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Ratio Analysis No. 1 CMD
 

Ratio Analysis No. 1 CMD

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    Ratio Analysis No. 1 CMD Ratio Analysis No. 1 CMD Presentation Transcript

    • Ratio Analysis No. 1 Higher/Int 2 Business Management 2009-2010
    • Today’s Ratios
      • Today we will look at the following ratios in more detail:
      • Profitability
        • Gross Profit Margin
        • Profit Mark-up
        • Net Profit Margin
      • Efficiency
        • Stock Turnover
    • Gross Profit Margin
      • A reminder of the ratio:
      • GP % = Gross Profit
      • Sales Revenue
      x 100 1
    • Gross Profit Margin
      • The purpose - to measure the percentage of profit earned on the trading activities of the organisation.
      • The Gross Profit Margin measures how many pence Gross Profit is earned from every £1 of sales .
    • Gross Profit Margin
      • What is a good figure ?
      • It is not possible to comment on what a good figure is without either:
        • Comparing trends over different time periods.
        • Making comparisons with other similar organisations .
    • Gross Profit Margin
      • If the Gross Profit Margin ratio is high , the organisation may have a prudent buying policy .
      • Changes in the ratio can be caused by an increase or decrease in the selling price or an increase or decrease in the cost of goods sold .
    • Gross Profit Margin
      • The Gross Profit Margin should be calculated at regular intervals , with any rise or fall investigated .
      • If the ratio falls it may simply mean that the price of raw materials has gone up .
      • However it might also mean that stocks have been stolen or damaged .
    • Gross Profit Margin
      • How can an organisation improve the Gross Profit Margin ?
      • They could:
        • Raise the selling price .
        • Look for a cheaper supplier .
        • Choose to sell something else .
        • Negotiate better discounts from their suppliers.
    • Profit Mark-up
      • A reminder of the ratio:
      • Profit Mark-up % = Gross Profit
      • Cost of Goods Sold
      x 100 1
    • Profit Mark-up
      • The Profit Mark-up ratio measures the percentage added to the cost of goods sold in order to arrive at the selling price .
      • No comments can be made on the results without comparing trends or comparisons with competitors .
    • Profit Mark-up
      • Where the percentage is high , it may indicate a prudent buying policy .
      • Changes in the ratio can be caused by an increase or decrease in the cost of goods sold (usually outwith the company’s control ).
    • Profit Mark-up
      • How can an organisation improve the Profit Mark-up ?
      • They could:
        • Raise the selling price .
        • Look for a cheaper supplier .
        • Negotiate better discounts from their suppliers.
    • Net Profit Margin
      • A reminder of the ratio:
      • NP % = Net Profit
      • Sales Revenue
      x 100 1
    • Net Profit Margin
      • The purpose - to measure the percentage of overall profit earned by the organisation after all expenses have been taken into account.
      • The Net Profit Margin measures how many pence Net Profit is earned from every £1 of sales .
    • Net Profit Margin
      • What is a good figure ?
      • Once again, it is not possible to comment on what a good figure is without either:
        • Comparing trends over different time periods.
        • Making comparisons with other similar organisations .
    • Net Profit Margin
      • The Net Profit Margin is used to highlight efficiency and control of costs .
      • One question which could be asked is:
        • Is the organisation making itself bankrupt by paying far too much in wages?
    • Net Profit Margin
      • How can an organisation improve the Net Profit Margin ?
      • By improving the Gross Profit Margin.
      • By reducing expenses for example:
        • Switching off heaters and lights when not in use.
        • Reducing personal telephone calls by staff.
    • Stock Turnover Ratio
      • A reminder of the ratio:
      • Stock Turnover = Cost of Sales
      • Average Stock
      • Average Stock is calculated by adding the opening and closing stocks together and dividing by 2
    • Stock Turnover Ratio
      • Stock turnover is the average period of time that an item of stock is held before it is used or sold .
      • This ratio usually depends on the type of organisation , for example:
        • a fast food outlet would turn over its stock many more times a year than a furniture business .
    • Stock Turnover Ratio
      • If the rate of stock turnover is improving , its likely that the firm is holding lower average stocks and therefore operating more efficiently .
    • Stock Turnover Ratio
      • How can an organisation improve the Stock Turnover Ratio ?
      • They could:
        • Introduce special offers or promotions .
        • Introduce JIT stock management .
    • Task
      • Using the example of Edward’s Electrical Supplies Ltd , answer the questions based on the ratios covered today.
      • Remember that for your NAB and final exam , it is important that you are able to describe ratios , give reasons for the results and be able to offer suggestions on how the ratios can be improved .