Unit 2 M3 Business Resources
Interpret the contents of a trading and profit and loss account and balance sheet for a selected company explaining how accounting ratios can be used to monitor the financial performance of the organisation.
Introduction
In order to help Ania compare her achievement through financial methods such as ratio analysis she has managed to obtain some data from her competitor which is called “Polish Cuisine Imports”. They are a direct competitor to Polish Fine Foods as they are also wholesale business importing foods, drinks and other products from Poland and selling them to small retailers. The financial information that Ania collected is as follows:
Polish Fine Foods
Polish Cuisine Imports
Difference
PFF-PCI
Solvency Ratios
Current Ratio
1.70
1.50
0.20
Acid Test
1.20
1.10
0.10
Profitability Ratios
Gross Profit Margin
31.6%
26.6%
5
Net Profit Margin
10%
8.1%
1.9%
Return on Capital Employed
72.5%
59.5%
13%
Performance Ratios
Stock Turnover
31 days
42 days
11 days
Debtors Collection Period
45 days
49 days
4 days
Asset Turnover
6
4
2
In the table above, I’ve also included the column with the difference between the ratios of Polish Fine Foods and Polish Cuisine Imports in order to make it easier to compare them. In order for Ania to be able to monitor her financial performance using ratio analysis, she needs to understand the ratios she has produced in a context. The context either needs to be in relation to ratio analysis conducted previously and collected over a period of time and this usually takes years; or it can be done in comparison with a direct competitor of Ania. So, in this assignment I’m going to analyse Ania’s ratios using data from the table which are the ratios for Polish Cuisine Imports.
Solvency Ratio Analysis
Current ratio is the first solvency ratio that I’m going to use. The current ratio measures a company’s current assets against its current liabilities. The current ratio indicates if the company can pay off its short-term
Introduction
In order to help Ania compare her achievement through financial methods such as ratio analysis she has managed to obtain some data from her competitor which is called “Polish Cuisine Imports”. They are a direct competitor to Polish Fine Foods as they are also wholesale business importing foods, drinks and other products from Poland and selling them to small retailers. The financial information that Ania collected is as follows:
Polish Fine Foods
Polish Cuisine Imports
Difference
PFF-PCI
Solvency Ratios
Current Ratio
1.70
1.50
0.20
Acid Test
1.20
1.10
0.10
Profitability Ratios
Gross Profit Margin
31.6%
26.6%
5
Net Profit Margin
10%
8.1%
1.9%
Return on Capital Employed
72.5%
59.5%
13%
Performance Ratios
Stock Turnover
31 days
42 days
11 days
Debtors Collection Period
45 days
49 days
4 days
Asset Turnover
6
4
2
In the table above, I’ve also included the column with the difference between the ratios of Polish Fine Foods and Polish Cuisine Imports in order to make it easier to compare them. In order for Ania to be able to monitor her financial performance using ratio analysis, she needs to understand the ratios she has produced in a context. The context either needs to be in relation to ratio analysis conducted previously and collected over a period of time and this usually takes years; or it can be done in comparison with a direct competitor of Ania. So, in this assignment I’m going to analyse Ania’s ratios using data from the table which are the ratios for Polish Cuisine Imports.
Solvency Ratio Analysis
Current ratio is the first solvency ratio that I’m going to use. The current ratio measures a company’s current assets against its current liabilities. The current ratio indicates if the company can pay off its short-term