Essay Unit 2 M3

777 Words Jul 16th, 2016 4 Pages
Interpret the contents of a trading and profit and loss account and balance sheet for a selected company explaining how accounting ratios can be used to monitor the financial performance of the organisation.

Profitability ratio
Profitability ratios assess a business’s profitability of how well they’re doing by their interest parties.
ROCE: In order for me to calculate the return on capital employed, I divided net profit from capital employed and then multiply by 100. This is shown bellow.
R.O.C.E=(NET PROFIT )/(CAPITAL EMPLOYED)*100
R.O.C.E=159.2/300*100
=53.066%
Return of capital employed is when investors receive money back on their capitals. For business the results of ROCE in 2007 show
…show more content…
x=164.2/257.2 ×100=63.84%
Compare to 2008 the business made a return on net profit of 64.84 %. This is due to fewer debentures being taken out of the business; this then allows business to generate high return.
Solvency ratio
Solvency ratios measure the stability of a business and ability to repay debt.

(LONG TERM DEBT )/(CAPITAL EMPLOYED)*100

(200 )/300*100 =66.6%
In 2007 the business has a high gearing. This shows that the business is in risk because are loaning a lot of money and they rely a lot on loan. The implication of this is that they have a lot of liabilities to pay, so therefore the business would struggle to generate money in order to pay off the liabilities, which means they have to seek loans to pay off their creditors.
In 2008 the business percentage 17%, low percentage means that the business stopped depending on loans as they have improved on their capital structure. This means that business doesn’t have to take out as much loans like in 2007 when the business had high gearing.

Liquidity ratios measure a business ability to cover its expenses.

A.T.R=(CURRENT ASSEST-CLOSING STOCK )/(CURRENT LIABIITIES )*100

A.T.R=(574.3-300 )/(321.8 )*100 =0.85:1
In both years the business shows to be struggling to

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