Strategic Financial Management

a ) Determination of Accounting Ratios

Profitability Financial Position Investors Ratios b ) 1 . Financial Analysis of Orrell PLC

The financial examination of Orrell PLC will mainly focus on the profitability and liquidity of the firm over the last two years of trading . A comparison of the salient ratios computed in the previous question will entail . These are listed in the table below

Ratios 2008 2007

Financial Performance

Return on year end capital employed 26 .5 28 .1

Net asset (equal to capital employed ) turnover 5 .9 times 4 times

Gross

profit margin 13 .8 17

Net profit (before tax ) margin 4 6 .3

Financial Position

Current Ratio 1 .3 :1 1 .6 :1

Closing inventory holding period 26 days 46 days

Trade receivables collection period 44 days 45 days

Trade payables payment period 46 days 55 days

Table 1

1 .1 Financial Performance of Orrell PLC

The application of proper accounting ratios revealed that the profitability of Orrell PLC deteriorated during the periods under consideration . Managers were less efficient in the generation of profits from the firm 's resources as shown by the 1 .6 decrease in the return on capital employed ratio , which is considered as the primary profitability ratio . A high percentage in the return on capital employed means that the company 's profits are substantially safe from unexpected changes in the business environment , such as new competitive measures , adverse economic changes and more (Randall 1999 ,

463 . In this respect , management should adopt hands on approach to ensure that the declining trend in such ratio is refrained as soon as possible

The gross profit margin and net profit before taxation margin of the organisation also diminished during the time frame under consideration complimenting the return on capital employed ratio . This further implies that the gross profit and net profit before taxation derived from every 100 of sales revenue is lower . The main reasons behind a declining profit margin are either a less favourable sales mix in terms of profits or inferior control on the firm 's operating costs . Sometimes companies are required to diminish the selling price charged due to competitive moves leading to a decline in the profit margins ratio However in such instances it is imperative that cost control measures are adopted to enhance the efficiency of the firm and limit the adverse impact on profitability of such reduction in selling price (McKenzie 2003 ,

238-239 . A horizontal analysis of the profits statements of these two years would be ideal in to shed further light on the cost control issue outlined above

The utilisation of resources section , outlined by the Net Asset Turnover examines how was management able to use the assets provided by investors and generated by the company 's operations to cause sales . A frequent principle used in economics is that the employment of an additional resource in the organisation does not necessarily mean improvement in revenue of the firm , commonly known as marginal revenue . Such ratios are therefore important because they portray...