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Annual reports of Boots - Essay Example

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The FTSE 100 prices are obtained from Yahoo! Finance (FTSE 100 2006) and the share prices of Alliance Boots are obtained from the web site of Alliance Boots (Investors: historical price download 2006).
Profitability ratios are an indication of earning capacity and ability to make profits…
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Annual reports of Boots

Download file to see previous pages... Return on capital employed has dropped from 18.15% in 2004 to 13.95% in 2005. Gross profit margin shows how much profit was made out of every dollar of sales before covering operating expenses. The gross profit margin has only improved very slightly from 45.67% in 2004 to 46.05% in 2005. Net profit margin shows how much profit was made out of every dollar of sales after covering all costs and expenses. The net profit margin has decreased from 7.73% in 2004 to 5.53% in 2005. Return on assets shows how much profit was earned out of every dollar of total assets. Return on assets has declined from 11.75% in 2004 to 8.76% in 2005. Return on owners' equity shows profit available to equity owners out of every dollar of their investment. Return on owners' equity has also decreased from 22.76% in 2004 to 18.78% in 2005. The downward trend of the profitability ratios indicates weakness.
Liquidity ratios are indicators of short-term financial stability. They show whether the business is able to meet its current debt obligation. The liquidity ratios include current ratio and acid test ratio. The current ratio shows the company's ability to meet its current debt obligations (due within 12 months) with assets that can be converted into cash within a short period. Though the current ratio has decreased from 1.5170 in 2004 to 1.4671 in 2005, it is still considered satisfactory being more than 1. This means that the current assets can cover current liabilities with a margin of safety. If the ratio is too big, it may mean that the firm has too much liquidity and is not optimising its investment opportunities. The acid test ratio shows whether the firm has sufficient liquid resources (assets that can be converted into cash very quickly) to meet its current liabilities. The acid test ratio indicates weakness as it has decreased from 0.9086 in 2004 to 0.8027 in 2005. The ratios in both years are less than 1, which means that the company may have difficulty in meeting its short-term financial claims with its liquid assets.
Use-of-assets ratios indicate operating efficiency and how well the assets ...Download file to see next pagesRead More
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