?
This case study is intended as a self-test exercise on all of ratio analysis. The answers are given
as popup boxes to each question. However, do try to work through them all first before
submitting to temptation. The more you practise calculating ratios, the easier it gets - we
promise!
Paul Marriot is the director of Stortftrd Yachts Ltd. The company has tradedfor 30 years and
has in the past achievedvery good levels of growth andreturn on capital, but this is now
changing. In recent time it has failed to introduce new product lines, relying on traditional
products and little has been invested in Research or Product Development.
You are a business planning consultantfor afirm of Management Consultants. StortfordYachts
is one ofyour clients" In recent times the business has experienced increased turnover but a
downturn in overall performance.
Paul Marriot has had a meeting with your Director and he has stated that he wants to introduce
tighter rnanagement control within the company by introducing a system of responsibility
accounting.
You receive the following memo from your Director, Pauline Changer, regarding this case.
Memorandum
To: Business Planning Assistant
Date: 21st May 2011
X'rom: Pauline Changer, Director
Subject: Stortford Yachts Ltd. - accounts information
You are aware that I met with Paul Marriot yesterday and that he is concemed with the latest
results shown in the final accounts that have recently been prepared at year end.
The file attached contains a sunmary of the company's abbreviated profit statements and balance
sheets for the past three years; together with additional information and perfornance indicators
for their business sector as a whole for the period under review.
I would like you to examine this information and meet with me on Friday morning to discuss the
form and presentation of a detailed financial analysis of the company over the three-year period.
Signed: P. Changer
X'inancial information on Stortford Yachts Ltd.
1. Suqmary profit statements
$m $m $m
2009 2010 20tt
Sales turnover 4.90 s.30 6.60
. Operating costs 4.17 4.43 5.82
Operating profit before 0.73 0.87 0.78
tax
Taxation 0.24 0.30 0.27
Profrt after tax 0.49 0.57 0.51
Dividends 0.12 0.16 0.r6
[Link] profit 0.37 0.41 0.35
N.B" The firm's detailed breakdown of costs is as follows:
Years 2009 20fi 20L1
Labour costs 0.93 0.98 1.25
Distribution costs 0.44 0.49 0.61
Administration costs 0.19 0.22 0.27
2. Summary balance sheets
$m $m $m
2009 2010 20tt
Fixed assets 2.40 2.77 2.88
Current assets
Stocks:
Raw materials 0.09 0.12 0.1s
Finished goods 0.40 0.43 0.45
Debtors t.t4 1.32 1.84
Bank 0.03 0.04 0.0s
t.66 1.91 2.49
Less Current liabilities 1.35 1.56 1.90
Net current assets 0.31 0.35 0.s9
2.71 3.12 3.47
Capital and reserves 0.5 0.91 1.26
Bank loans 2.21 2.21 2.21
2.7t 3.t2 3.47
3" Yacht Builders Federation
Average ratios for federation members 2011
7oReturn on capital employed 26.0%
Asset turnover 1.79 times
Net profit margin t4.s%
Current ratio 1.5:1
Acid test ratio 1.03:l
Debtors collection period 83 days
Gearing ratio 32.0%
Labour cost %o of sales 18.t%
Operating cost 9/o of sales 85j%
Distribution costs 7o of sales 9.s%
Admin costs 7o of sales 4.5%
Questions
In your role of planning assistant you are to prepare an analysis of the company's figures over the
three-year period using the performance criteria listed in the inter-frm comparison table.
1. Calculate all the ratios given in the average ratios for federation members for 2009, 2010 and
201t.
[Link] a detailed report on the company's performance in terms of profitability and liquidity
compared with the average of the sector over the period.
Answers
1. Calculate all the ratios given in the average ratios for federation members for 2009, 2010 and
2011.
; ''
[Link] - question 1
Follow the links below for the answers to each of the ratio calculations:
(i) Return on capital ernployed
(ii) Asset tumover ratio
(iii) Net profit margin
(iv) Cunent ratio
(v) Acid test ratio
(vi) Debtors collection period
(vii) Gearing ratio
(viii) Labour cost as % of sales
(ix) Operating costs as o/o of sales
(x) Distribution costs as % of sales
(xi) Administrative, costs as o/o of sales
Total: 30 marks
[Link] detailed report on the company's performance in terrns of [Link] and liquidity
. compared with the average of the sector over the period.
Summary of ratios
.
Ratio 2009 2010 20ll Industry See
Average Notes
7o Return d,n capital 26.9 27.9 22.5 26% I
employed
Asset turnover (times) 1.81 1.70 1.90 1.79 2
tirnes
Net profit margin (7o) 14.9 16.4 11.8 14.5% 3
Current ratio 1.23:1 1.22:1 1.3:1 1'5:l 4
Acid test ratio 0.87:1 0.87:1 0.99:1 1.03:1 5
Debtors collection period 85 91 lO2 83 days 6
(days)
Gearing ratio (oh) 81.5% 70.8% 63.7% 32% 7
Labour costs as 7o of sales 18.9 18.5 18.9 1,8.1% 8
Operating costs as 7o of sales 8s.1 83.6 88.2 85.5% 9
Distribution costs as 7o of 8.98 9.24 9.24 9.5% 10
sales
.[Link] costs as %o of 3.87 4"15 4.09 45% l1
sales
Refurn on capital employed
% Return on iapital employed is calculated as:
Net profit before tax and dividend I Capital employed x 100
Years 2009 2010 201t
Net profit before tax and 0.73 0.87 0.78
dividend
Capital employed 2.71 3.12 3.47
ROCE 26.9% 27.9% 22.5%
(3 marks)
Asset turnover ratio
Asset turnover is calculated as:
Turnover / Capital employed (total assets)
Years t 2009 2010 20tt
Turnover 4.90 5.30 6.60
Capital employed 2.71 3.12 3.47
Asset turnover 1.81 l.t0 1.90
times times times
(3 marks)
Net profit margin
Net profit before tax and dividend / turnover x 100
Current assets - stock 1.r7 1.36 1.89
Current liabilities 1.35 1.56 1.90
0.87:1 0.87:1 0.99:1
Debtors collection period
Debtors collection period is calculated as:
Debtors / turnover (sales) x 365
(3 marks)
Gearing ratio
Gearing ratio is calculated as:
Loan capital / total capital employed x 100 I
Years 2009 2010 20t1
Loan capital 2.21x x
2.21, 2.21x
100 100 100
Total capital employed 2.71 3.r2 3.47
Gearing ratio gr"s% 70.8% 63.7%
Labour cost Els o/o of saEes
2009 2010 2011
Labour costs 0.93 0.98 t.2s
xl00 x100 x100
Turnover 4.90 5.30 6.60
Labour cost as o/o of t8.9% t8.5% 18.9%
sales
Operatimg costs as o/o of sales
85.1% i83.6%:88.2yo
EEstributiosr costs as o/o of sales
(3 marks)
Adsmiaristrative costs GS o/o of sales
(3 marks)
Answers - question 2
1. Return on capital employed
Though it stayed just above the industry average for the first two years, there has been a
significant decline in 2011 to a level below that of the industrial sector average for that year. The
fall is quite significant and needs some careful investigation. Has the firm lost out in terms of
competitiveness? Has their turnover grown slower than their competitors? There is some
evidence that the problem may be cost conhol with their operating costs as aYo of sales
increasing significantly in 2011. Something to investigate frrther!
2. Asset turnover
The company is generating more turnover in relation to their assets than its competitors. The
f,rgure did fall below the industry average in 2010, but they appear to have corrected this. The
implication of this is that they are working their existing assets harder to generate more sales.
Profitability of these sales has not improved but that is a different issue.
3. Net profit margin
The reduction in overall performance is highlighted here in the reduction of the net profit margin.
This is a woffy and the firm needs to look careflrlly at their cost control and see why their net
profit has fallen so sharply.
4 & 5. Current ratio & Acid test ratio
The current and acid test ratios are measures of the liquidity position of the firm and are always
best looked at together. The cru:rent ratio includes ALL current assets, but the acid test ratio
looks at current assets without stock as this is considered to be hard to sell quickly. A firm may
therefore have a healthy current ratio as they have plentiful current assets, but a poor acid test
ratio as a high proportion of their current assets are held as stock. The figures for this firm
indicate a fairly sound level of liquidity, though are marginally below the desired level and a
little below the industry average. However, liquidity is strengthened in 2011 and this could
indicate improved stock control or improved credit control. However, the laffer is unlikely as the
debtor collection period has increased significantly.
6. Debtors collection period
Tlie figure for the debtor collection period ii higher than the industry average and rising
significantly. Credit controls need to be tightened. The key options here are to put more rigid
controls in place to collect debts and/or to pay bills a little later (though this can cause problems
in relationships with suppliers). If the frm does not sort out these problems then they could start
to face working capital shortages.
7. Gearing ratio
The gearing ratio for the firm is well above the industry average, though it has been falling year
by year as the loan capital has stayed the same and capital employed has grown with higher
retained profit being added to the capital each year. The gearing ratio for the industry is fairly
low, but the higher gearing ratio for Stortford Yachts may expose them to extemal influences.
Any change in interest rates will lead to higher interest payments and may reduce their
profrtability
8. Ladour costs as a 7o of sales
Labour costs as apercentage of sales have been held fairly steady over the period indicating
reasonable control over labour costs. However, the figure is slightly above the industry norm for
period.
9. Operating costs x a oh of sales
There hps been a significant increase in the relationship of operating costs to sales, which
indicates that operating overheads and some other direct costs require tighter controls. This needs
careful looking at by the firm as it is likely to be the principal cause of the poor profit
performance indicated by the fall in the ROCE and net profit margin.
l0 &11. Distribution and administrative costs as ao/o of sales
These figures appear to compare favourably with the industry as a whole. This indicates
reasonable control over these costs, so the firm needs to look elsewhere for their ovqrhead cost
control problems (as mentioned above).
(20 marks)
