Ratio Analysis and Interpretation of Accounts

Performance evaluation for the month of July 2013

Gross Prfit Margin=

Gross Profit
100
Net Sales

2218000
100
2801500

79.2

79.2% of Net Sales were Gross Profits.

Net Profit Margin=

Net Profit
Net Sales

1826000
100
2801500

65.2

65.2% of Net Sales were Net Profits.

NET PROFIT MARGIN

Net Profit

35%

Net Sales
65%

Fig 1: PIE CHART SHOWING WHAT PERCENTAGE OF SALES WAS NET PROFIT.

For every $100 of sales a gross profit of $79.2 was made but
when additional expenses and revenues are factored in $65.2
were made per $100 sales

Return on Capital Invested=

Net Profit
100
Capital Invested

1826000
100
1020000

179

The business generated 79% more net profit than the capital
employed i.e. for every $100 invested, $179 of net profit was
made.

Liquidity evaluation as at the end of the month of July

2013
Current Ratio =

TotalCurrent Assets
Total Current Liabilites

3206000
560000

5.73:1

The current assets of the business outnumber its current liabilities

5.7 times.

Acid Test Ratio=

Total Current AssetsStockPrepaid Expense

Current Liabilities

3206000496500
560000
4.8 : 1

The current assets (not including stock) of the business

outnumber its current liabilities 4.84 times.

COLUMN CHART SHOWING THE CURRENT ASSETS V.S. CURRENT LIABILITIES

3,206,000.00

560,000.00

Fig 2: COLUMN CHART SHOWING A COMPARISON BETWEEN THE

MONETARY VALUE OF THE ASSETS AND THAT OF THE LIABILITIES.
The current assets are generally 5.73 times more than the current
liability but the current assets which are the easiest to convert to
cash (i.e. not factoring in stock) are 4.84 times more than the
current liabilities.

Overall Performance
It is seen by the gross profit margin of 79.2% that the business
sold their goods at a price much higher than the cost incurred to
acquire the goods. The slightly lower net profit margin of 65.2%
shows that it did well to manage additional expenses, but they
still had a sufficient impact on profits as additional revenues for
the business were low by comparison.
For the month of July it is seen that the business made a total net
profit of $1,826,000.00. Compared to the opening capital of
$1,020,000.00 this business is shown to be extremely profitable
having a return of 179% on the capital invested, this business has
made exceptional use of its capital.
For the period assessed the business shows great liquidity as it is
able to pay all its current liabilities 5.73 times using current assets
and if the business needed to pay all its current liabilities quickly
it could do so 4.84 times without selling off stock. The difference
in the current ratio and acid test ratio indicated that a large sum
of money is tied up in unsold stock. The large ratios highlight an
inefficient use of current assets by the business.
The business also was shown to have low fixed assets in relation
to current assets, further highlighting inefficient use of current
assets.

Comparisons

Stock
Capital
Total Cash

Opening Balance
$
400,000.00
1,020,000.00
380,000.00

Closing Balance
$
495,000.00
2,846,000.00
1,663,000.00

In the short period of a month the business:

1. More than doubled its net worth, this was due solely to net
profits made and shows that the business was extremely
profitable.
2. Was not able to fully sell all of its opening stock and instead
ended the month with a greater amount of stock. This is
indicative of low sales and/or high purchases.
3. Increased the total cash owned by 4.4 fold and the business
has yet to utilise this cash.

Source Documents

Purchases Invoice
A.Roland
7 Bamboo Dr
Kingston 2
Invoice no: 18276
Computer & Accessories Limited
20 brunk Endz
Kingston 5
Jamaica

Quantity
20
15
10

Description
Boxes of ipods
Boxes of USB Speakers
Boxes of Flash Drive

Per Unit $
10,000
5,000
10,000

Total $
200,000
75,000
100,000
490.000

Sales Invoice
S.Senior
10 Brunk Endz
Kingston 3
Invoice No: 89999
C.Barrett
22 Mathews Av.
Kingston 6
Jamaica

Quantity
60
30
35

Description
Ipods
Flash Drives
USB Speakers

Unit Price $
6500
1000
2000

Total $
390,000
30.000
70,000
490,000