Liquidity Ratios free essay sample

The difference between the two years is 0. 3p decrease. As Sainsbury’s needs to have a ? 2 to ? 1 earned, the price is behind in both years. This means that there is a 2 year crises at Sainsbury’s. Acid test ratio 2013 Current assets = 1901 Inventories = 987 Current liabilities = 3115 ATR = (CA – I) / CL = 0. 29 2012 Current assets =2032 Inventories = 938 Current liabilities =3136 ATR = (CA – I) / CL = 0. 34 The difference between the 2 years is that Sainsbury’s has a better ratio in 2012 with Sainsbury’s earning ? 0. 34p to every ? 1 that Sainsbury’s owe whereas in 2013, where they earn   0. 29p to every ? 1 earned. This should be ? 1. 50 to every ? 1 of debt. So in both years Sainsbury’s is falling behind in its ability to cope. This again shows the two year crises. Gross Profit Margin †¢This ratio shows how much gross profit the business makes for every ? 1 of sales †¢i. e. the relationship between sales and the l evel of profit before overheads are considered †¢The higher the percentage the better †¢A ‘good’ GPM figure will vary between industries †¢Improve ratio by increasing sales or reducing cost of sales Gross Profit Margin = (Gross profit / Sales) x 100 2013 = 5. We will write a custom essay sample on Liquidity Ratios or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 48% 2012 =5. 43% The higher the percentage resulting from the calculation is a better result. Sainsbury’s has had a 0. 05% in its gross profit margin, this can be improved through the increase in sales of stock or reduce cost of sales. Net Profit Margin †¢Shows how much net profit the business makes for every ? 1 of sales †¢Tells the business how efficiently it is controlling its expenses †¢The higher the percentage the better †¢Should be compared with GPM to identify where the problem lies †¢Improve the NPM by increasing sales or cutting expenses NPM = Net Profit / Sales x 100 (%)  2013 887 ? 5,734 x 100= 15. 47% 2012 874 ? 5,629 x 100= 15. 52% Between 2012 and 2013 Sainsbury’s Return on Capital Employed has fallen by 0. 05% which is bad for business as the fall will lead to two decisions either to increase sales or decrease the capital employed. Return on capital employed Return on Capital Employed = Op. Profit / Capital employed x 100 (%) à ¢â‚¬ ¢Shows the percentage return the owner of the business is receiving on his capital investment †¢Measures the efficiency of the firm in generating profits from the funds invested †¢The higher the percentage the better †¢The Return On Capital Employed figure is compared with alternative investments the owner could make with his funds. †¢If a better return can be made the owner should divest and invest elsewhere Rate of stock turnover RoST = Cost of Sales / Ave Stock Ave Stock = (Opening Stock + Closing Stock) / 2 2013 22,026 ? 987 = 22. 3 times a year. 2012 21,083 ? 938 = 22. 5 times a year. Sainsbury’s had run out of stock more in 2012 that they did 2013 with a decrease in stock sales. This can be improved by reducing the amount of stock held by the company. Debtors’ collection period DCP = (Debtors / Sales) x 365 (days in one year) It shows how long the business takes to collect money due from customers; the shorter the period the better, the figures must be compared with the allowed credit period of the business (usually 30 days). This can be improved by reducing the credit period or by improving the efficiency of collection procedures Debtors ? Sales x 365 (days) 2013: ? 23,303 x 365 Asset turnover Asset Turnover = Sales / Assets employed 2013 23,303 / 5,734 = 4. 06 2012 22,294 / 5,629 = 3. 96 Asset turnover measures how many pounds in sales the business can generate by using its assets. The higher the figures the better as this means the assets are ‘working harder’ or are better for the company. One can improve figure by increasing sales from the existing assets or by selling off under-used assets. Creditors Days Trade Creditors ? cost of sales x 365 days 2013 2,726 ? 22,026 x 365 = 45. 17 2012 2,740 ? 21,083 x 365 = 47. 43 The higher the better, normally businesses give 30 days to pay back the suppliers any longer they don’t like it. So in 2012 they took less time to pay back the suppliers than in 2013. . Gearing Gearing = (Long Term loans / capital employed) x 100 2012 3575 / 5629 x 100 = 63. 5% 2013 3846 / 5734 x 100 = 67% The lower the percentage the better, anything above 50% is considered bad. This means that business has borrowed a lot of money so they have more debt. To improve in 2014 they need to pay back loans or not borrow so much so their business isn’t financed mostly on debt. Shareholder’s ratio Shareholder equity ratio = total shareholder equity / total assets The higher the shares the better, this means that if the share price is higher, more investors will invest in the company.