2.0 BENEDICT CO.’S INTRODUCTIONBenedict Co. is a leading UK retailers Salvage Company with many years of professional experience in buying and reselling damaged cargo, abandoned freight, casualty losses and more (Benedict co. 2018).In order to compare the growth between two years, it is advisable to use financial ratios which represents the relationship between different elements within the financial statements and are convenient for performance analysis and comparison purposes (Atrill and Mclaney 2006).A financial Ratio is a relative magnitude of two selected numerical value measuring an enterprise’s value as shown in her financial statements.
In ratio analysis, Palepu, Healy and Bernard (2003) state that an analyst may compare ratio of two or more firms in same industry or compare ratio of some absolute benchmark. Financial ratios are very useful to review large volume of financial information (Edward, 2003). 2.1 FINANCIAL RATIOFinancial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company’s financial statements; which are used to perform qualitative and quantitative analysis to access a company’s liquidity, leverage, growth, margins, profitability, rates of return, etc.
(corporatefinanceinstitute.com).The following Accounting Ratio will be reviewed:2.1.1 PROFITABILITY RATIOS: These ratios measure the degree of success a business has. it is a measure of profit which business is generating. Profitability ratio are basically a financial tool which helps us to measure the ability of a business to create earnings, given the level of expenses they are incurring. 2.1.2 USE OF RESOURCES RATIOS: Also known as the efficiency or working capital ratio. These ratios are used to calculate how efficient a resource is used in a company (Artill and Mclaney, 2006). The stock days, debtor days, creditor days, cash conversion cycle are used in measuring the suppliers’ performance.2.1.3 LIQUIDITY RATIOS: Liquidity refers to the speed in transfer of assets into cash. These ratios measure the relationship between the liquid resources and the short-term payables. Liquidity ratios are financial ratios that measures a company’s ability to repay both short-term obligations.2.1.4 GEARING RATIOS: These ratios measure the performance of the company from the perspective of shareholders by analysing their return of share held (Artill and Mclaney, 2006). This measures the proportion of a company’s borrowed funds to its equity. The ratio indicates the financial risk to which a business is subjected, since excessive debt can lead to financial security.2.1.5 INVESTOR RATIOS: These are used to measure the ability of a business to earn an adequate return for the shareholders. The shareholders have money tied up in the business and need a return commensurate with the risk involved. 2.2 PROFITABILITY RATIOS ANALYSIS RATIO 20X1 20X0 ROCE 17.50% 24.19% GROSS PROFIT % 48.05% 41.77% NET PROFIT MARGIN 22.73% 32.93% NET ASSET TURNOVER 0.77 0.73 Table 2a: Profitability ratios analysis2.2.1 Return on Capital Employed Ratio (ROCE): The return of capital employed ratio used in measuring the earning power of the net asset of a business. The ROCE shows the percentage return earned by a company’s capital employed. The decrease in the return on capital employed is as a result of the company’s decrease in its profit before tax which went from $8,700,000 in the previous year to $8,300,000 in the current year and also the increase in capital employed which went from 32.93% in 20X0 to 22.73% in 20X22.214.171.124 Gross Profit %: The gross profit % ratio is calculated to find the profitability of business. A high gross profit ratio is a symbol of good management. This shows the % of selling price that represents profit rather than cost. There was a 6.28% increase in the gross profit percentage from 20X0 to 20X1. Sales also increased by 23.69%, which suggest the growth of the gross profit. The increase in the gross profit ratio is as the result of an increase in sales.2.2.3 Net Profit Margin: This measures the profit available for distribution amongst shareholders after paying all expenses during a given period of time. This shows the percentage of a company’s turnover which is represented by profit after operating cost. The Net Profit Margin ratio has been negatively affected due to the decrease in profit before tax and interest. Sales increase by 23.69% in 20X1. There was a decrease in the net profit margin from 32.93% to 22.73%.2.2.4 Net Asset Turnover: This measures how well a company’s resources are being used to generate income. The Net Asset Turnover shows how efficiently the company’s capital employed is used to produce turnover. From 20X0 to 20X1; an increase of ratio from 0.73 to 0.77 times. There was a higher increase in sales than capital employed.2.3 USE OF RESOURCES RATI0 ANALYSIS STOCK 20X1 20X0 STOCK DAYS 118.63 65.45 DEBTOR DAYS 90.06 55.7 CREDITOR DAYS 115.13 108.24 CASH CONVERSION DAYS 53.56 12.91Table 2b: Resources ratio analysis2.3.1 Stock Days: This shows the number of days (average) worth of stock held by a company. Stock comes from closing balance. The above table shows an increase in the number of days that the company keeps its stock before selling, the number of days which stock was kept went higher by about 54days in 20X126.96.36.199 Debtor Days: This shows the number of days (average) it takes debtor to pay. Debtor comes from closing balance sheet. The number of days in which the debtors use to pay the company increased from 55.70 in 20X0 to 90.06 in 20X1 which is 34.36days. The company’s ability to quickly collect revenues from sold stock has decreased. If the credit sales are not available, then turnover can be used as proxy.2.3.3 Creditor Days: The creditor days’ shows the number of days (average) that it takes to pay creditors. Trade creditors comes from the closing balance sheet. If credit purchase is not available, then cost of sales can be used as proxy. From the above table, the period of days the company use in paying its creditors has increased from 108.24 in 20X0 to 155.13 in 20X1 (43days). The increase in creditors’ days is higher than the increase in debtors’ days; this may in turn affect the rate at which the suppliers are willing to supply Benedict Co. on credit due to its long credit period.2.3.4 Cash Conversion Cycle: This gives an idea of the (average) length of time it takes a company to generate cash from operation. From the above table; there was an increase in this ratio which means the company requires about 40days more in 20X1 to turn its stock to cash, compared to 20X0. Benedict co. would take more time in 20X1 to generate cash from operations. 2.4 LIQUIDITY RATIO ANALYSIS STOCK 20X1 20X0 CURRENT RATIO 1.19 1.25 QUICK RATIO 0.7 0.75 Table 2c: Liquidity ratios analysis2.4.1 CURRENT RATIO: This is used to evaluate the liquidity or ability to meet short-term debts. This is the most commonly used ratio to describe liquidity. It gives the number of times that a company’s working capital assets covers its short-term liabilities. There has been an increase in 20X0 from 1.25 to 1.19 in 20X1. This is because the increase in the current asset is lower compared to the increase in current liability.2.4.2 QUICK RATIO: This determines the possibility to cover the short-term debts/liabilities with the most liquid asset of the company. This ratio is similar to the current ratio, but it is an even shorter-term measure of liquidity. Stock is excluded from current asset since the amount of time that stock takes to turn into cash can be quite long. This ratio has decreased from 0.75 in 20X0 to 0.70 in 20X1. This means that the company’s risk has increased.3.5 GEARING RATIORATIO 20X1 20X0CAPITAL GEARING RATIO 30% 23.60%DEBT/EQUITY RATIO 42.86% 30.89%INTEREST COVER 5.38 16.4Table 3a: Gearing ratios analysis2.5.1 CAPITAL GEARING RATIO: This gives an indication on the level of long-term borrowing and shows long-term borrowing as a percentage of capital employed and equity or share capital and reserves. From the above table, the gearing ratio increased by 6.40% in 20X1. There has been an increase in Benedict Co.’s long term debt than in its capital employed. This means that the risk to cover its long-term debt by its capital employed has increased.2.5.2 DEBT/ EQUITY RATIO: This ratio indicates the same thing as the capital gearing ratio. From the above table, it is shown that there was an increase in the ratio in 20X0 from 30.89% to 42.86% in 20X1. This was due to the increase in the company’s long-term debt than in its stock capital and reserve.2.5.3 NTEREST COVER: This indicates the number of times that the company’s interest charge in its income statement is covered by the profit before interest and tax. From the above table; there has been a decrease from 16.40 times in 20X0 to 5.38 times in 20X1; this shows in the company’s profit.3.6 INVESTOR RATIORATIO 20X1 20X0RETURN ON EQUITY 23.57% 27.03%DIVIDEND PER SHARE 0.25 0.2EARNING PER SHARE 0.0003 0.0004DIVIDEND COVER 0.001 0.002PAYOUT RATIO 681,182 51,423PRICE/EARNING RATIO 18667 9000DIVIDEND YIELD 4.46% 5.56%EARNING YIELD 0.00005 0.00011Table 3b: Investor ratio.3.6.1 RETURN ON EQUITY: This ratio is a similar measure to ROCE, but uses measure of return and capital employed which are more relevant to shareholders and investors. The return on equity decreased because the company’s profit before tax decreased and the capital employed increased.3.6.2 DIVIDEND PER SHARE: This ratio shows the amount of dividend per share available to each ordinary share holder. The above table indicates that the dividend per share increased from 0.2 in 20X0 to 0.25 in 20X1. This is as a result of the total dividend paid by the company which; which increased from $3.6million in 20X0 to $4.5million in 20X188.8.131.52 EARNING PER SHARE: This ratio shows the amount of earning per share available to each ordinary share holder. The above table indicates that the earning per share decreased from 0.0004 in 20X0 to 0.0003 in 20X184.108.40.206 DIVIDEND COVER: Dividend cover is the inverse of payout ratio. The dividend cover ratio decreased from 0.002 in 20X0 to 0.001 in 20X1 due to a low earning after tax and high dividend.3.5 BENEDICT CO.’S AREA OF CONCERNThe major course of concern is that Benedict co. is not competitive enough and has strong financial and business risk; there is serious increase in Benedict co.’s debtor and creditor days, cash conversion cycle and liquidity strain. The company’s gearing ratios were really bad, which indicates the company’s inability to meet its obligations once they are due.