Return on Capital Employed (R.O.C.E)
Question A: Calculate for SYS plc all the ratios for which there is an industrial average ratio.
1. Return on Capital Employed (R.O.C.E):
R.O.C.E = Net Profit / Capital Employed x 100
22000 / 77000 = 28.57%
2. Net Profit Percentage:
Net Profit / Sales x 100
22000 / 60000 x 100 = 37%
3. Gross Profit Percentage:
Gross Profit / Sales x 100
36000 / 60000 x 100 = 60%
4. Asset Turnover:
Sales / Capital Employed
60000 / 77000 = 0.78 times
5. Fixed Asset Turnover:
Sales Revenue / Fixed Assets
60000 / 68000 = 0.89 times
6. Stock Turnover Period:
Average Stock / Cost of Sales x 365
7 / 24 x 365 = 106 days
7. Debtors’ Collection Period:
Debtors / Sales x 365
10 / 60 x 365 = 61 days
8. Creditors’ Payment Period:
Creditors / Purchases x 365
7 / 26 x 365 = 98 days
9. Current Ratio:
Current Assets / Current Liabilities
22 / 13 = 1.69:1
10. Liquidity Ratio:
Current Assets – Stock / Current Liabilities
14 / 13 = 1.08:1
11. Gearing:
Fixed Interest Capital / Equity + Fixed Interest Capital x 100
20 / 77 = 26%
12. Interest Cover:
Profit before Interest / Interest for Period
21 + 1 / 1 = 22 times
13. Earnings per share:
Profit after Preference Dividend / Number of Ordinary Share Issued
17 / 8 = £2.13
14. Dividend Yield:
Dividend per Share / Market Price of One Share x 100
0.25 / 8 x 100 = 3.13%
15. Dividend Cover:
Profit after Preference Dividend / Total Ordinary Share Dividend
17 / 2 = 8.5 times
16. Price Earnings Ratio:
Market Price of One Share / Earnings per Share
8 / 2.125 = 3.76:1
17. Return on Equity:
Profit after Preference Dividend / Equity Capital x 100
17 / 57 x 100 = 29.82%
Question B: Drawing on the ratio’s calculated in ‘Question A’ and comparisons with the industrial averages; discuss the position and performance of SYS plc.
Ration comparison:
Industrial Average Ratio
SYS plc Ratio
Ratio Difference
Return on Capital Employed
25%
28.57%
3.57%
Net Profit Percentage
35%
37%
2%
Gross Profit Percentage
65%
60%
-5%
Asset Turnover
0.7 times
0.78 times
0.08 times
Fixed Asset Turnover
0.8 times
0.89 times
0.09 times
Stock Turnover Period
50 days
106 days
56 days
Debtors’ Collection Period
35 days
61 days
26 days
Creditors’ Collection Period
40 days
98 days
58 days
Current Ratio
1.4:1
1.69:1
0.29:1
Liquidity Ratio
01:01
1.08:1
0.08:1
Gearing
35%
26%
-9%
Interest Cover
10 times
22 times
12 times
Earnings per Share
£4
£2.13
-£1.87
Dividend Yield
5%
3.12%
-1.88%
Dividend Cover
5 times
8.5 times
3.5 times
Price Earnings Ratio
8:1
3.76:1
-4.24:1
Return on Equity
40%
29.82%
-10.18%
R.O.C.E
R.O.C.E is frequently used to express the annual percentage return that an investor would receive on their capital input in a particular company; as well as how efficiently that company is at utilising its total capital invested within all areas.
For SYS plc it is evident that from the ratio result for every £1 of capital invested in the company, the annual return to an investor would be 28.57p.
As a result an investor would prefer to receive as high a R.O.C.E as possible. The R.O.C.E may be an excellent ratio to investigate in terms of profitability as it gives an indication as to the R.O.C.E. whilst also taking into consideration the amount of capital utilised within the company at the same time.
In consequence the elevated R.O.C.E in comparison to the industrial average is a positive point to future investors of SYS plc as it suggests that a greater amount of profit can be re invested into the company for the benefit of its shareholders. This increased R.O.C.E will definitely be an attractive financial characteristic to future investors. In turn more investment will be generated enabling SYS plc to generate more capital that can then be further employed into their expansion plans.
Net Profit Percentage
Net Profit Percentage is frequently used to indicate how much of a company’s total sales are actually retained as earnings. For instance, in the case of SYS plc who has a Net Profit Percentage of 37%. This would mean that SYS plc preserve 37p for every one pound of sales generated after all direct and indirect expenses have been deducted. The Net Profit Percentage ratio also signifies a company’s ability to adapt to adverse and unfavorable economic events and conditions, such as low demand for products and/or services as well as increased price competition.
Net Profit Percentage is especially functional when comparing companies that operate within similar industries. For this reason this may be one of the more useful ratios to compare when looking to invest in a similar company. For example with relation to SYS plc who are currently looking to expand, investors would prefer to see a superior Net Profit Percentage over other companies within the same market sector and/or industry as the 2% increase on the industrial average indicates a more lucrative and profitable company that has enhanced control and organisation over its costs in comparison to competitors. Similarly, with SYS plc having a higher Net Profit Percentage than the industry average will allow the company to invest more capital on product improvements and expansion plans, such as the implementation of new up to date factories.
Other benefits of analysing Net Profit Percentage also allow the investor to assess the profitability of the company focusing on all influencing factors regardless of management jurisdiction and control.
Gross Profit Percentage
A company’s Gross Profit Percentage is an indication of their generated profit after subtracting any variable costs. In terms of SYS plc this ratio will allow investors to monitor how effectively the company manages and manipulates their costs of production. The value of the Gross Profit Percentage is calculated with regards to the cost of production and the cost of sales. For example for a retail company, such as Toys R Us it would be the difference between the cost of buying a toy and the cost of a selling a toy in store.
Investors are likely to use this ratio to explore the competitive strength of a company. However, in terms of SYS plc there is a negative difference of 5% compared to the industry average. This declined Gross Profit Percentage will certainly not be looked at favorably by potential investors. This 5% difference in comparison to the industry average may imply that SYS plc are paying more than their competitors for their raw materials and parts. In addition to this it may also mean that SYS plc are generating less income with regards to product selling than competitors. As a result this will see a much greater increase in SYS plc’s cost of sales.
In order for SYS plc to increase their Gross Profit Percentage they should think about re designing their business strategies in order to gain pricing power within their market segment so they can regain control of their industry market segment. As a result this will enable SYS plc to spend more capital on developing new product ranges and advanced marketing so that in turn they can gain enough further capital to expand their company as they aspire to do so.
Asset Turnover
An increase of 0.08 times the industrial average with regards to Asset Turnover for SYS plc would be looked at favorably by investors. In simple terms Asset Turnover measures how efficiently a company can utilise its assets to generate profits and sales. The Asset Turnover Ratio is often industry specific as it enables an investor to reflect on a variety of turnover values coherent within similar industry sectors.
For SYS plc to have an above the industrial average Asset Turnover is highly beneficial and often regarded as a competitive advantage. This will strongly indicate to investors that the company has a completive and successful pricing strategy. In addition to this a high Total Asset Turnover relative to the industrial average may possibly be the consequence of the utilisation of archaic, obsolete, and extremely dated and depreciated assets which is not capable of does not increasing production rate, and in turn generating sales.
Fixed Asset Turnover
Fixed Asset Turnover is very comparable to Asset Turnover. Fixed Asset Turnover is simply a narrower measure of Asset Turnover; it can also calculate how successfully sales are generated by fixed asset investments; these fixed assets are commonly attributes such as, equipment and property however it does not include current assets.
In terms of investment; when company’s make considerable purchases sensible and interested investors will analyse this ratio for the next few years in order to compare and visualise how effective the purchase of the fixed asset has been for the company.
For SYS plc their Fixed Asset Turn over is 0.09 times greater than the industry average, this increase highlights how the company are more effective and have greater ability in generating net sales from fixed asset investment. This type of efficiency illustrates how lucrative investments are. Accordingly an increased Fixed Asset Turnover would definitely be attractive to potential investors, specifically in the case of SYS plc looking to expand the proof of their above industry average Fixed Asset Turnover already depicts how efficient they are at generating sales through the effective use of such aspirations.
Stock Turnover Period
The concept of the Stock Turnover Period ratio is an excellent measure of efficiency. This ratio allows the investor to explore the relationship between the cost of sales and the average cost of stock within a set period of time. Seemingly this ratio denotes that the number of time the stock has been turned over during the given time period and then assess the efficiency with which the company is able to manage its stock levels.
For SYS plc they have a Stock Turner Period of 56 more days than the industry average. This Stock Turnover Period is high in comparison to the industry average; which is definitely seen as good thing to investors and the company alike. It highlights that SYS plc are very efficient in stock investment.
For SYS plc this high inventory Stock Turnover Period implies efficient management of stock, this is due to the stocks being sold more frequently, meaning less capital is required to finance and purchase more stock. Furthermore, in terms of expansion aspirations this high stock turnover period suggests that with extra facilities and property SYS plc maybe able to further increase their Stock Turnover Period in order to generate increased profits and market share. Similarly, the expansion may enable the company to produce different products within the same market segments in order to further increase profitability.
Debtors’ Collection Period
The Debtors’ Collection Period is commonly known as the average amount of time a company takes to collect money owed to them by its trade debtors. As a result this ratio allows investors to measure the quality of its debtors.
In terms of SYS plc The Debtors’ Collection Period is a hefty 26 days more than the industry average. This Debtors’ Collection Period is not appealing to investors and will not aid in the company’s plans for expansion. This lengthy Debtors’ Collection Period may suggest that SYS plc is being too tolerant and inefficient in their methods and periods of collection. If the company wishes to expand and become more functional they must seek to reduce their Debtors’ Collection Period which in turn would influence prompt payment by debtors, and reduce the possibility of occurring ‘bad debts’.
Creditors’ Payment Period
The Creditors’ Payment Period indicates the amount of time that a company has before they have to pay their creditors’. For SYS plc this Creditors’ Payment Period is 98 days, which is 58 days longer than the industry average. This is a positive point for the company as it means they have more time to pay back money they owe to creditors’. This high Creditors’ Payment Period suggests that the creditors are being paid punctually by SYS plc.
In addition to the amount of time SYS plc have to pay back their creditors’ it also gives the impression of been able to have enhanced credit value, which in the long term will encourage creditors’ to provide you with more raw materials and stock etc, as well as being confident in the fact that they will receive their payments on time. This kind of performance is again highly appealing to investors which in turn may encourage them to invest more money which will enable the company to expand as it aims to do so.
Current Ratio
The Current ratio is a simple means of assimilating how liquid a company is, and what their ability will be like in order for paying its current creditors’ on time. For SYS plc they appear to be 0.29:1 times more liquid than the industry average. This is highly plausible and attractive to investors. This cushion represents a margin of safety that is available to SYS plc to the creditors, and provides an accurate position of the strength of working capital within the company.
As a result of appearing to be more liquid than the average industry. Creditors’ are more likely to lend the company money in order to fulfill their aims of expansion.
Liquidity Ratio
The Liquidity Ratio is much more thorough than the Current Ratio; it removes stock and prepaid expenses as an element of current assets. The Liquidity Ratio measures a company’s ability to pay off current debts immediately.
SYS plc appears to be 0.08:1 times more liquid than the industry average, for this reason it may be assumed that the company is liquid, and has the ability to meet its liquid liabilities on time.
As a rule of thumb it is often thought by many investors that a Liquidity Ratio of 1:1 is satisfactory, therefore a Liquidity Ratio for SYS plc of 1.08:1 is more than acceptable, which again is encouraging to potential investors, which may as result mean enough funding is gathered to fund the desired company expansion.
Gearing
The Gearing Ratio illustrates how well a company can capitalise of investment. For this reason is of great significance to SYS plc and its potential investors. Gearing must be very strategically thought out as it affects the company’s ability to uphold a consistent dividend policy during less profitable and demanding trading periods. It is often assumed that the higher the level of gearing within a company, then the more elevated the level of financial risk will be due to the amplified volatility of profit levels.
Gearing submits to the relationship comparison between a company’s share capital and other fixed interest holding loans or types of company funding. SYS plc appears to be 9% under the industry average in regards to their Gearing; this portrays a positive image of the company and suggests that they are Low Geared which as a result means they are able to issue high equity share capital to its investors. Consequently this again will be beneficial to SYS plc as it will encourage investors to fund the company which in turn will provide them with more capital enabling them to focus their plans on expanding the company as they aim to do.
Interest Cover Ratio
TheInterest Cover Ratio can be employed to discover how easily a company can pay their interest expenses on already owed debt. For SYS plc they are 12 times less than the industrial average for their Interest Cover ratio result. This highlights the fact that the company is less fraught and troubled with bad debt and expenses. This again will give investors a positive insight and may encourage them to invest in SYS plc, feeling that their funding is safe and secure.
Earnings per share
The Earnings per share ratio can give an insight as to a company’s profitability. As a result the ratio can indicate the quantity of a company’s profit assigned to each shareholder after tax.
For SYS plc their Earnings per share are £1.87 less than the industrial average, this may indicate that
£8 @ Beginning of 31st March and now really low why? And in relation to industry average?!
Earnings per share will allow investors to evaluate different company’s power to make money in their industry….
Talk about more orinary shares / preference shares as it says in Q!?
Dividend Yield
For SYS plc their Dividend Yield is 1.88% less than the industry average, this could be seen as beneficial to an investor looking to supplement his/her returns. This ratio illustrates how much a company will issue in dividends each year in relation to its share price.
It could be argued that SYS plc is an established developing and success oriented company functioning better than some of the other companies operating in the same industry sector due to their lower Dividend Yield rates.
Talk about more orinary shares / preference shares as it says in Q!?
Dividend Cover
For SYS pld their Dividend Cover is a measure of their focus and capability to maintain the level of dividend paid out to its shareholders. For SYS plc their Dividend Cover is 3.5 times greater than the industry average this means that the company has much greater ability of maintaining dividend payouts if profits decrease.
Price Earnings Ratio
For SYS plc the Price Earnings ratio gives investors an indication as to the level of confidence that investors have in the future wealth, affluence and ability of the company.
Unfortunately for SYS plc their Price earnings ratio is less than the industry average therefore it could be argued that the company’s future is not bring or profitable to investors. Say why? Not sure… mention orinary shares / preference shares as it says in Q!? expansion and anything else?
Return on Equity
For SYS plc their return on equity is 10.18% less than the industry average this is not appealing to investors and is not likely to help the company’s expansion plans, as this level of Return on Equity may indicate that the company is not using their available resources effectively. This ratio indicates the amount of net income restoredas a percentagepayout of shareholders equity. In consequence this is a quantifiable level of a company’s profitability, through the analysis of profit generated through investors.
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