Ratio Analysis for SunGen Ltd
Question 32
Ratio / Business / Results / Better/ Worse / What reasonsHow could you improve
Gross Profit Margin (%)
GP ÷ Turnover x 100
What % of your turnover has turned into Gross Profit
Higher the better / Electrical
Solutions
SunGen / 28% - 24% - 22%
(fall of 6%)
(36) – (38)
(Fall of 2%) / Worse
Worse / Reason:
· High costs of sales
· Fall in Revenue (not the case)
Improve:
· Reduce cost of sales (i.e unit cost)
· could try and benefit from economies of scale,
· try and find a cheaper supplier,
· Reduce direct labour costs
· Increase sales turnover
· Promotions
· Increase brand awareness – advertising
· Add value to the produt
· Increase or decrease the price – dependant on elasticity of demand (probably inelastic)
Net Profit Margin
NP ÷ Turnover x 100
What % of your turnover has turned into Net Profit
Higher the better / Electrical
Solutions
SunGen / 9 – 8 – 8
(Fall of 1%)
(12) – (14)
(Fall of 2%) / Worse
Worse / Reason:
· High overheads
· Low Revenue (not the case)
· High cost of sales (probable)
Improve:
· Reduce cost of sales (i.e unit cost)
· could try and benefit from economies of scale,
· try and find a cheaper supplier,
· Reduce direct labour costs
· Increase sales turnover
· Promotions
· Increase brand awareness – advertising
· Add value to the product
· Increase or decrease the price – dependant on elasticity of demand (probably inelastic)
· Try to reduce overheads – try to find cheaper property, reduce electricity or telephone bills etc.
Return on Capital Employed (ROCE)
N P÷ Capital x 100
What % of the capital investment is returned in Net profit
Higher the better / Electrical
Solutions
SunGen / 23 – 22 – 20
(Fall of 3%)
(6.3) – (16)
(Fall of 9.7%) / Worse
Worse / Reason:
· Net profit has not changed proportionally with capital employed –i.e they are making less profit
· Reduce cost of sales
· Reduce overheads
· Increase revenue
If you decrease the capital the ratio will appear to improve – this is not improving the business though – it is purely window dressing
Improve:
· Need to improve Net profit figure
· Increase revenue –
· Increase or decrease in price dependant of elasticity (probably inelastic)
· Decrease overheads
· Decrease costs the sales
· could try and benefit from economies of scale,
· try and find a cheaper supplier,
· Reduce direct labour costs
· SunGen’ main problem is probably the overheads
Current Ratio
CA ÷ CL
How many current assets do you hold in comparison to current liabilities
Ideal 1.6:1 – 2.3:1 / Electrical Solutions
SunGen / 2.3 – 1.8 – 1.6
(Fall of 0.7:1)
1.2 – 1.1
(Fall of 0.1:1) / Slightly low
Very low / Reason:
· Too many current liabilities
· Too few current assets
Improve:
· Take out loans on longer terms
· Reduce amount of creditors
· Reduce the time you pay creditors
· Reduce overdraft
· Keep more cash
· Maybe sell off or sale and leaseback fixed assets
· Hiring instead of owning
· Debt factoring
· Hire purchase
· Take more long term credit as opposed to short term
· Reduce debtors
· Reduce time debtors pay you
· Maybe offer money off for quick payment or payment in cash
· Hold less stock (JIT) (not probable)
· Sell stock quicker – more advertising and promotion
· Keep more retained profit – pay fewer dividends
Acid Test Ratio (quick ratio)
CA – Stock ÷ CL
How many current assets without stock do you hold in comparison to current liabilities
Ideal 0.8:1 – 1.3:1 / Electrical Solutions
SunGen / 1.2 – 0.9 -0.7
(Fall of 0.5 :1)
0.8 - 0.6
(Fall of 0.2:1) / Too low
Slightly low / Reasons:
· Electrical solutions are holding too much stock
· SunGen may not be holding enough stock
· Too many creditors
· Too many short term loans
· Too little cash
Improve:
· Take out loans on longer terms
· Reduce amount of creditors
· Reduce the time you pay creditors
· Reduce overdraft
· Keep more cash
· Maybe sell off or sale and leaseback fixed assets
· Hiring instead of owning
· Debt factoring
· Hire purchase
· Take more long term credit as opposed to short term
· Reduce debtors
· Reduce time debtors pay you
· Maybe offer money off for quick payment or payment in cash
· Keep more retained profit – pay fewer dividends
Stock turnover
Sales ÷ Stock x 365
How many days does it take you to sell the value of your stock
Lower the better / Electrical Solutions
SunGen / 91 – 102 – 105
(Fall of 14 days)
33 – 28
(Fall of 5 days) / Better
Better / Reason:
· They are holding less stock
· They are selling quicker
Improve:
· Additional promotions
· Using JIT system
· Increase market therefore selling more quicker
Debtor Days
Debtors ÷ Revenue x 365
How many days does it take on average for you debtors to pay you.
Lower the better / Electrical Solutions
SunGen / 15 – 14 – 14
(Fall of 1 day)
46 – 49
(Rise of 3 days) / Better
Worse / Reason:
· Reduce the time debtors pay
Improve:
· Set high interest rate – encouraging firms to pay immediately or quickly
· Set a low interest rate allowing firms to be able to pay quicker
· Offer promotions or money off for fast or cash payment
· Offer sanctions / fines for late payments of debts
Creditor Days
Creditors ÷ Purchases x 365
Amount of time on average it takes you to pay your debts / Electrical Solutions
SunGen / 34 – 35 – 38
(Rise of 4 days)
41 – 39
(Fall of 2 days) / Better
Better / Reason:
· You are taking longer to pay your creditors – this is good as interest accrues in your bank but can be bad for reputation and cash flow
Increase;
· Try and pay at the latest possible point (ducking and diving)
Decrease:
· Pay earlier – improving cash flow and reputation
· Hold more cash and have the funds to pay quickly
· Keep more retained profit – pay fewer dividends
Sungen notes