M2

1. PROFITABILITY RATIO

Profitability is a calculation of a company's earnings compared to another. Profitability lets

the client assess the quality of financial reporting, such that the investor can realize how often
profit business makes from revenue or capital assets. The productivity may be calculated by
three specific types: gross profit percentage, net profit percentage of sales and return of
employed capital.

a. Gross profit percentage of sales:

The Gross profit percentage tells us about your goods and services' profitability as well as
how much it will costs a company to generate the product. This formula took Sales and Gross
Profit information. GP percentage is a measure of productivity which indicates the
association between gross income and total net sales income. It's really a common method of
assessing the operating efficiency of the organization.

Gross profit percentage=( gross profit / sales turnover)×100

27052
Gross profit percentage= ×100
28359
Gross profit percentage=95.4 %

The ratio is calculated by net profit division of the gross profits. The gross profit percentage
of company is 95.4%. Since the gross profit margin indicates exactly how well company
treats the acquisition of stocks. A high GP ratio indicates that a business will make a fair
selling profit as long as it holds operating costs in hand. If the COGS surpass overall revenue,
the business would have negative gross income, ensuring it will lose profits over time, so a
negative GP ratio would still be present.

b. Net profit percentage of sales

The net profit percentage of the sales is a profitability ratio that measures the organization's
profitability. Thus determine the amounts of net income, that amount is determined from the
net profit and revenue.

Net profit percentage=(Net profit / salesturnover )× 100

16938
Net profit percentage= ×100
28359
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 Net profit percentage=59.7 %

The calculation I've made has told me they've had 59.7%of the profits they made out of 100
%. That implies they have a strong efficiency to get a net income. This is because they spend
too much of their operating expenses, such as advertising expenses, wage expansions, etc.

c. Return On Capital Employed (ROCE)

ROCE measures how efficiently the business earns income from its investments. For
determining the rate of ROCE, it will be determined by net income before interest & tax is
excluded and then the capital employed measured.

profit before interest

ROCE= ×100
net capital employed
16938
ROCE= ×100
55369−18089
ROCE=45.4 %

It is shown in this ratio that the company is 45.4% out of 100%. That is a moderate
performance, as they can use it effectively to be a mechanism to produce income from the
overall resources that they have. The probable explanation for this is that they are purchasing
products that are very valuable, so the purpose of the asset is not much wasted. This also
brings benefits to company as they can make use of it at their maximum efficiency so it
would bring company more profit.

2. LIQUIDITY RATIO

The ratio of liquidity is often used to calculate the ability of a company to pay its short debts.
It lets the client determine its own business from the financial statements. Liquidity may be
characterized as a company's capacity to meet its financial obligations whenever due. This
way, the equity factors measure a firm's capacity to turn the capital assets through cash and
meet existing obligations. 

a. Current ratio

The existing ratio shows the willingness of a business to pay out its total assets with its
current liabilities. The percentage shall be determined depending on the sum of assets and
existing liabilities. A current ratio is typically relatively slower or more inclusive in
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accordance with the industry average. An current ratio may imply a expanded hazard of
suffering or defaults. Similarly, if a expert enters a truly widely developed professional
group, he notes that it does not work adequately by his acts. (Will kenton, 2019).

Current assets
Current Ratio=
current liabilities
38744
Current Ratio=
18089

Current Ratio=2.141

Thus, business should pay is 2.141 in the current ratio I've estimated reveals. This is a
positive result, as it means they have more net assets and will cover the short-term debt. The
explanation they have higher net assets is that they either have that much cash to spend or
have too much inventory to hold.

b. Acid test ratio / liquidity ratio

This measure is also known as the Quick Measure. The aim of this formula is to calculate
how effectively a company with its liquidity assets will meet its short-term obligations. The
estimation of the acid check ratio or equilibrium ratio is the same as the present amount. The
distinction between the current ratio and acid check ratio, though, is that stock will subtract
the existing asset. That is because capital is not a liquid asset fund, and in the limited span of
time it is impossible to convert into cash. Nevertheless, this calculation is useful when
contrasting the liquidity ratio with the current level, since this will calculate the willingness
of the company to meet its obligations by eliminating stock inventories that are not liquid
assets.

Current assets−stock
Acid Test Ratio=
current liabilities
38744 – 468
Current Ratio=
18089

Current Ratio=2.115

So, the Organization got the acid test ratio of 2,115. That assumes Company will service their
obligations as their existing assets are larger than the liabilities on the flows. The potential
explanation for this is similar to the current ratio. They could have either too much currency,
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or too many debtors.  The distinction between both the acid test ratio and the acid test ratio,
though, is that the acid test ratio represents the actual cash usable and that it is more accurate
than the current ratio.

3. EFFICIENCY RATIO

Efficiency ratio is a calculation of how much businesses use their assets to produce income,
and how effectively the company utilizes the assets to generate profits. It looks at how many
days it would take companies to raise cash from consumers, or how long it takes companies
to transform money into assets.

a. Rate of Stock Turnover

Stock turnover reveals how an organization is selling many times and reduces the commodity
supply in a given period. That is for calculating the total stock the organization has. The
answer can then be used to find the stock turnover rate.

The stock turnover rate ratio is determined from average stock and the expense of the sold
products. The stock turnover rate is used to assess how many days the business would need to
replace the products. It formula will be used to see the financial success of the company
operations.

Average stock
Rate of stock turnover= × 91
Cost of gooods sold

OMR 679
Rate of stock turnover= × 91
OMR 1307

Rate of stock turnover=47 days

So, calculation I've done tells that Company's stock turnover period is 47 days. it is
recommended that the business will raise its stock efficiency, as it means that the product is
running well enough. Because when the pace is high, that implies that company stock is
moving quick such that when the amount of inventory turnover is low, that indicates poor
productivity as stock is not running in the specific market sector, which implies that the firm
will not sell the available products.

D2 – Write a conclusion to summarise the overall performance of Sharma and Ryan’s

first year of trading.

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The gross profit is 95.4 %for the company. This is indeed a good percentage as it exceeds
50% which means that the business has a higher amount of revenue left that can be spent on
operating payments as well as the business retains. The company could aim to continue to
increase its sales turnover as well as to reduce sales costs to ensure they have a secure and
successful future, prohibiting any financial crisis.

Though, company's net profit is 59.7 per cent out of sales 100%. This is not good for
company, since the gross profit is 95.4%, whereas the net profit is 59.7%. It means that the
running costs are 35.7%. This demonstrates that company spends too much money on
expenses and will make it hard for the firm to solve the issue in future. To avoid this, my best
suggestion to them is that the company spends less money on its expenses and controls its
budget.

The ROCE on the other side is 45.4 %. That implies the production is strong and they can
make successful and productive use of the resource to produce income. This demonstrates the
ratio that businesses can take advantage of their assets to get 50 percent more for profit. As
they will produce more income, they will purchase more properties and get more income as
well as retain their ROCE not to decline in the future it is easier to sustain the success of
companies.

Then company's current ratio is 2.141. This means that the net assets are higher than existing
liabilities. This implies that firms with larger amounts of current assets will be able to pay off
current liabilities more easily without having to sell off long term assets. The Acid-test ratio
is the measure utilized when financial investors try to assess if a company has sufficiently
short-term liquidity to offset its obligations without needing to sell inventory. The
explanation is that inventory may not quickly be translated to cash as not everyone will like
to purchase goods from a company. And company's acid test ratios are 2.115.

During the first year of business the stock turnover rate is at 47 days. Because it was their
first trade, it is a good thing for them to achieve that. They also have a high chance of
developing and extending their business. Because they have 47 days to restore their items,
stock sales will enable the business to make more profit which can lead to business growth.
Furthermore, this indicates that the operation profits for them are strong, which is why they
have to restock in 47 days.

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