Ratio analysis - case study - Stortford Yachts Limited
This case study is intended as a self-test exercise on all of ratio analysis. The answers are given as popup boxes to each question. However, do try to work through them all first before submitting to temptation. The more you practise calculating ratios, the easier it gets - we promise!
Paul Marriot is the director of Stortford Yachts Ltd. The company has traded for 30 years and has in the past achieved very good levels of growth and return on capital, but this is now changing. In recent time it has failed to introduce new product lines, relying on traditional products and little has been invested in Research or Product Development.
You are a business planning consultant for a firm of Management Consultants. Stortford Yachts is one of your clients. In recent times the business has experienced increased turnover but a downturn in overall performance.
Paul Marriot has had a meeting with your Director and he has stated that he wants to introduce tighter management control within the company by introducing a system of responsibility accounting.
You receive the following memo from your Director, Pauline Changer, regarding this case.
Memorandum
To: Business Planning Assistant
Date: 21st May 2011
From: Pauline Changer, Director
Subject: Stortford Yachts Ltd. - accounts information
You are aware that I met with Paul Marriot yesterday and that he is concerned with the latest results shown in the final accounts that have recently been prepared at year end.
The file attached contains a summary of the company's abbreviated profit statements and balance sheets for the past three years; together with additional information and performance indicators for their business sector as a whole for the period under review.
I would like you to examine this information and meet with me on Friday morning to discuss the form and presentation of a detailed financial analysis of the company over the three-year period.
Signed: P. Changer
Financial information on Stortford Yachts Ltd.
1. Summary profit statements
| $m | $m | $m | |
|---|---|---|---|
| 2009 | 2010 | 2011 | |
| Sales turnover | 4.90 | 5.30 | 6.60 |
| Operating costs | 4.17 | 4.43 | 5.82 |
| Operating profit before tax | 0.73 | 0.87 | 0.78 |
| Taxation | 0.24 | 0.30 | 0.27 |
| Profit after tax | 0.49 | 0.57 | 0.51 |
| Dividends | 0.12 | 0.16 | 0.16 |
| Retained profit | 0.37 | 0.41 | 0.35 |
N.B. The firm's detailed breakdown of costs is as follows:
| Years | 2009 | 2010 | 2011 |
|---|---|---|---|
| Labour costs | 0.93 | 0.98 | 1.25 |
| Distribution costs | 0.44 | 0.49 | 0.61 |
| Administration costs | 0.19 | 0.22 | 0.27 |
2. Summary balance sheets
| $m | $m | $m | |
|---|---|---|---|
| 2009 | 2010 | 2011 | |
| Fixed assets | 2.40 | 2.77 | 2.88 |
| Current assets | |||
| Stocks: | |||
| Raw materials | 0.09 | 0.12 | 0.15 |
| Finished goods | 0.40 | 0.43 | 0.45 |
| Debtors | 1.14 | 1.32 | 1.84 |
| Bank | 0.03 | 0.04 | 0.05 |
| 1.66 | 1.91 | 2.49 | |
| Less Current liabilities | 1.35 | 1.56 | 1.90 |
| Net current assets | 0.31 | 0.35 | 0.59 |
| 2.71 | 3.12 | 3.47 | |
| Capital and reserves | 0.5 | 0.91 | 1.26 |
| Bank loans | 2.21 | 2.21 | 2.21 |
| 2.71 | 3.12 | 3.47 |
3. Yacht Builders Federation
Average ratios for federation members 2011
| % Return on capital employed | 26.0% |
|---|---|
| Asset turnover | 1.79 times |
| Net profit margin | 14.5% |
| Current ratio | 1.5:1 |
| Acid test ratio | 1.03:1 |
| Debtors collection period | 83 days |
| Gearing ratio | 32.0% |
| Labour cost % of sales | 18.1% |
| Operating cost % of sales | 85.5% |
| Distribution costs % of sales | 9.5% |
| Admin costs % of sales | 4.5% |
Questions
In your role of planning assistant you are to prepare an analysis of the company's figures over the three-year period using the performance criteria listed in the inter-firm comparison table.
1. Calculate all the ratios given in the average ratios for federation members for 2009, 2010 and 2011.
2. Prepare a detailed report on the company's performance in terms of profitability and liquidity compared with the average of the sector over the period.
Answers
1. Calculate all the ratios given in the average ratios for federation members for 2009, 2010 and 2011.
Answers - question 1
Follow the links below for the answers to each of the ratio calculations:
(i) Return on capital employed
(ii) Asset turnover ratio
(iii) Net profit margin
(iv) Current ratio
(v) Acid test ratio
(vi) Debtors collection period
(vii) Gearing ratio
(viii) Labour cost as % of sales
(ix) Operating costs as % of sales
(x) Distribution costs as % of sales
(xi) Administrative costs as % of sales
Total: 30 marks
2. Prepare a detailed report on the company's performance in terms of profitability and liquidity compared with the average of the sector over the period.
Summary of ratios
| Ratio | 2009 | 2010 | 2011 | Industry Average | See Notes |
|---|---|---|---|---|---|
| % Return on capital employed | 26.9 | 27.9 | 22.5 | 26% | 1 |
| Asset turnover (times) | 1.81 | 1.70 | 1.90 | 1.79 times | 2 |
| Net profit margin (%) | 14.9 | 16.4 | 11.8 | 14.5% | 3 |
| Current ratio | 1.23:1 | 1.22:1 | 1.3:1 | 1.5:1 | 4 |
| Acid test ratio | 0.87:1 | 0.87:1 | 0.99:1 | 1.03:1 | 5 |
| Debtors collection period (days) | 85 | 91 | 102 | 83 days | 6 |
| Gearing ratio (%) | 81.5% | 70.8% | 63.7% | 32% | 7 |
| Labour costs as % of sales | 18.9 | 18.5 | 18.9 | 18.1% | 8 |
| Operating costs as % of sales | 85.1 | 83.6 | 88.2 | 85.5% | 9 |
| Distribution costs as % of sales | 8.98 | 9.24 | 9.24 | 9.5% | 10 |
| Administration costs as % of sales | 3.87 | 4.15 | 4.09 | 4.5% | 11 |
Follow the link below to see some possible commentary on the ratios.
