Accounting and finance for managers - Essay Example

Return On Capital Employed (ROCE) 102.78% The Return on Capital Employed ratio is used to analyse a company's position in terms of the return or profit it gains on the funds invested by the company's shareholders (Mcmenamin, 1999). It shows the effectiveness and performance of the company's management to obtain more returns on the shareholders' investment. It is of importance to the company's management as well as investors and shareholders being a performance indicator for the company. The ROCE ratio for the Glaxo Smithkline plc is 102.78%, which shows that the company has been able to utilise the funds invested by shareholders in an profitable manner. Asset Turnover 90% The Asset Turnover ratio reveals the management's efficiency in utilising the company's assets towards sales and revenue generation (Meigs & Meigs, 1993). It is of particular interest to company's management in evaluating their policies and the revenue generation. The Glaxo Smithkline plc's asset turnover ratio is 90%, which shows that the sales generated by the company proved to be 90% utilisation of the company's assets. It is a sign of an above-average performance of the company's management. Gross Profit Percentage 78.83% The Gross Profit Margin Percentage evaluates the percentage of profit earned by a company on sales after the production and distribution activities (Mcmenamin, 1999). This ratio analyses the company's profit margin before accounting for various operating costs. This ratio is of critical importance to both the management and investors, in order to keep an eye over the company's income level and profit margin. The gross margin percentage for the company in consideration is 78.83%, which indicates that the company only loses about 22% of its sales revenue in the production and distribution activities. It is an indicator of the company's gross profitability. Net profit percentage 21.7% The Net Profit Marin Percentage ratio shows what percentage of profit a company earns on its sales (Mcmenamin, 1999). This ratio analyses a company's profitability after taking into account all the operating costs. The importance of this ratio is the same as that of gross profit percentage. The net profit percentage for Glaxo Smithkline is 21.7%, which means that the company loses about more of the gross profit in various selling and administrative expenses. Therefore, the company needs to revise its operating costs in order to gain much out of the actual gross profit. Current Ratio 1.5: 1 The current ratio measures short-term liquidity of a company in terms of its ability to pay off its short-term debts and liabilities (Meigs & Meigs, 1993) (Mcmenamin, 1999). It shows how much liquid assets a company owns against its short-term liabilities and obligations. The current ratio is of extreme importance to a company's short-term creditors for the purpose of a better evaluation of the company's liquidity position. The current ratio for this company is 1.5: 1, which means that the company owns about $1.5 worth of assets to pay off its short-term liabilities worth $1. Quick Ratio 1.3: 1 Quick ratio reveals the liquidity position of a company after keeping aside the value of stock (Meigs & Meigs, 1993). Therefore, it gives a quick review of a firm's liquidity position in terms of cash or the assets that can be quickly convertible into cash. It is of particular interest to the short-term creditors and suppliers of the company, as they need to evaluate a company's liquidity position and analyse how feasible it is for them to do business with the company. The quick ratio for this company is 1.3: 1, which means that after keeping aside the value of stock, the company still has $1.3 worth of assets to pay of its liabilities worth $1. Also, the difference between current and quick ratio shows that not most of the company's capital has been tied up in stock. Gearing Ratio 78.05% The Gearing ratio is an analyser of a company's long-term liquidity or solvency (Meigs & Meigs, 1993). It illuminates the capital structure of a company by evaluating the ratio of debt and equity funds employed by the company to finance its operations. This ratio is of particular interest to the long-term creditors and also the investors of the company, who need to know the actual solvency position of the company to evaluate and figure out any bankruptcy risks associated with the company. The gearing ratio for this company is 78.05%, which shows that the company keeps about a mixed capital structure and does not rely on a single source of finance. Stock Turnover 2 times The Stock Turnover ratio reveals the efficiency of a company in finishing its entire stock by means of converting the stock into sales (Mcmenamin, 1999). It shows how many times the company efficiently finishes its entire stock of goods and generates sales. It is also of particular interest to short-term creditors who need to analyse the company's ability in generating quick-current assets and as the sales activity leads to increase in either accounts receivable or cash balance, the stock turnover ratio is one of the best examiners of the company's ability to generate sales. The company has been able to turn out its entire stock about 2 times in the whole year, which seems rather inefficiency of the company in converting its stock into sales. Earnings Per Share 75.0p The Earnings Per Share ratio is the best evaluator of the profits earned by the investors in the form of the market price of the company's shares (Meigs & Meigs, 1993). This ratio reveals the profitability and feasibility of an investment of funds into the company's shares. It is of significant interest to the investors who want to gain profit on their investment by means of increasing market price of the company's shares. The earnings per share of this company are 75p per share, which is quite a profitable return on the investment of shareholders. Price Earning Ratio 19.28 This ratio determines the real worth a company's shares by revealing the number of times an investor pays for the company's shares against their market price (Meigs & Meigs, 1993). Obviously, being related to earnings, it is of particular interest to investors for the purpose of determining the real value of their investment into a company's shares. The company's P/E ratio is 19.28 and market price is 1446p, which shows that the shareholders have been paying a more times for the shares than its market value. Dividend Yield 2.9% It is an efficient way to assess the investment potential in a company's shares, as it is important for the investors whose objective is to maximise the dividend revenue from their investments. The dividend yield ratio for Glaxo SmithKline plc shows the expected percentage of dividend that may be availed by the investors after a certain period of time. The market price of company's share is 1446p and the dividend per share is 42.0p, which means that the investors receive a yield of 2.9% of the investment they have made in the company's shares. Dividend Cover 0.5 times The dividend cover ratio reveals the dimensions of dividends provided by the company. It shows how much dividend a company has paid with respect to its total earnings. Therefore, it is of much interest to both the existing and potential investors of a company to analyse any future profitability associated with investment into the company's assets. The dividend cover ratio of Glaxo SmithKline plc shows that the company has paid only 25% of the company's earnings as dividends to the shareholders. This might be relevant to some of the company's policies that might be evaluated by the shareholders in the light of dividend cover ratio in order to make a rational investment decision. Appendix Return on capital employed = Operating profit Equity shareholders fund 6090 = 102.78% 5925 Asset turnover= Sales Total Assets 20,359 = 90% 22,578 Net profit percentage= Net Profit Sales 4,418 = 21.7% 20,359 Gross Profit Percentage= Gross Profit Sales 16,050 = 78.83% 20,359 Current Ratio= Current Assets Current Liabilities 13,633 = 1.5: 1 8,722 Quick Ratio= Current Assets- Inventory Current Liabilities 13,633- 2,192 = 1.3: 1 8,722 Gearing Ratio= Long-term debt Equity Capital 4,625 = 78.05% 5,925 Stock Turnover= Cost of Goods Sold Average Inventory during Period 4,309 = 2 times 2,150 Earnings Per Share= 75.0p Price Earning Ratio= Market price Earnings Per Share 1446 = 19.28 75.0 Dividend Yield= Dividend Per Share Market Price Per Share 42.0 = 2.9% 1446 Dividend Cover= Dividend Per Share Earnings Per Share 42.0 = 0.5 times 75.0 References Meigs & Meigs (1993), "Accounting: The Basis For Business Decision Making", Mc Graw Hill: New York Mcmenamin Jim (1999), "Financial Management: An Introduction", Routledge, London Bibliography Arthur J. Keown, John D. Martin, John W. Petty, David F. Scott (2004), "Financial Management: Principles and Applications", Prentice Hall Eugene F. Brigham, Joel F. Houston (2003), "Fundamentals of Financial Management", South- Western College Pub Gerald I. White, Ashwinpaul C. Sondhi, Dov Fried (2002), "The Analysis and Use of Financial Statements (Analysis and Use of Financial Statements)", Wiley John J Wild, K. R. Subramanyam, Robert F. Halsey (2005), "Financial Statement Analysis", McGraw-Hill Leopold A. Bernstein, John J. Wild (1999), "Analysis of Financial Statements", McGraw-Hill Thomas R. Robinson, Paul Munter, Julia Grant (2003) "Financial Statement Analysis : A Global Perspective", Prentice Hall Read More