Analysis of the Operation and Financial Condition of the Enterprise

Terms of ReferenceAnalysis of the Operation and Financial Condition of the EnterpriseThe purpose of this report is to present a financial analysis of the performance of CrescentQuarries Ltd (later referred to as the company) for years ended X3 and X4 and to comparethis to the benchmarks for the business sector for Year X4.AnalysisThis comprises measures as:ProfitabilityLiquidityAssets UtilisationProductivityExecutive SummaryOver the period under review the company has increased its turnover significantly (24%)in the period under review but there has been a downturn in overall performance in thatthere has been a reduction in the primary ratio – Return on Capital Employed from 23% to19% and the analysis that follows, together with the summary conclusion, highlightsclearly the areas of concern that have contributed to this adverse performance.ProfitabilityReturn on Capital EmployedThis is also often referred to as return on investment (ROI).This is the main measure of profitability and considered the primary ratio.Capital employed is defined as total assets less current liabilities or share capital andreserves plus long term capital.The return is expressed as:Profit on Ordinary Activities before Interest and Tax x 100/1Capital EmployedIt represents the percentage of profit being earned on the total capital employed; andrelates profit to capital invested in the business. Capital invested in a corporate entity isonly available at a cost – corporate bonds or loan stock finance generate interest paymentsand finance from shareholders requires either immediate payment of dividends or theexpectation of higher dividends in the future.It is therefore business strategy to maximise the profit per ‘£’ of investment.From the company accounts we find:X1X20.95:4.12 x 100 = 23.06% 0.86:4.47 x 100 = 19.24%% Return on capital employed vary widely between business sectors, research suggests theaverage for this business sector is approximately 21%.129