FINANCIAL DECISION MAKING

Financial decision making



Financial decision making

This paper will thoroughly analyze the financial statements of Capello Design; it will analyze and give appropriate conclusion by judging the financial situation the company is in, and also give recommendations.

Part a. and b: Ratio Calculation and Analysis

The following ration analysis is based on the balance sheet which was provided.

Profitability ratio

First let's discuss the Profitability Ratios. The profitability ratios describe, how effective the firm is at generating profits given sales and or its capital assets. Following are the Profitability Ratios

1) Gross Profit Margin: Gross profit margin is a financial ratio used to assess the profitability of a firm's core activities, excluding fixed costs (Ball, Brown, 2009, pp. 300-323).

Gross profit margin = gross profit /turnover *100

Gross profit margin (2009/10) = 167.5/ 590 *100

Gross profit margin (2009/10) = 28.38%

Gross profit margin (2008/09) = 169.5/ 550 *100

Gross profit margin (2008/10) = 30.81%

As compared to the previous year Capello design's Gross profit has dropped by 1.98. This indicates that the company's ability to assess the impact of its sales and how much it cost to generate (produce) those sales has gone down. The company needs to manage the cost which is used to produce sales. Even though the sales may have rise as compared to the previous year, but it still not an exponential increase in sales so therefore the cost needs to be managed (Artto, 2008, pp. 27-37).

2) Net profit Margin: Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue. Net profit takes into account the fixed costs involved in production minus the overheads.

Net Profit Margin: Net Profit Margin = Net Profit / Turnover x 100

Net profit Margin (2009/10): 42.5 / 590 *100

Net profit Margin (2009/10): 7.2%

Net profit Margin (2008/09): 44.3 / 550 *100

Net profit Margin (2008/09): 8.05%

The net profit margin of 2009/10 is lower than 2008/09. This indicates that the company has lost its efficiency in controlling its costs. The higher the profit margin the better the company is at converting revenue into actual profits. There is a difference of 1.3% which shows that company needs to control its cost effectively.

3) Return on Assets (ROA): this ratio tells how well the company is in relation to its assets. This gives an idea how well the company is utilizing its assets in generating profits. This is also known as return on net worth (Weygandt, Kieso, 1996, 801-802).

Return on Assets (ROA): Net income / total assets.

Return on Assets (ROA) (2009/10): 42.5/ 345.7

Return on Assets (ROA) (2009/10): 12.29%

Return on Assets (ROA) (2008/09): 44.3/ 274.7

Return on Assets (ROA) (2008/09): 16.12%

Return on Assets of the company has dropped like the other ratios. This shows that even though the company has made huge investments, i.e. their assets have rise from 274.7 million pounds to 345.7 million pounds but still they have been unable to make good profits. They need to come up with the plan on how they ...