Question

The accountant of Maypole plc has just completed the financial reports for the year ended 31^st December 2017. The Financial Director has asked for a report to be prepared to enable the Board of Directors to get a clear picture of the performance and financial position of the company. The company produces only one product and it is sold worldwide.

(a)          Discuss the performance over the period from 2015 to 2017 and the financial position at the end of each year. In your answer, focus on the possible causes of the differences over the three year period.

(b)          Suggest ways by which the Return on Capital Employed (ROCE) could be improved.

	2015	2016	2017
Sales – units	800	900	1000
	£0	£0	£0
Sales revenue	84	86.4	98
Cost of sales	21	28	32
Gross profit	63	58.4	66
Administration expenses	16	18.9	22
Advertising and promotion expenses	20.6	27.8	30
	36.6	46.7	52
Profit before interest and tax	26.4	11.7	14
Interest expense	1	5	9
Profit / (Loss) before tax	25.4	6.7	5
Tax payable	6.4	1.7	1.2
Profit for the year	19	5	3.8
Ratios (using the ratios in the course notes)
Gross profit percentage	75.00%	67.60%	67.30%
Net profit percentage	31.40%	13.50%	14.30%
Return on Capital Employed	19.30%	6.60%	6.80%
Return on Shareholders Funds	15.00%	3.80%	2.80%
Inventory – days	139	156	194
Receivables – days	52	68	82
Gearing	7.30%	24.40%	34.50%
Times Interest Earned	26.4	2.3	1.5

Answer 1

Ratios can be generally be broken down into several key areas: profitability,liquidity,gearing,and investment.let's analyse mayapole plc using different key areas.

profitability

Gross profit margin-

gross profit margin looks at the performance of the business at the direct trading level.typically variation in the ratio are basically result of selling price/selling volume or change in cost of sales.by examining the operating profit margin of mayapole plc we can say that we have a slight decrease in gross profit margin.which is not a drastic change.

Net profit margin-

net profit margin is calculated by deducting all the indirect cost,analyse the net profit margin enables to determine how well the business has managed to control its indirect cost during the period.in the above results we can say that we have an increase in profit margin in 2018.which is favorable to the organisation performance.it can be due to the increase in sales.

Return on capital employed

the ratio is generally considered to be the primary profitability ratios as it shows how well a business generated profit its financing.we have a decrease of 64% in Roce from 2015.a decrease in Roce represent a weak performance.

liquidity ratios

inventory days-

generally the longer inventory is held the greater the risk that it could be subject to theft,damage or obsolescence.and mayapole plc have a increase in inventory days ,which means the company have trouble to sell it's product.

receivable days

it is preferable to have a short credit period for receivable as this will aid business cash flow.but mayapole plc is having a increase in receivable days ,which means it is having trouble get back the money.it will effect the performance of the organisation in the long-run

financing ratio

gearing

the gearing ratio is of particular importance to a business as it indicates how risky a business is perceived to be based on its level of borrowing.as borrowing increases the risk also increases. mayapole plc is having a increases gearing ratio ,which indicate company is having trouble to operate with the financing and have been taking more finance.

times interest earned

we have drastic decrease in interest earned ,which means the company might go bankrupt.

conclusion

we can say that mayapole plc is having trouble in many areas ,mainly liquidity and financing,roce. which indicates the performance is weak.management should consider the numbers with more analysis.