Chique Ltd – Ratio Analysis
Ratios
One of the best ways to explain financial ratios is to go through them as an example.
The following example provides a set of financial accounts for Chique Ltd. from
which you are going to calculate important ratios.
The Company
Chique Ltd is a small company that buys and sells Chinese Antiques. The company
employed 14 staff in 2004 which increased to 18 in 2005. All sales and purchases
are made on credit.
What’s required
Chique Ltd is going through some turbulent market conditions and the directors want
a report that snapshots the whole organisation. To do this the directors have
insisted a ratio analysis is done using the company accounts along with an
explanation of what this means to the organisation. They have outlined the
requirements below.
Profit & Loss Account
Profit and loss account for Chique Ltd
Year ending 30 April 2010
£m
Sales revenue
236
Less cost of sales
Opening stock
51
Purchases
71
Closing stock
10
Cost of goods
132
Gross profit
104
Expenses
Rent and rates
40
Administration
15
Wages
37
Marketing
10
Heat and lighting
8
Miscellaneous
6
Total expenses
116
Net profit
(12)
Balance Sheet
Balance sheet for Chique Ltd
on 30 April 2010
£m
Fixed Assets
Premises
12
Fixtures and fittings
8
Machinery
10
Vehicles
5
35
Current Assets
Stock
10
Debtors
53
Cash in bank
49
Cash in hand
14
126
Current Liabilities
Overdraft
29
Creditors
20
49
Working capital
77
Long term liabilities
Bank loan
1
1
Assets employed
112
Financed by:
Shares
61
Retained profit
51
Capital employed
112
Task 1
Using the profit and loss account and the balance sheet for Chique Ltd that you completed in
Activity sheets 8 and 9, help the owner of the business interpret the results by completing the
table below.
Ratio
Liquidity
Current ratio
Acid test
Calculation
Interpretation
Profitability
Gross profit
percentage
Net profit percentage
Return on capital
employed
Performance (efficiency)
Stock turnover
Debtors’ collection
period
Asset turnover
Task 2
Now you have calculated the ratios for Chique Ltd you are required to explaining the
meaning and findings of each of these ratios. Answer the points below about each
ratio category.
a. Liquidity. What does the ratio show? What is the significance of this? What
level of risk is Chique Ltd. under (hi or low) are how does this ratio
demonstrate this. Make suggestions as to how Chique Ltd might improve its
liquidity.
b. Profitability. What does each of the ratios mean about the profitability of
Chique Ltd. What is the relationship between gross and net profit ratios i.e.
how could a price cut, reduce gross profit yet increase net profit? Why is
ROCE of such importance within business?
c. Financial Efficiency. What does each of the ratios mean. Explain how the
company can improve each one and what the costs might of this. What is the
problem of aged debtors and aged stock?
Task 3
Write a short recommendation section to the board of directors of Chique Ltd. on
what the company should be doing both in the short and long term to help all aspects
outlined above.