INTERPRETATION OF RATIO Financial reports/statements basically show profit or loss, but it is very fundamental that one understands the

nitty-gritty of these figures and what they represent. The tool for analysing these reports is Ratio Analysis. It shows the profitability of the firm, its ability to offset its debts also asset utilization amongst other things. Tobermoray ltd an electrical company, which is has been engaged in an organic expansion project for the past few years. Below is an analysis of its financial performance. FINANCIAL PERFORMANCE: FINANCIAL PERFORMANCE Sales turnover index Gross profit margin Net profit margin (operating profit) Return on capital employed (ROCE) 2004 100 25% 10% 2005 105 25% 10% 2006 158 20% 7.94% 2007 100 18% 5.77%

18.48%

19.29%

18.17%

14.21%

ROCE data shows the efficiency in which the company can transform its capital into for every profit the company in 2007 they made 14pence as against 18pence which was realized in 2006. This report shows that there has been a steady increase operating expense as well cost of sale has continue to increase as well. These two increments is a result or the expansion project which attracts an increase in overhead expenses operation expenses. Also the sale turnover index has continued to its increase over the years from 5% (2004-2005) to a towering 50% (2005-2006) and a fair turnover of 9.5% from (2006- 2007).this is one the reasons why Tobemoray has continued to expand its retail outlets to maintain customer satisfaction and also maintain turnover. This shows a downward movement from 2006 to 2007. This explains that for every pound of sales in 2006 there was a gross profit of 22pence but in 2007 there was a loss of 2pence to drop at 18pence for every sale, this shows to tell us that Cost of sales was higher than the previous years. In addition in increasing cost of sale increasing, operating expense increased as a result of the expansion program leading in the net profit. LIQUIDITY Ideally the current ratio should be 2:1 to cover its current liabilities and also that the company can deal with any form of unexpected expense. In 2004/2005 the companys current ratio was very goo especially in 2005 when it was at its peak (2.03:1) but it took a sudden deep in 2006 to 1.05:1 as result over excessive bank overdraft. Nevertheless the current picked up marginally to 1.30:1 in 2007 in line with an increase in trade debtors in the same year.

The acid test ratio shows the ability of the company to quickly convert its asset into cash in other to settle its debt. As at 2005 the companys acid test ratio was in a good sphere standing at 1.39:1, the changed sharply by almost 505 to a critical 0.70:1. Although it increased to 0.85:1 the company was still not credit worthy, which is bad for its creditability ratings which means the would find it quite difficult to offset their debts. From the interest cover ration it is evident that the company has the capacity to pay interest its debt. Also there has been steady decline over the years from the statistic these rates are expected to increases when the company slow down a little on its expansion. GEARING There is no absolute limit on what a gearing ratio ought to be. Tobermoray is a highly geared company, this shows that the companys ability to utilize loans. STOCK TURNOVER This represents the length in which the good take from raw materials to finished goods. Tobermoray should be credited for reducing production time. This reduction has aide the overall sales turnover all well. Although there was a two days increase between 2006 and 2007 this was in efforts to meet the demand for their product DEBTOR COLLECTION PERIOD There has a reasonable reduction in the debt collection date from 40 days to 39 day. Although on paper it may seem much but in consideration to the size of Tobermoray the reduction is significant. Also from the statistic it is reveals that this collection date is a trend which the company seeks to continue. The underlying principle is that if the money is collected on time the money can be reinvested in the business or used to settle pressing issues. CREDIT REPAYMENT PERIOD Just like the debtor collection period Tobermory has even put more effort in paying up itsa own debt as quickly as possible with a reduction of 4 days in 2006 to 29 days in 2007. WORKING CAPITA L CYCLE This essentially looks at the time between production and when u start to realise money for the for the capital. This days have been quite unpredictable but with the statistics, although there has been a 7day increase from the previous year, this ration show tobermoray need to work hard to reduce the working capital cycle in order to increase cash flow in the system. FIXED ASSET TURNOVER This is the speed at which tobermoray utilizes its fixed asset into cash. Ratio analysis cannot measure all aspects of performance, such as business sustainability, environmental impact of operations, or managements business ethics or social responsibility in a world where the non-financial/alternative measures of performance are becoming increasingly relevant.

TOTAL AND FIXED ASSET Both assets are similar but the difference there is, fixed asset only focuses on fixed asset which grew by 2.77 times high than the previous year which was 2.33. Although the increase is minimal it shows growth within the company. Total assets in the other hand as the name implies encompasses both fixed and current asset which also increased from 1.68 in the previous year 2006 to 1.87 in 2007. Which shows the company is profitable. WORKING CAPITAL TURNOVER This refers to how effective a company utilise it working capital into sales. In 2006 the companys over utilization or maximally utilized its working capital to well over a 100times while in 2007 it dropped by over 80& to 22times. I effort suggested to brings a balance in the system RETURN ON SHAREHOLDERS EQUITY This shows that for every 1pound invested in 2006 by shareholders there was a return of 21pence but in 2007 due to high cost of operations in Tobermoray 6pence was lost for every pound invested. Despite this Tobermoray will have a problem to fulfil its long terms debt this is because of it still mad some profit that year. PRICE EARNING RATIO This essentially represents a share price of the company over the year. the share price of the company had enjoyed steady growth from 6.25 in 2004 to 10pence which represent a steady growth. DIVIDEND PER SHARE With due consideration to the turnover and other ratios the share dividend per share did not increase as expected instead there was a down ward slid on the dividend per share falling from 15p inn 2006 to 10p in 2007 representing a 30% drop . This is attributed to high cost of sale which affects the profit margin. EARNING YIELD This is a percentage reflection on how much each dollar invested in the company has yielded over the years. In the case of Tobermory the percentage yield has continued to decline, a 6% decline over the space of 4yearsdecline from as a result of the expansion project, because most of the profit is used to cover overhead expenses. DIVIVDEND COVER This is shows the companys ability to pay dividend to its ordinary shareholders. From the statistics it shows the companys profit after tax has steadily been on the increase even though the ordinary shareholders d dividend continue to increase as we. This is represented by a upward shift from 2.4 in 2006 to 2.5 in 2007. For this analysis to be more meaningful there has to be a comparison of Tobermorays ratios with other firms within that same industry. In order to ascertain the real profitability of the company.

Barry Elliot and Jamie Elliot (2006): financial accounting and Reporting, Financial Times

ACCA F5 2010: Performance Management, Study Text