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In accounting, ratio analysisÂ is known as used to evaluate relationships among financial statement items as well as indicate a firm's performance and financial situation. "The ratios are to identify drifts over time for one company or to compare two or more companies at one point in time." (Weetman, Pauline 2010, Financial and management accounting; an introduction) Financial statement ratio analysis is more focuses on three key aspects of a business which are liquidity, profitability, and solvency. By reading the financial statement for Blacksea plc for the years ended on 30th June 2009 and 2010, we calculated different ratio to compare with the company previous year's performance and the average of the industry based on the three main aspects.
"Profitability ratio offer several different measures of the success of the firm at generating profits." (2 Financial Ratio) In 2010, the company's ROCE is 18% comparing to 2009 which was 15%, it increased in total by 3%. Apply on the theory of the profitability ratio, a higher value/percentage relative to other's ratio or theÂ same ratio from a previous period is indicative that the company is doing well. The 3% increases reflect the company is gaining its profit and earning more than 2009. But then compare to the average industry ratio of ROCE which is 20%, the company still not reach to the average level. Apart from reading the result of ROCE, the gross profit margin and net profit margin are also ratios to define a company's profitability. The gross profit margin has a slightly decrease from 49.4% in 2009 to 47.4% in 2010. Annual expenses have increased £47million over the year period and so the decline in gross profit margin is has been reflected in a similar decline although the gross profit has largely increases £472million within 2009 and 2010. Overall the company's profitability level is on-going below the average in the industry. Gearing ratio has a huge increase from 3.72% to 23.85%. It shapely increases because of the long term loan have increased significantly when the retained profit has only increased little over the year. "The higher the level of gearing the higher are the risks to the business, since the payment of interest and repayment of debts are not "optional" in the same way as dividends." (4 Accounting Principle Help Sheet 5)
"Liquidity ratio determines a company's ability to pay off itsÂ short-terms debts obligations." (3) To determine the liquidity of the company, current ratio and quick ratio are essential to look at. The higher the value of the ratio is, theÂ larger the margin of safetyÂ thatÂ the company can possesses to cover the short-term debts. In 2010, the company has greater current assets as well as the current liabilities. The current ratio has risen from 1.46:1 in 2009 to 2.73:1 in 2010. The quick ratio increased from 0.39:1 to 1.23:1. They are both short-term liquidity measurement. The results indicate the higher ability of entity to meet its short-term debts from its current assets and also the unexpected demands from liquid current assets. The company shows a clearly improvement over the past year.
(d) Comment on any aspects of the company's performance you think significant, including interpretation of the statement of cash flows.
By looking at the cash flow statement and the financial ratio for 2010, there are some important and noticeable changes. Firstly, to examine the operations section, it shows the incoming and outgoing cash form the company's core operations. Ideally, this figure should be positive. At the same time, annual sales revenues have increased sharply over the past year and in the current year, there has been a significant increase in the cost of sales. Annual operating expenses have risen from £100m to £418m over the period of time as well as the decline in gross profit margin is has been reflected in a similar decline. The fall in gross profit margin and net profit margin, included with an increase in both sales revenue and gross profit, has resulted in a sharp decline the profitability of trading and mark up for the company. With the increases of taxation it affected the net cash from operating activities having a slightly decline. From the investment part of the cash flow statement accounts, cash are used to make new investments, proceeds gained from previous investments. In this case, the number in 2010 was (650), which shows the company spent significant cash investing in project and it hopes will lead to future growth. This last section of the cash flow statement is about the company's financing activities which refer to the movement of cash. The commonest financing activities are taking on a loan or issuing stock to new investors. The company reports a positive number for 2010 which is 555. The company paid off a newly debt of £300m and paid out £45m in dividends and repurchased 100m of company stock. Dividends have increased by £5m within this year and this has led to an increase in the dividend cover ratio in the current year to the extent the profit. For the information, investors would appreciate since the company acquire the dividend which shows the company is confident in its own stock performance and wants to keep it gain. By the end of the cash flow statement, we have a positive number of cash and cash equivalent in June 2010, positive cash flow is important for the company; a strong cash flow is a symbol that the company is healthy.
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