Course: BA/BSc Management

Time Guide: 15-20 hours

Submission Date: 15.12.03

Section Page No.

1.Terms of Reference 3

2. Procedure 3

3. Findings 4

3.1. Profitability Ratios 4

3.2 Working Capital Efficiency Ratio 5

3.3 Investment Ratios 7

3.4 Liquidity Ratio 8

4. Conclusion & Recommendations 9

6. Bibliography 11

7. Appendices 12

An investigation into the financial performance of Dickie Dirt Ltd. The report also includes accounting ratio analysis of the company over the past three years.

1. Terms of Reference
Exodus Venture Capital Ltd has requested this report to disseminate information with the aid of accounting ratio analysis Dickie Dirt’s financial performance over the past three years. The author was requested to ascertain the company’s financial state identifying any limitations and assumptions made. The submission date is for the fifteenth of December 2003.

o Procedure.
The author, in order to complete the report studied several texts with regards to financial management. The author also researched many useful websites and journals with regards to accounting ratio analysis. Also all formulas used throughout the report can be found in the appendices section found at the closing part the report.

o Findings.
3.1 Ratio Analysis

According to Southworth, J (1997) financial ratio analysis is the calculation and comparison of ratios, which are derived from the information in a company\'s financial statements. The level and historical trends of these ratios can be used to make inferences about a company\'s financial condition, its operations and attractiveness as an investment. Profitability ratios, liquidity ratios, working capital efficiency ratios and investment ratios will all be a part of an in depth analysis of Dickie Dirt’s financial situation.

3.2 Profitability ratios.

Profitability ratios is used in accounting ratio analysis as it can work out how profitable a business is, and therefore identifying the attractiveness of investing in Dickie Dirt’s Ltd. The first profitability ratio to be discussed is gross profit margin. As Glautier & Underdown stated, the gross profit margin ratio tells the profit a business makes on its cost of sales, or cost of goods sold. For 2000 Dickie Dirt showed a gross profit margin of 66%. This rose steadily to 74% in 2001 and 81% in 2003. This high gross profit margin indicates that the business in question can make a reasonable profit on sales, and showing by the trend over the past three years, Dickie Dirt seems to earn considerable profit on sales alone. Net profit margin according to Solomon, E (1997) indicates how much profit a company makes for every £1 it generates in revenue. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better. For 2000 Dickie Dirt’s net profit margin was 9% with it then a drop of one point to 8% in 2001. However in 2003 it rose two percent from the previous year indicating that the company is increasing profitability. Dickie Dirt Ltd has therefore increased both gross profit margin and net profit margin steadily in the past three years. This reflects positively on the companies’ profitability ratios.

According to Pizzey, A (1998) the return on capital employed ratio (ROCE) tells us how much profit we earn from the investments the shareholders have made in their company. The resulting ratio represents the efficiency with which capital is being utilised to generate revenue. In 2001 Dickie Dirt’s Ltd recorded ROCE at 8.28% with it falling slightly to 7.47% in 2002. This indicates that profit earned from investment by current shareholders has slowed up in the past year, deteriorating by .8%. At 8.28% for 2001 and 7.47% in 2002 still perhaps represents a fairly return on investment employed. Reasons for this could be from the purchase of new fixed assets or an increase in liabilities.

3.2 Working capital efficiency ratios

‘Working capital efficiency ratios refer to stock, debtors and creditors control’ (Tamminen, R. 1976). As explained above working capital is concerned with the ability of a business to be able to pay its way. The four ratios that are used under working capital efficiency ratios are concerned with spending and saving money at the right time in the right place. If a company has too much stock than it wastes money on storing it let alone buying it. If