Financial Ratios of Ipplepen Plc - Essay Example

Ipplepen Plc. Financial Ratios: Ratios 2006 2005 Profitability Assessment Return on Investment (ROI)% 19.21% 20.94% Gross Profit % 7.52% 7.13% Net Profit % (1) 7.52% 7.13% Net Profit % (2) 4.89% 4.68% Return on Equity (ROE) % 13.26% 14.02% Earnings Per Share (EPS) (pence) 34.57 32.87 Dividend Yield % 7.0 pence 5.4 pence 2. Liquidity Assessment Working Capital (000) 38,924 29,886 Current Ratio 1.82 : 1 1.68 : 1 Acid Test Ratio 1.19 : 1 -- 3. Assessment of Operational Efficiency Total Asset Turnover (times) 1.81 2.04 Fixed Asset Turnover (times) 3.83 4.18 Cash Turnover (times) 20.67 24.25 Debtor Days 48.31 48.55 Creditor Days 40.09 40.48 4. Capital Structure Assessment Gearing Ratio % 3.26 0.87 Debt-Equity Ratio % 49.03% 46.34% Debt Ratio % 32.91% 31.66% Interest Cover 12.84 20.52 Table 1. Financial ratios calculated from the data in Annual Income Statement, Annual Balance Sheet, Cash Flow Statement. Executive Summary Ipplepen Plc is involved in the retail and wholesaling of clothing, footwear, and leisure equipment. Its activities are mainly concentrated in U.K. and Ireland. There are two core areas of operations of the company. One operation is involved in 'stores' as a clothing footwear and leisure equipment retailer. The second area of operation is 'Manaton,' which is the U.K. distributor and retailer of Manaton products (Annual Report 2006). There is a clear division in the activities of the two segments and their dealings with each other are as with third parties. Profitability Assessment The profitability figures of Ipplepen are good. The Return On Investment (ROI) is a good 19.21 percent in 2006. Though this is a decrease in growth from 20.94% in 2005, but the decrease is only marginal. The gross profit ratio has increased marginally from 7.13% in 2005 to 7.52% in 2006. The Net Profit of the company also shows a marginal increase from 4.68% to 4.89%. The Return On Equity (ROE), however, has fallen in track with ROI. But ROE is still a healthy 13.26%, only 0.08% lower from 14.02% in 2006. So there is still no reason to panic or loose hope in the company. The earnings per share have increased in 2006, from 32.87 pence in 2005 to 34.57 pence in 2006. The dividend declared was 7.0 pence as against 5.4 pence in 2005. The proposed dividend for the year 2007 is 8.0 pence. The company is showing a consistent growth in all profitability measures. It is a profit making company, and there are reasons that it is worth investing in the company. Liquidity assessment The liquidity position of the company in 2006 is strong, as can be seen from the liquidity measures of working capital, current ratio, and acid test ratio. The working capital is positive and has increased from around 29,886,000 to 38,924,000 in 2006. The company has performed well in managing its capital in the previous year and this year it sees an increase in its working capital. The current ratio is a very good 1.82. It shows that the company's current assets are nearly two times its current liabilities. This is a good solvency position for any company. The acid test ratio also shows a healthy liquidity position of the company, where its current assets over its stock assets are about 1.19 times its current liabilities. The figures for acid test ratio are not available for 2005. The liquidity position of the company is good, and it reflects good working capital utilization by the company. Apart from the revenue generated from operations, the company indulges in investing and financing activities. In the year 2006, the company invested to the tune of 636,000 in Internet development, and trademarks to the value of 30,000. The corresponding investments for 2005 were nil. Ipplepen invests its cash, at bank and in hand, under the bank deposit rates. Short term deposits are also being made at floating rates, after taking into account the meeting of the cash requirement. The company has a good amount of undrawn committed borrowing facilities also. The bank overdrafts are charged at 5.46% per annum in 2006, which was 5.38% per annum in 2005. A slight increase in average effective interest rate is seen. Overall, the liquidity position of the company is good and the company is solvent. Its working capital utilization is also good. It is shown in the banks' confidence in the company, who have given huge borrowing and overdraft facilities to the company. Assessment of operational efficiency The company, Ipplepen Plc, is operationally an efficient company. The total asset turnover is 1.81 times and the fixed asset turnover is 3.83. Both show that the total assets and fixed assets are being used several times and efficiently so. The turnover figures have decreased from 2005, where it was 2.04 times for the former and 4.18 for the latter. The operational efficiency of the company has decreased from 2005. But the company is still quite efficient. The need is to increase its efficiency or at least maintain the level of efficiency in the future. There is a difference of eight days between debtor days collection and creditor days payment periods. The payment has to be eight days prior to the receipts. This is the same difference as it was in 2005. Since the company's liquidity position is good and it has a positive working capital cash flow, so this difference has not affected the liquidity or operations of the company. Capital structure assessment Ipplepen Plc is a low geared company. The gearing ratio of the company in 2005 was 0.87, which increased to 3.26 in 2006. The gearing is very low for a company. That debt equity ratio is also less than 100. It is 49.03 percent, and increased from 46.34% in 2005. The debt ratio has also increased to 32.91% in 2006, from 31.66% in 2005. But these figures are still lower than hundred, and are in safe ground. From the gearing ratios, it can be inferred that the company has a policy of keeping gearing as low as possible, and use its working capital for funding operations. The company is thus low geared and has a nil possibility of insolvency. The capital structure is based on solid ground, and the company is thus attractive to investors for the long term. The company's interest cover was at 12.84 in 2006, while in 2005 it was 20.52. Although the interest cover has fallen by about 8 percentage points it is still in a very good position as far as interest payments are concerned. The company has set the policy to minimize exposures in relation with borrowing, liquidity, foreign exchange and banking relationships. Financial transactions of speculative nature are not permitted by the company. Summary The company, Ipplepen Plc, Is working efficiently and profitably. The gearing and liquidity position of the company are very good. The company is making efforts to keep the borrowing as low as possible. The company is definitely an attractive buy for the investors due to its long term profitability expectations. The cash flow position of the company is good and the company is making efforts to invest in short term deposits, while making sure to meet the daily requirements of its operations. The company is also involved in investing and financing activities. The profits of the company are growing consistently and that is hope that the company will undertake expansion. If the company is able to maintain its operational efficiency, then the company will show growing profits over the years. An increase in gearing is recommended for further investing and expansion activities. The company should also try to stop the decline in the profitability figures that it has seen in 2006. The company is moving cautiously ahead, which is good. But there is also scope for bolder steps. The investors are getting a consistent return from the company. And they probably will support the company in its expansion efforts. Appendix 1. Formulae The following table displays the formulae used in calculating Financial Ratios as displayed in table 1 above. Table 1: Key financial ratio formulae Ratio Formula Return on Investment (ROI) {Profit before interest and tax (PBIT) / Investment (total assets - current liabilities)} Gross Profit Ratio (Operating profit + profit from JVs & Associates) / revenue Net Profit Ratio (1) {Profit before interest and tax / revenue} x 100 Net Profit Ratio (2) {Profit after interest and tax / revenue } x 100 Return on Equity (ROE) {Profit after interest and tax / equity } x 100 Earnings per share Supplied in annual report Dividend Yield Supplied in annual report Working Capital Current assets - current liabilities Current Ratio Current assets /current liabilities Acid Test Ratio Current assets (-stock)/ current liabilities Total Asset Turnover Revenue / total assets (fixed + current) Fixed Asset Turnover Revenue / fixed assets Stock Turnover Ratio Cost of sales (here operating costs) / Average stock (Average stock = [opening stock +closing stock] / 2 Cash Turnover Ratio Revenue for period / average cash balance (Average cash balance = [opening cash balance + closing cash balance] / 2 Debtor Days Collection Period Trade and other payable / credit sales (= revenue) Creditor Days Payment period Trade and other receivables / purchases (= operating costs) Gearing Ratio {Total debt capital / (Total debt capital + equity funds)} x 100 (Total debt capital = borrowings and interest rate swaps) Debt-Equity Ratio (Debt capital / equity capital ) x 100 Debt Ratio (Total debt finance / total assets) x100 Interest Cover Profit before interest and tax / total interest payable (Total interest payable = finance costs + net interest on pension liability) Note: All titles refer to titles in Group Income statement, Group Balance sheet and Group Cash Flow statement Appendix 2. Financial Ratio Calculations The following table details the Financial Ratio calculations as displayed in Table 1 above. Table 2: Financial Ratio calculations Read More