Compass financial analysis and sources of finance used by the company Essay

Compass financial analysis and sources of finance used by the company - Essay Example Gross Profit Ratio It is calculated by the following formula. Gross profit ratio = [(Gross profit / Net sales) ? 100] The results are presented in Table 1. Table 1: Gross profit ratio of the Compass Group Plc Company ? million 2011 2010 Gross Profit 1,010 983 Net Sales 15,833 14,468 Gross profit ratio 6.38% 6.79% There is a decrease in the gross profit ratio that has been realized amounting from 6.79% in 2010 to 6.38% in 2011. This can be attributed to poor sales strategies and an increase in the cost of goods sold (Compass Group Plc 2011, p.63). Mark Up It is calculated as shown below. Mark up = (Sale price / Cost) – 1 The results are shown in Table 2. Table 2: Mark up of Compass Group Plc ? million 2011 2010 Sales price 15,833 14,468 Cost 14,823 13,485 Mark up 6.81% 7.29% The mark-up decreased slightly from 7.29% in 2010 to 6.81% in 2011 (Compass Group Plc 2011, p.63). This can be contributed to low sales turnover, coupled with an increase in the costs of sales. Net Profit R atio It is calculated by means of the following formula: Net Profit Ratio = (Net profit / Net sales) ? 100. The results are shown in Table 3. ... 2011 2010 EBIT 958 913 Total Assets Current liabilities 9,410 (3,990) 8,254 (3,239) Net profit ratio 17.68% 18.21% A significant decrease in ROCE was realised, when it reduced from 18.21% in 2010 to 17.68% in 2011 (Compass Group Plc 2011, p.67). However, it is necessary to note that the rate of capital employed should always be higher than the company’s rate of borrowing, otherwise proportionate increase in borrowings would result into proportionate reductions in earnings of company’s shareholders. Current Ratio This is a ratio between current assets and current liabilities, where â€Å"current† means the assets and liabilities that need to be paid within one year. This ratio shows how well the assets can repay the amount of liabilities of the company, and it also assesses the liquidity of the company’s assets (see Table 5). In the Compass Group Plc’s case, the current ratio appears lower than it should be. Even though there are not even enough asse ts to pay the liabilities, the company is doing pretty well (Dobbs, Huyett & Koller 2009, p.54). Table 5: Calculations of the current ratio ? million 2011 2010 Current Assets 3,475 2,752 Current Liabilities 3,990 3,239 Current Ratio 0.87 : 1 0.85: 1 Acid Test (Quick) Ratio There is the following formula used for the calculation of this ratio: acid test (quick) ratio = (current assets – inventories)/current liabilities (see Table 6). Table 6: Acid test ratio of the company ? million 2011 2010 Current Assets Inventories 3,475 270 2,752 238 Current Liabilities 3,990 3,239 Quick Ratio 0.803 : 1 0.776 : 1 Compass Group Plc’ quick ratio was 0.803:1 and 0.776:1 in 2011 and 2010 respectively. Given that the quick ratio of 1:1 is considered as a satisfactory financial condition, Compass Group Plc is sufficiently liquid