The Financial Ratio Analysis Accounting Essay

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

From the ratio above, return on capital employed had increase from 11.53 in year 2011 to 12.72 in year 2012. The company had generated more earnings per dollar of the capital employed or total asset less current liabilities in year 2012. This indicates that Abel and Moore PLC had efficiently increased its profitability compared to prior year. Besides that, return on asset (ROA) had increase slightly from 0.02% to 2.49% in 2012. This ratio measures the efficiency of the company in using its asset to generate net income. Increase in ROA signals that the business is making good use of its asset from year to year.

Current ratio matches current asset with current liabilities and measures whether current asset are enough to pay-off the current liabilities. Abel and Moore PLC's current ratio in 2011 is 0.75 and in 2012 is 0.80. The current ratio is below than 1 which indicates that the current assets are not enough to pay debts that are due in the same year. However, there is an improvement in the current ratio in year 2012 compared to year 2011. This shows that as overall, the company is improving in its working capital.

Gross profit margin had increase 1% from 52% in 2011 to 53% in 2012. Part of the strategic objective of the company is to increase profitability and bring more cash. With the increase in gross profit margin, the company's performance seems to be in line with the strategic objectives. Gross profit ratio also reflects Abel and Moore PLC basic prising decisions. The revenue had increased approximately 5% compared to 2011 and cost of sales had increased 2%. This indicates that the company had managed the labour and raw material cost efficiently and thus, the prising strategy of the company is effective.

Operating profit margin seems to have a slight increase by 0.1% in 2012. Management has greater control over selling, general and administration (SG&A) expenses. Therefore, it is important that Abel and Moore manage these expenses to ensure that more profit can be generated by the company. The company manage to increase its operating profit margin by 0.1% which seems that the company's SG&A expenses are quite high. In order to generate more profit, Abel and Moore PLC need to ensure that the sales are growing more than the operating expenses.

The gearing of Abel and Moore PLC had decrease by 24.5% from 111% in 2011 to 86.5% in 2012. High gearing means that the company is a high risk company. However, we can see that the gearing has reduced by 24.5% which indicates that Abel and Moore PLC is able to generate cash from the business to recover the loan. Besides, the company is able to generate higher profit even after deducting the interest paid on the debts.

Overall, Abel and Moore PLC is moving towards achieving its strategic objectives. Return on capital employed and return on asset seems to be reasonably high and had increase from prior year. This shows that the company is efficiently managing assets in a way that generates profit to the company. Increase in gross and operating profit margin also shows a good indication that the business had succeed in its strategic objective to increase profitability. Current ratio and gearing show positive sign in the growth of the company.

Limitation of using published financial information in assessing the performance of a business:

The first limitation is that published financial statement is prepared using historical financial data. This means that financial data is retrospective not prospective. This retrospective information may not be a good choice in assessing the performance of a business as well as strategic planning.

Most companies used the published financial information in preparing ratio analysis which will be used in measuring performance. This ratio can be manipulated through acceptable alteration of accounting policies. There are many grey areas in the accounting standards where management can manipulated the financial data to show favourable results, for example, provisions and estimates.

Besides that, financial information only shows quantitative economic data but do not addresses any qualitative information. Published financial information fails to provide qualitative information such as customer's satisfaction, internally generated brand name and management skills and knowledge. Therefore, it is important to look at both financial and non-financial information of a business.

Apart from that, different in accounting methods between companies makes it difficult to compare the performance of financial information of one company with another. Therefore, the performance measurement will not be accurate. For example, one company may use FIFO in the valuation on stock and weighted average is used by another company. Thus, we cannot compare the efficiency of stock management where both companies using different method in stock valuation.

How benchmarking assist managers in pursuit excellence and benchmarking activities.

According to Mohamed et al (1994) benchmarking is the continuous process of measuring products, services and processes against the strongest competitors or those renowned as world leaders in their field. Benchmarking can improves organisation performance by improving upon the most efficient practices. There are several bases of benchmarking; benchmarking against internal operation, external competitors, industry functional leaders and generic leaders.

Managers of Abel and Moore PLC can use benchmarking to understand organisation's strength, recognises weaknesses and know how the other organisations perform those practices which required modification. Identifying the strength and weakness of the company through comparing with competitors or industry functional leaders can ensure that Abel and Moore PLC are at the same level as other business.

Apart from that, benchmarking can help managers to ensure the company remain competitive in the industry. Company must understand the competition in order to become competitive. Benchmarking helps Abel and Moore PLC not just to look at competitors' businesses but to discover the best practices wherever they may exist in the industry.

Besides, by using benchmarking, the managers can adequately meeting customer's requirement and needs. The industry leaders or best in class exist because they are excellence in their business and preferred by users or customers. Therefore, understanding competitors' business and practices will help Abel and Moore PLC to reveal what customers want and will ensure that they remain competitive in the market.

Also, benchmarking helps Abel and Moore PLC's managers in establishing goals and objectives of the organisation. Benchmarking forces managers to focus on external environment and at all level of an organisation. Therefore, in goal setting process, managers will also tend to concentrate on the best in industry that will result in effective and efficient goals and objective of the company.

Benchmark can help managers to pursuit excellence through the awareness of how far their company may be behind from global competitors. Having these awareness can ensure that managers will take immediate action in improvising the performance and position of the company in the industry. The concentration on understanding the global competitors can lead to improved strategies of the company.

Besides that, benchmarking can speed up organisation's ability to make improvements. This can be done by learning what leading company is better compared to other companies in the industry. This will consume less time rather than to generate improvement internally. By speeding up the process of improvements, managers of Abel and Moore PLC can focus on other important matters, for example the core competencies of the company.

Besides that, benchmarking can reduce the development time and increase capabilities by sharing of information. In order for Abel and Moore PLC to compete successfully, quality of the product or services must be beyond its competitors, innovation ahead from competitors and achieving cost below them. Benchmarking can help company to achieve these goals if company have information about competitor's business.

Possible activities and company to be benchmark with:

Activities

Company used to benchmark

1.

Purchasing material and supplies

Cadbury, Nestle

2.

Packaging product

Cadbury, Nestle

3.

Managing inventories

Greggs, Sainsbury's

4.

Deliver products from warehouse to stores

DHL, FedEx

5.

Accepting order from customer

Starbucks, McDonald

6.

Weekly stock ordering process

7-Eleven

7.

Restocking product on the shelf

Asda, Aldi

8.

Develop marketing strategy

Coca Cola, BMW

9

Identify customer segmentation and their needs

Tesco

10.

Managing customer satisfaction

Amazon

Total word count: 2996 words

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.