Many metrics have been developed to ease this process.
Faced with too much information, Investors at times get confused with no clear indication of what the true prices of stocks should be. (Penman, 2003). Under such circumstances, the investor either make decision based on his or her instinct, such investors according to Penman (2003) are intuitive investors while others who make their decision based on capital market efficiency are referred to as passive investors.
This part of the question addresses the performance of a new venture to be set up to enable us make informed judgment as to a hold a buy or sell decision. Thus, the objective of this question is to analyse the liquidity, the profitability and solvency position of the new set up from information extracted from the projected profit and loss account, the balance sheet and the cash flow statement. The report do not only provide a financial overview of the new venture for the projected three years period. The question also, guide potential investors on where the business is coming from and where it is heading to.
Gross profit margin assumes that in the absence of other expenses what percentage of sales comes to the corporation as profit, while net profit margin takes into consideration all the expenses and measures what percentage of sales comes in as profit after all the other expenses must have been deducted. It is important to note here that, ratio analysis in them is useless except when compared with the industry benchmark or other competitors.
Cost of Sales
Growth in Sales (%)
Gross Profit Margin (%)
Net Profit Margin (%)
From the above analysis and interpretation, one will see that our proposed new venture is a feasible and profitable business. While gross profit margin for the first three years under projection is above 30%, net profit margin also portrays a favorable situation.
Analysis of Capital Employed
According to Penman (2003), assets and liabilities are distinguished based on the nature of the operations the underlying operation and the funding structure. The underlying operation is represented by the operating assets of the business. Operating assets are also known as capital employed - the amount of capital that is employed in the business. Here, it is defined as being the total assets without any deduction for the creditors of the business.
Key data & ROCE
Profit Before Interest& Tax
This ratio ROCE measures how well a business has performed in terms of the capital used to carry out the daily operations. According to Penman (2003), it is a key performance indicator and may show a decline even though the net profit margin has gone up. This will reveal the fact that the increase in