Harrod : Ratio Analysis Assignment

Harrod : Ratio Analysis Assignment Words: 1523

Ratio Analysis Return on capital employed Basically, it measures business performance. This ratio is used to calculate the return versus the money that is invested. Gross profit margin This ratio uses for measuring of profitability in selling, buying or producing goods before any other expenses are put into account. Therefore, any change in this figure can have an important result on the net profit margin of the year. Harrods’ gross profit margin can be divided into 2 parts which is the year between 2000-2003 and 2004-2006.

Harrods has pretty much the same percentage of gross profit margin from 2000 to2003 is between 41 and 43% and from 2004 to 2006 is between 51-53%. This means gross profit margin had been increased by 10% over that period. That may be because of decreasing in the cost of sale between 2003 and 2004 which is a slight over 100 million pound or an increase in selling prices. Operating Expenses margin It can be seen that the Operating Expenses margin of Harrods had increased at least 10% over the period that is not a good sign of profitability.

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Because this ratio indicates how efficiently the expenses is being managed. Thus, the lower the operating ratio, the greater the profitability. In Harrods case, the cause might be because of Sales; it had been decreased since 2001 and may be for a few of reasons, such as poor maintenance or an ineffective advertising. Net profit margin Basically, it is the amount of profit after all non- financing costs have been deducted. Net profit margin is built by the company as a percent of the sales left. Net profit margin of Harrods had been fluctuated with the lowest was 4. 0% in 2003 and the highest was 13. 51% in 2006. It seems that a high level of expenses in 2003 directly effect on net profit margin of Harrods which can means the company’s earning is not as good as before. Factors for example the intenseness of competition, the group of customer and the economic circumstance are influence. This ratio should be in the positive trend, the higher the better. Fixed Asset Turnover This ratio can tell that how much the company would earn from the investment on fixed asset.

For instance, 1 pound invested on fixed assets during 2006 generated 0. 53 pounds in sales. The increase expenditures on non-current assets in 2006 likely relate to declined in fixes assets turnover. Although the ratio had declined, Harrods had almost remained the same on this ratio which can say that there had not much changed on fixed asset over the 7 years. Current ratio Harrods is quite good ability to pay the short term liabilities which can be seen from this ratio, it was between 1. 1 and 1. 9 over the 7 years.

As the liquidity is essential to run of a business, a higher current ratio or lower current ratio depends on type of business. Harrods is department store, inventories can move fast so ratio could be low. Acid test ratio From 2000 to 2005, Harrods seemed to have some problems of liquidity because it is not normal for the acid test ratio to be below one. This ratio is similar of current ratio, but excluding inventories and much more accurate. Stock days Stock days ratio of Harrods was pretty up and down. The average was 68 days.

The highest was 105 days in 2005 and it was almost twice times of the lowest which means Harrods was overload of finished goods in storage that can cause cash flow problems if those goods could not be sold in time because they had to pay short-term liabilities and those goods could become dead stock. Although, it mean Harrods got enough goods to continue selling up to 105 days, it is should be as low as possible and enough to satisfy customers’ demand. Stock days should not too high or too low. Debtor Days

From the figure of debtor days of Harrods, it was obvious that Harrods was attracting good creditworthy customers and/or there was efficiencies in credit control management. Having said that, The UK average is 60 days, the debtor payment period of Harrods was between 9- 15 days. However, the number of days had slightly increased since the end of 2004 that might because Harrods allowed debtors more time to pay or more goods had been sold in credit. If this ratio goes high, it can lead to cash flow problems. The lower the number of days the better. Creditor days

If we look at Debtor Days and Creditor days over 7 years, we can see that Harrods has given more credit to customers but the company could not be able to pay amount due to its creditors as fast as before. It can be seen that Harrods creditor days had gone up steadily since 2004, it is higher than the UK average 60 days, which is could be a signal of cash flow difficulties because the average time taken to pay creditors had been increasing. On the other side, Harrods might have got more credit from suppliers. Gearing Ratio The figure from this ratio shows the high risk of Harrods’ business.

Because it mean Harrods has borrowed huge money from outside and the question is how much Harrods has to pay for interest. It can take the business becoming insolvent. Another reason that Harrods had to borrow from outside may be that the owner has insufficient funds. Harrods gearing has risen constantly; debt is building, the future cash flow should be of interest. The long term capital that comes from borrowing should not over 25%. Interest cover The ratio represents the amount of profit is largely higher than the amount of interest payable.

The interest cover ratio has decreased from a place where profit before interest covered interest 2. 5 times in 2000, to one where profit before interest covered interest only 0. 74 times in 2003 which mean Harrods could not pay its interest even 1 time and might not be able to deal with a down turn in sales. Earnings per share This ratio is the proportion of company’s profit is allocated to each share. In 2003 earnings per share was negative which mean there was no profit made for each share or Harrods was losing money in this year.

Negative earnings per share can pull the price of share down. Dividend per share Dividend per share ratio measures the returning cash to a shareholder receives from holding share in the business. Usually, this ratio will show a partial measure of return to investors. From the table, dividend per share ratio of Harrods was not high and it was almost zero in 2006but this is not the worst. In 2000, it was zero. This might make the market concern value of shares held. Dividend payout ratio This ratio reveals the percentage of profit that shareholders are paid out by company in from of dividend.

In between 2001 and 2005 the dividends was higher than the profit for shareholders which is unacceptable. That’s mean Harrods borrowed money from other source for paying dividend to shareholders especially in 2003 it was negative. It may be business loss in profit. Dividend cover The number of time that company can pay dividend from current margin to shareholders. Harrods’ profit attributable to shareholders was 31. 4 times the amount of dividend paid out in 2000 but could not have paid the dividend at all in 2003. Return on Equity

This ratio is only for shareholders. It is indicates the return of investment of shareholders as a percentage and measures the company’s efficiency. Critically reflect upon your learning experience derived from the process of studying and completing this assignment. First of all, I have to say that I have never studied about Accounting or Finance before and I have never thought that I could deal with this kind of knowledge. I did not mean I could not calculate at all but I’m talking about logics and theories of Accounting and Finance.

I have started to study this module since the beginning of this semester. I have never missed classes. I feel like I have to come to study otherwise I would not have had ideas. In first few weeks I was really stressful. I tried so hard to listen and understand everything that David has taught in classes. Month later I feel a little bit comfortable but still nervous. Finally, I make a progress in studying Accounting and Finance. I realize that these two subjects are very useful and stretch my point of view. I know about theories and I try to adapt them into the real world of business.

Accounting and Finance give me ideas how to plan, control and run business and how to make it very successful. It comprehends me that how much it is important and need to know. I completed this assignment with all effort I’ve got. It is not easy but not too difficult to do it. I know my assignment is not good but I try my best and feel so proud of it and myself. Learning more details about accounting and Finance is my new idea. Because the knowledge is not just philosophy that we cannot touch. But this is actually concrete.

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