Essay
Unit 5 - D2
- Module
- Unit 5 - Business Accounting
- Institution
- PEARSON (PEARSON)
evaluate the financial performance and position of a business using ratio analysis
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SIGNature in the previous year had different values than those in the table. Various factorscould affect the results of ratio analysis.
Gross Profit Margin refers to the amount of money is left for every £1 spent after the cost
of goods have been deducted. This year SIGNature’s Gross Profit Margin was 57.7%, this
is because, they would have low material cost and adding value to it, by machines and
trained staff. The previous year their Gross Profit Margin was 32%. This could be that their
sale price was lower and their materials could have been more expensive. For them to
have increased their Gross Profit Margin, they must have increased sale price and found a
different supplier to have cheaper materials.
Net Profit Margin is the amount of money is left for every £1 spent after all the expenses
have been deducted. This year's SIGNature’s Net Profit Margin was 19.40%, with all ex-
penses deducted, including machinery and trained staff, their Net Profit Margin would be
lower, however, SIGNature having a Net Profit Margin of around 20% is still high consider-
ing their expenses. In the previous year, their Net Profit Margin was 11%. Factors that
could have affected the increase of percentage, as they moved to a smaller space, as they
didn’t need as much storage space, they could have also spent a lot of money on advertis-
ing last year, resulting in a smaller margin and this year receiving the benefits of the ads
having more customers.
Current Ratio is the amount of current assets in relation to current liabilities. This year's
Current Ratio is 4.64:1, which is very high which means they own £4.64 Current Assets for
every £1 spent, which allows SIGNature sufficient liquidity to meet current liabilities. Last
year their Current Ratio was 1.5:1 which still allowed them to meet current liabilities how-
ever if their current liabilities suddenly increased, they could be forced to take out an over-
draft. SIGNature to have increased its Current Ratio must have paid off their previous loan
or overdrafts to reduce expense costs, as the figure is very high it indicates they are not
utilising their working capital effectively such as having £18,960 in the bank, they could be
using this money for investment purposes or for paying non current liabilities.
Acid Test Ratio is the amount of current assets in relation to current liabilities excluding
stock. This years Acid Test Ratio is 3.87:1. Which means for every £1 SIGNature owns
£3.87 in liquid assets. They have sufficient liquidity to meet current liabilities if a supplier
required immediate payment. Having more than enough liquidity allowed them to not worry
about taking out a loan or overdraft. In the previous year, their Acid Test Ratio was 0.9:1,
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