1. Identify the main changes from one period to the other using analytical techniques, having calculated the ratios. From the overall apparent analysis the company’s position has deteriorated from last year with a very significant fall seen in the company’s profit, cash flow reserves and balance sheet position…
The Return on capital employed (ROCE) has also fallen from 35% to 5.9% in March 2012 which is also mainly due to deceased profits for the year. Since profitability ratios are all based on profits for the year the underlying problem is the drastic fall in profit as compared to last year which is concerning. The operating profit margin has fallen by 9% from 10.8% to only 1.8% this year. Despite of increase in sales revenue an immense increase was seen in the cost of sales and the operating expenses which both increased by 30% and 43.6% respectively, while the sales is merely increased by 19.6%. Another factor further contributing to the decrease in profit is high interest cost incurred this year which has increased from $ 18m to $ 32m this year making an increase of 77.7%. On the efficiency side the ratios seems pretty constant this year form inventories turnover days remaining at 56.7 days which was 56.6 days last year, the debtors days at 37.2 days which has an decrease of 2 days which was 39.1 days last year. The sales to capital employed ratio have also been increased a little which is 3.36 times this year. Since there was an increase recorded in sales the sales per employee shows an inverse effect which has decreased by 11.1% this year. The liquidity ratios seem decreasing too due to increasing liabilities this year accompanied by decrease in profits and cash flow position. The current ratio of the company decreased by 0.3 times and is at 1.6:1 times which is isolation is a good ratio above 1 but comparatively has fallen from last year. Similarly acid test ratio has also fallen from 0.8:1 times to 0.6:1 times where a slight fall was seen. However the cash from obligation has fallen from 0.9 times to 0.1 times, which can be quite alarming for the company, the reason causing such a change is the decreasing cash flow and increasing liabilities of the company. The gearing of the company has also increased from last year from 26.2% to 36% this year. On the other hand the interest cover ratio of the company has drastically fallen due to increased interest payment and decreasing profit this year which has fallen from 13.5 times to only 1.5 times this year. The investment ratios however seemed to increase for the period and weren’t as bad as other ratios. The dividend paid for the period was constant from last year at $ 40m despite of low profits this year. This situation made the dividend payout ratio increase from 24.2% to 363.3% and the dividend yield ratio was increased from 3% to 4.9%. The EPS of the company also decreased drastically because of low reported profits this year from 27.5c from last year to 1.8c this year. The price earning ratio of the company has dramatically increased from 9.1 times to 83.3 times. 2. Give possible reasons for variances, making whatever assumptions you feel may be appropriate, whilst stating the assumptions made. The ratios analysis shows few concerning areas in the company which have occurred this year. The company’s overall performance has deteriorated this year with decreasing ratios mainly seen in the profitability and liquidity areas. Other then that too the company has shown a low performance. The first and the foremost is the profitability ...
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