Analysis of the Operation and Financial Condition of the Enterprise

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Analysis of the Operation and Financial Condition of the EnterpriseNet Profit before Interest and Tax x 100/1SalesYear X1Year X20.95 : 5.38 x 100 = 17.66% 0.86 : 6.68 x 100 = 12.87%It is interesting to note that:Return on Capital = Asset x ProfitEmployed Turnover MarginFor example in year X219.24% = 1.49 x 12.87%Management’s objective is to increase return on capital and therefore they may focus onone or a combination of these two factors which influence and drive performance.Measures of liquidity include:Current RatioLiquidity Ratio (Acid Test)The current ratio is expressed as:Current Assets : Current LiabilitiesIf Current Assets exceed Current Liabilities then the ratio will be greater than 1 andindicates that the company has sufficient current assets to cover demands from creditors.However the speed at which stock can be converted into cash flow is such that it is notprudent to regard stock as available to cover creditors, thus a second ratio in terms ofliquidity is considered – the quick ratio or acid test.This is expressed as:Current Assets – Stocks: Current LiabilitiesIf this ratio is 1:1 or more, then clearly the company is unlikely to have liquidity problems.If the ratio is less than 1:1 we would need to analyse the structure of current liabilities, tothose falling due immediately and those due at a later date.The level of both the current ratio and acid test vary considerably between businesssectors.Current Ratio:Year X1Year X21.47 : 1.12 = 1.31 :1 1.84 : 1.25 = 1.47 :1132
Analysis of the Operation and Financial Condition of the EnterpriseAcid Test:Year X1Year X20.92 : 1.12 = 0.82 :1 1.24 : 1.25 = 0.99 :1Measures of utilisation or those sometimes referred to as measures of efficiency include:Debtors collection periodCreditors payment periodStock turnover or stock daysDebtors Collection PeriodThis measure of management’s efficiency is expressed as:Debtors x 365 daysSalesThis is an indicator of the effectiveness of the company’s Credit Control systems andpolicy.Recent research suggests that UK businesses suffer more problems from slow paymentsthan their European counterparts.Year X1Year X20.88 : 5.38 x 365 days = 60 days 1.19 : 6.68 x 365 days = 65 daysCredit Payment PeriodThe balance between debtor and creditor days is influenced by the working capital cycle.The creditor days is a measure of how much credit, on average, is taken from suppliers.It is expressed as:Creditors (Trade)Cost of SalesThis ratio is an aid to assessing company liquidity, as an increase in creditor days is often asign of inadequate working capital control.It constitutes the ‘pool of wealth’ from which the company: pays employees; paysproviders of capital, pays government taxation and maintains and expands assets.Value added:Year X1 Year X2£m £mTurnover 5.38 6.68Bought in materials and services 3.21 4.32Value added 2.17 2.36133
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Analysis of the Operation and Financial Condition of the Enterprise

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