Solution 17.7

Choose 12 ratios from the following

		2013		2012
PROFITABILITY
Gross profit margin	Gross profit x 100	£7,461	73.8%	£8,186	74.7%
	Sales	£10,100		£10,952

Operating margin	Operating profit (PBIT) x 100	£3,184	31.5%	£3,315	30.27%
	sales	£10,100		£10,952

Expenses to sales	Expenses x 100	£4,277	42.3%	£4,871	44.4%
	sales	£10,100		£10,952

ROCE	Net profit (PBIT) x 100	£3,184	22.67%	£3,315	24.7%
	Capital Employed	£14,047		£13,414

ROOE	NP after I & T	£2,316	29.9%	£2,307	35.97%
	Total equity	£7,747		£6,414

LIQUIDITY
Current ratio	Current Assets	£491	0.465 : 1	£517	0.487 : 1
	Current Liabilities	£1,055		£1,060

Quick-acid test ratio	Current Assets - Stock	£196	0.185 : 1	£217	0.204 : 1
	Current Liabilities	£1,055		£1,060

EFFICIENCY/USE OF ASSETS
N.C. asset turnover	Sales	£10,100	0.7 : 1	£10,952	0.805 : 1
	Non current assets	£14,408		£13,600

Capital employed turnover	Sales	£10,100	0.719 : 1	£10,952	0.816 : 1
	Capital employed	£14,047		£13,414

Inventory Turnover	Cost of Sales	£2,639	8.95 times	£2,766	9.22 times
	Average stock	295		300

Inventory days	Average stock x 365	295	40.8 days	300	39.6 days
	Cost of sales	£2,639		£2,766

Debtors days	Accounts receivable x 365	£160	5.78 days	£175	5.83 days
	Credit sales	£10,100		£10,952

Creditors days	Accounts payable x 365	£300	41.5 days	£351	46 days
	Credit purchases	£2,639		£2,766

CAPITAL STRUCTURE
Gearing	Fixed interest debt	£6,300	0.81 : 1	£7,000	1.09 : 1
	Shareholders funds	£7,747		£6,414

Interest cover	Net profit (PBIT)	£3,184	6.37 : 1	£3,315	6.0 : 1
	Interest	£500		£552

INVESTMENT
Earnings per share	PP after I & T & pref dividend	£2,316	0.386	£2,307	0.384
	Number of shares	6,000	(38.6 cent)	6000	(38.4 cent)

Price earnings ratio (P/E)	Market price of share	170 cent	4.04 times	200 cent	5.2 times
	EPS	38.6 cent		38.4 cent

Dividend cover	Profit available to pay dividend	£2,316	5.8 times	£2,307	4.16 times
	Dividends paid and proposed	£400		£554

Dividend yield	Dividend per share x 100	6.66	3.9%	9.2	4.6%
	Market price per share	170		200

The Report to Directors should include the following points.

Profitability and managements efficiency

Turnover and operating profit has decreased by 7.8% and 4% respectively between 2012 and 2013.
ROCE has fallen from 24.7% to 22.6%. The returns are excellent but the fall would be of concern
The ROOE has also fallen but at 29% is still an excellent return for equity shareholders
When one breaks down the ROCE into its component parts there is a slight increase in the operating profit margin (30.2% - 31.5%) and a fall in the capital employed turnover (0.82 – 0.72)
The operating profit percentage has increased despite a fall in the gross profit percentage of 1%. The reason for the increase has been the fall in the expenses to sales % which fell 2%. This fall in gross profit percentage could be due to
- A decrease in the expenses to sales percentage (44.4% to 42.3%) This is mainly due to a reduction of 19% in the sales and distribution expenses. Administration expenses also fell by 4%.A greater break down of expenses is required to identify where the saving were made.
- The capital employed turnover ratio has decreased from 0.82 to 0.72 per € invested in the business. This reflects the fall in sales turnover. The company is now only generating 72 cent in sales per € invested in the business. This reflects a falling demand caused by possibly greater competition or a reluctance to travel for a wide range of reasons.

As this company has a low investment in current assets the inventory and accoutns receivable/debtors turnover ratios are not significant and there are no significant changes in these indicators.

Liquidity

The cash flow of the company has deteriorated going from a negative cash position of €260,000 in 2012 to an negative position of €370,000 in 2013. This is a negative cash flow of €110,000.

The current and quick ratios have not changes significantly and are in line with norms for the hospitality and tourism sectors.

Capital structure

The company was considered neutral geared with a debt to equity ratio of 109% in 2012. However this has come down to 81% in 2013.

The interest cover ratios are quite high at over 6 times in both years. Most financial institutions require a interest cover rate of 3 times thus the company has no issues in servicing its current debt levels

Investor

The EPS of the company has remained steady of the period although share price has fallen 15% from €2.00 to €1.70. The P/E ratio is quite low at 5.2 times in 2012 and based on the current share price of €1.70 has fallen to 4 times. The P/E reflects the low level of confidence the market has in the company’s ability to maintain current returns. It also could reflect the markets concern for the sector as a whole. As the travel tourism and hospitality sectors are very sensitive to external factors such as terrorism, oil prices etc. it would be important to assess if other companies within the sector are experiencing abnormally low P/E’s.

Dividend cover is has increased from steady at 4 times to 5.6 times telling us the company is paying out less dividend per share and hence the yield has fallen. The market may judge this however to be a prudent move with more profits retained in the business during times of uncertainty

Conclusion

Overall the key indicators for this company suggest it has been a good year with excellent returns of capital recorded although they are significantly reduced from 2012 levels. The liquidity situation is stable and gearing has improved with the debt to equity ratio recorded at a reasonable level of 80% in 2013. The company’s share price is down 15% and the company stands on a low P/E rating reflecting the lack of confidence the market has at present in the company. It is important to set this performance in context as it could explain the reasons for this poor performance. The questions that are crucial to ask are ‘is this a blip or a trend’ and ‘does it relate to the sector as a whole of just the company’.