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W 1P: How Are The Ratios Looking?

This worksheet looks at a ratio analysis of the accounts of Cameron Balloons. For more information about the work of the accounts department at Cameron Balloons you may want to look at the accounts explanation section.

Step 1 - Accounting for the accounts

Below is a simplified version of the annual accounts for Cameron Balloons. As a limited company they are required by law to submit an audited version of their accounts to Companies House in Cardiff. This is an approximate simplified version of the accounts.

Balance Sheet
            £
   
Fixed assets 387,000
   
Current assets  
 Stock1,559,000
 Debtors434,000
 Cash119,000
   
Liabilities 2,497,000
   
   
Share capital 100
Profit and loss account 1,900
 
Profit And Loss Account
           £
  
Turnover7,644,000
  
less Cost of goods sold6,355,000
  
Gross Profit1,289,000
  
less Overheads972,000
  
Net Profit317,000

Step 2 - Rationalising the ratios!

Now let's try calculating the ratios from these accounts. Starting with the profitability ratios:

(N.B. If you need a reminder of how to calculate the ratios, you may want to look at the accounting theories section .)

Profitability ratios

Using the table below calculate the return on capital employed and the profit margin:

RETURN ON CAPITAL EMPLOYEDPROFIT MARGIN
Variable£'000Variable£'000
    
Net profit Net profit 
Total capital employed (Total assets) Turnover 
 % %
Return on capital employed = Net profit / capital employed * 100 Profit margin = Net profit / Turnover * 100 

What do these figures show us?

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Are they good figures?

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Liquidity ratios

Now try to do the same thing for the main liquidity ratios:

CURRENT RATIOACID TEST RATIO
Variable£'000Variable£'000
    
Current assets Current assets 
Current liabilities Current liabilities 
  Stock 
    
Current ratio = current assets / current liabilities Acid test ratio = current assets - stock / current liabilities 

What do these figures show us?

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Are they good figures?

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What does the comparison of the current ratio and the acid test ratio tell us about the company's situation? What can you say about the level of stock at Cameron Balloons?

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Step 3 - Any more ratios?

There is also another category of ratios known as activity ratios. These show how effectively the resources are being used by the business, and can be a useful measure. Calculate the figures in the table below from the information given at the start of the worksheet.

STOCK TURNOVERDEBT COLLECTION PERIOD
Variable£'000Variable£'000
    
Cost of goods sold Debtors 
Stocks Turnover 
 Times Days
Stock turnover = Cost of goods sold / Stock Debt collection period = Debtors / Turnover 

What do these figures show us?

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Are they good figures?

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