
The expenses as a percentage of Sales Revenue using the formula below:
Expenses x 100
Next Plc expenses as a percentage of sales in 2011 were 12.43%. 2011 figures show that it was lower than 2010 which was 13.89 %. Next have managed there expenses as a result it generate more in profits in 2011. 2.4 Return on Capital Employed:
Return on capital employed specifies the productivity and the effectiveness of a business’s capital investment. Using the formula below:
Net Profit × 100
Long Term Capital
The Return on capital employed in 2011 for Next was 59.91%, higher than 2010 which was 56.63%. Therefore this indicates that Next was more efficient in distributing capital investments for higher incomes in 2011 than 2010.
2.5 Efficiency Ratios:
Activity Ratios are financial Ratios that measure how effective a company uses its assets to chance into cash or sales. For e.g. inventory turnover.
2.6 Stock Turnover:
Stock Turnover Ratios are used to measure how quickly a business operates its Inventory. The larger the Stock Turnover the better it is for both the company and potential investors. Using the formula below:
Cost of Goods Sold × 365
Average Inventory
Next cost of goods sold in 2011 was averaged out in 55 days; in 2010 it was averaged out in 47 days. This indicates that they were in a stronger place in terms of the Stock Turnover in…