Finance Coursework

ENG3182
Matthew Wood
URN: 6172413

Wood MJ Mr (UG - Civil & Env. Eng.)Coursework: Finance ENG3178 URN: 6172413

Contents
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Question 1

Question 2

Wood MJ Mr (UG - Civil & Env. Eng.)Coursework: Finance ENG3178 URN: 6172413

Question 1
Return on capital employed using the operating profit (ROCE)
135/409 = 33%
This ratio indicates how efficiently the company is making use of the employed
capital. Hence a higher ratio indicates more efficient use of employed capital. Too
low a value means it does not produce enough money and is hence not profitable
for shareholders. It is also of interest to directors of the company, as it allows
them to recognise whether the company could be run more efficiently to improve
profit margins. However, there is no specific value that is identified as a high
ratio, as it depends on the industry the company is situated and the current
market. Therefore it would give a better indication to compare with previous
years as well as competing companies in the same market.
Gross Profit Ratio
359/837 = 42.9%
This ratio identifies how efficient the company is at using its raw materials,
labour and fixed assets to generate profit. A higher ratio and hence a higher
profit means greater dividends for shareholders. By breaking this down into its
separate aspects, it allows directors to identify how to improve labour efficiency
and whether to keep with the same supplier of raw materials if not regarded as
efficient enough. It also means more money for reinvestment back into the
company for growth and expansion; this is of benefit to all stakeholders in the
company, specifically the directors and the shareholders.
Net Profit Ratio
135/837 = 16.1%
The ratio is a bottom line indicator of a companys profitability. Therefore, for all
stakeholders it is generally the case that the higher the ratio, the better.
However, for shareholders, this ratio can come from several income and expense
operating elements; so it is better to look comprehensively at the companys
profit margins on a systematic basis. If the profitability is too low in the company,
then stakeholders such as suppliers and creditors may encounter problems with
debt owed.
Acid test
176-43/90 = 1.47
This ratio measures the companys ability to pay its current liabilities using its
fixed assets, minus stock. The higher the ratio the more financially stable the
company is in the short term. A low ratio would indicate that the company is
struggling to maintain and grow sales; or is paying bills too quickly or collecting
receivables too slowly. This is a good indicator for shareholders in the company,
3

Wood MJ Mr (UG - Civil & Env. Eng.)Coursework: Finance ENG3178 URN: 6172413
as it suggests the company is financially stable in the short term and is likely to
be going through growth. Hence the return from shares is likely to be higher. It is
important for those employed by the company, as it would indicate job stability.
A low acid test ratio is likely to concern stakeholders such as suppliers and
creditors, as they may encounter issues with collecting debt from the company.
Fixed asset turnover
837/623 = 1.34
This ratio indicates how efficiently the company is using its fixed assets to
generate revenue. A high fixed asset turnover ratio indicates the company is
efficient at managing its fixed assets, which usually make up the largest portion
of total assets. By comparing this ratio to previous years in the company, it will
indicate whether the performance of the company is improving or deteriorating.
It is also important to compare to other companies within the same industry to
show whether it is competing well against other companies. It is therefore
important to directors, as it suggests growth or decline in the company. It is
therefore also very important to potential and current shareholders as it
implicates the likelihood for increased dividend.
Stock turnover
478/43 = 11.1
This ratio should be compared against industry averages, as stock moves at
different rates in different industries. It shows how often the companys stock is
sold and replaced over a period. A low ratio implies poor sales and excess stock.
If this ratio is compared to be low and it therefore has excess inventory, then it
indicates to all stake holders that the company is open to trouble shifting stock
and retaining profitability should prices begin to fall. It may give false values for
indicator ratios that contain stock as a fixed asset, as it may not be easy to shift
and hence result in a lower value for total assets. This ratio is of interest to the
directors as it allows them to compare to other companies in the competing
market. This value indicates the company may be a distributor of industrial
goods, as its turnover is roughly 10-20 times a year.
Debtor collection period
96/837 x 365 = 41.9 days
This value is of particular interest to shareholders; as a too high a value indicates
cash flow problems, which can reduce dividends which are paid using available
cash. If this value becomes too high in relation to the market average these cash
flow problems are of keen interest to the directors, as they may result in
unpayable debts and possible liquidation of assets.
Capital gearing
300/409+300 = 42.3%

Wood MJ Mr (UG - Civil & Env. Eng.)Coursework: Finance ENG3178 URN: 6172413
The higher a company is geared; there is a higher level of associated risk to the
company from its greater reliance on short and long-term loans. The repayment
of loans and their interest is non optional; how high a company is geared is
therefore of interest to shareholders. This is because in times of low cash levels,
money that would have otherwise gone into dividends to the shareholder is
instead paying debts. However, if the company has high and reliable cash flows,
it becomes more financially sound as a business plan. Therefore, as a
shareholder it is important to compare this value to a market average and the
cash flow of the company.

Question 2
2013

2014

Profitability Ratios
Return on capital employed (%)
14.9
33
Return on ordinary shareholders funds (%)
13.1
19.1
Gross profit (%)
43.8
42.9
Net profit (%)
13.8
16.1
Efficiency Ratios
Fixed asset turnover (times)
Stock turnover (times)
Trade debtors collection period (days)
Trade creditors payment period (days)

1.08
5.9

1.34
11.1

56.2
83.9

41.9
90.0

Liquidity Ratios
Current asset
1.96 : 1
Acid test

0.73 : 1

1.47 : 1

Investment Ratios
Gearing
Earnings per share ()
Price/earnings
Dividend yield (%)
Dividend cover

0.46 : 1
0.23
15.2
2.4
3.1
3.9

0.42 : 1
0.39
13.1
2.2

0.99 : 1

Wood MJ Mr (UG - Civil & Env. Eng.)Coursework: Finance ENG3178 URN: 6172413

The following report marks the financial successes of Mammoth plc over the past
trading year; noting the important changes to the business that have occurred and
how they have affected the company financially.
In the last year, Mammoth plc has come under new management; who have started
by undertaking a complete revaluation of the companys structure. This has led to
large scale alterations in the company in the aim to increase its profitability. The first
and foremost of these changes is the dissolution of some of its redundant sectors.
The loss of these fixed assets has in turn resulted in fewer employees in the
company. By doing this the company is focusing its resources into less, so to become
more efficient. It has done this by lowering operating costs of the business to
increase profit margins. The dissolution of part of the company has also led to
reductions in production quantities required. The company is now manufacturing a
smaller range of goods to fit the current market.
In the past year the efficiency of the company has increased, leading to a two-fold
increase in the return on capital employed. This increase in efficiency of the capital
employed is directly from the aforementioned restructuring of Mammoth plc; as well
as an increase in stock turnover of nearly twice of that in the previous year. This
increased stock turnover comes as the company has discontinued some of its
products; leading to ultimately less stock but a higher turnover rate. An increase of
turnover from Mammoth plcs fixed assets has also increased total turnover; this has
resulted from the liquidation of assets found to be redundant in the restructure. The
company has also improved its cash flow from the previous year; by significantly
decreasing its trade debtors collection period and extending its creditors payment
period. It has done this by reducing its creditors from the loss of those associated
with the dissoluted sectors.
This improved cash flow has allowed Mammoth plc to successfully deal with the
liquidity issues it was experiencing in previous years. All liabilities are now being met
successfully using both current assets and its more liquid assets such as inventory.
The company has now brought its Acid test ratio from below 1, at 0.73:1; to well
above, at 1.47:1. The Current asset ratio of Mammoth plc has also dramatically
increased from 0.99:1, to 1.96:1. Mammoth plc has also begun to reduce its reliance
on loans and lower its gearing, in the aim to produce a more financially stable
company more appealing to safe investment. The company is therefore no longer to
be accessed in caution and is actively seeking further investment from shareholders
so to sustainably maintain the growth of the company into the coming years.
A negative point that has somewhat limited the growth and profitability of Mammoth
plc is due to an industry increase in cost of raw materials. This has led to an increase
in total cost of sales relative to total company turnover; which in turn has resulted in
a fall in gross profit by 0.9%. However, due to reductions in operating costs such as
distribution and administrative expenses that have resulted from the reshuffle of the
company; it has resulted in an increase in net profit of 2.3%. This in turn has resulted
in an increase in return for ordinary shareholders funds of 6%.

Wood MJ Mr (UG - Civil & Env. Eng.)Coursework: Finance ENG3178 URN: 6172413
Although there has been a minor fall in dividend yield, this is because of the
increased trading price of Mammoth plc stock and not from a fall in return from
investment. The return on dividends has not risen proportionally to the increase in
net profit. This could be as part of an aim to reinvest profits to ensure further
sustainable growth of the company. This is essential, as although the company has
ended this financial year with an increase in net profit; this could have been wholly
reliant on the readjustment of the company. Therefore, in the coming year after this
effect has worn off, the profitability of the company may drop back down if
appropriate caution is not exercised by the company. That said; the return on
earnings per share has still been shown to rise; from 0.23 to 0.39. This is
simultaneous with the company placing greater importance on paying consistent
dividends on holdings; as shown from the increase in dividend cover. Both of these
may be in the attempt to create the impression of a more financially stable company
in terms of investment for prospective shareholders.