Ratios

Question 1

REVENUE

Answer 1

Happy Playz
* Revenue has increased by 6.5% which shows growth
* Impressive given Gleetills decline
Gleetill
* Has revenue of 150% of Happy Playz but has seen a decrease of 0.1%

Question 2

COSTS

COS, Admin costs, Selling and Marketing

Answer 2

COS
* HP has increased by 5.3%, this is less than the increase in revenue so we should see an increase in Gross Profit Margin showing well controlled costs.
* GT has increased by 5.3% as well but with no increase in revenue so profits will be down.

Admin costs
* HP has increased by 2.4%
* GT has decreased by 12.7% possibly from economies of scale (larger company) but we would need more information.

Selling and Marketing
* HP increased by about 2%. Total S&M costs are about 15% of revenue (static with 2000) which could account for the increase in growth.
* GT has reduced by 19.8%. Total S&M costs are about 11% of revenue (down form 14%)

Question 3

PROFIT FOR THE YEAR

Answer 3

Happy Playz
* Growth in profit for the year of 18.8% despite increase in revenue of only 6.5%
Gleetill
* PFY has fallen by 6.4%

Question 4

PROFITABILITY RATIOS

GPM, OPM, NPM, ROCE

Answer 4

• Gross Profit Margin is revenue as a percentage of COS
• Operating Profit Margin is revenue as a percentage of operating costs (COS plus admin and distribution)
• Net Profit Margin is revenue as a percentage of all costs including financing and tax
• ROCE is operating profit over capital employed and will be affected by profit levels and the efficiency of the asset base.

Question 5

LIQUIDITY RATIOS

NCA Turnover, Current Ratio, Inventory Days, WCC

Answer 5

• Non-current asset turnover is revenue divided by non-current assets. Shows how effectively NCA’s are being used.
• Current ratio is current assets over current liabilities. Ours is low as a toy retailer wouldn’t have many trade receivables as most sales would be for cash.
• Inventory days would want to be low for a toy retailer to show inventory is moving out the door regularly
• Working Capital Cycle would want to be as low as possible.

Question 6

GEARING AND INTEREST COVER

Answer 6

• Gearing is the total loans divided by total loans and equity. The lower the better and the cheaper your cost of debt will be. High dividend payments will stop the gearing ratio from reducing further.
• Interest cover is operating profit divided by interest charges/expenses. The higher the better as it shows how many times over you could cover your interest charges. A reduction may indicate growth though as the company would be taking on more loans for investment.