Key Financial Ratios
Gross
Profit Margin
The gross profit margin
is used to determine whether or not a company is able to meet its operating
expenses. It is calculated by divided
the gross profit with the revenues.
Gross profit margin = (total
sales- total cost of goods sold)/ totals sales
= Gross
profit/ Total sales or revenue
Gross profit margin 2016
= 104,251 / 402,086
= 25.93%
Gross profit margin
2017 =121,607 / 465,444
=26.13%
As far as Majestic wines is concerned, the gross profit
margin is quite favorable as after meeting the operating expenses, it still has
more than 25% of the sales revenue to operate with. The ratio has also been
consistent over the two years.
Net
profit Margin
This is a measurement
of the income that a business can extract from its sales after deducting all
the expenses.
Net profit margin = net income / revenue
Net profit margin 2016 =
2,324/ 402,086
= 0.58%
Net loss margin 2017= (2,695)/ 465,444
=0.58%
In 2016, after deducting all the expenses associated with
the business, Majestic wine still had 0.58% of the total revenue as net profit.
In the year 2017 however there was a decline leading to a loss. The least that
a company should do is break even.
Return
on Equity
The ratio shows how
much a business make from what is invested by the owners into it.
ROE = Net income/
Average Shareholder equity
ROE 2016 = 2324/ 109214
=0.02
= 2%
ROE 2017 = (2,695)/ 114572
= -0.0235
=2.35%
In 2016, £0.02 was made from each pounds that was put into
the business which is quite commendable. In 2017 however, as a result of the
net loss, £0.0235 was lost for every pounds that was invested into the
business. This signified a 2% gain and 2.35% loss in year 2016 and 2017
respectively.
Current
Ratio
The current ratio show
Current ratio = current
assets/ current liabilities
Current ratio 2016 = £102569/£31132
= 3.29
Current ratio 2017 =£135844/£40707
= 3.34
Debt to Asset Ratio
The debt to asset ratio compares whether a business assets
can settle all its debts in case there is need and helps in acquiring debts.
Debt to asset ratio = Total
liabilities/ total assets
Debt to asset ratio 2016 = 124599 / 233813
= 0.53 or 53%
Debt to asset ratio 2017= 146172 / 260744
= 0.56 or 56%
Majestic wine PLC has managed to maintain a debt to asset
ratio of over 50%. This shows that less than half of its assets are need to
cover all the debts that it has incurred. As long as the ratio remains less
than one/100% the company is in a good financial situations.
Debt to Equity Ratio
The debt to equity ratio compares what extend of the
business is financed by debt and what extent is covered by equity.
Debt to equity ratio = Debt/Equity
Debt to equity ratio 2016= 124599 / 109214
= 1.14
or 114%
Debt to equity ratio 2017=146172 / 114572
= 1.28
or 128%
The debt to asset ratio has been over 100% over the two
years. This shows that the company rely more on debt for financing more than it
does on investments from shareholders.
Return on assets
This shows how much a business makes or losses from the
assets that it commits to the business.
Return on Assets = Net income/ total assets
Return on assets 2016 =2324/ 233813
= 0.0099 or
0.99%
Return (loss) on assets 2017 = (2,695)/ 260744
= 0.0103 0r 1.03% loss
In 2016, for every £1 that a was committed in the business, £0.0099
was made. In 2017, the opposite happened and for every £1 that was committed, a
loss of £0.01 was incurred.
Interest Coverage Ratio
Interest coverage ratio = Income before tax and
interest/interest expenses
Interest coverage ratio 2016 = 6,283 /1,540
=
4.0798 or 407.98%
Interest coverage
ratio 2017 = (246) /1,222
-
0.20131
or 20% on the negative side
In 2016, the company was able to cover all its interest
expenses over 4 times from just its income. In 2017 however it made a loss thus
the income alone could not cover the interests’ expenses.
Financing
Majestic Wine uses a combination of various sources of
financing. The share capital as of end of 2017 was £5,309,000 while the share
premium was £20,505,000. Other sources include bank loans which amounted to £33,512,000
in 2017 and a bank overdraft of £12,537,000. The other source is customer bonds
which amounted to £2,619,000 in 2017. The total debts at the end of the year
was £146,172 which was an increase from the £ 124,599,000 that was the total
liabilities at the beginning of the year. Majestic wine uses the profits that
it makes to pay for the debts that it has including the tax liabilities. In
2017, the finance expenses was £1,222,000. It also paid tax liabilities
amounting to £1,227,000. The bank loans were also used in paying part of the
debts.
As discussed earlier, Majestic Wines has a debt to equity
ratio of 1.28 showing how much it depends on debts for financing. Another
distinctive feature of the company is that it has a very small share capital
amounting to only £ 5,309,000. In order to sort out its debt issues, it will be
better for Majestic Wines to issue more share capital so as to raise more
funds.
CONCLUSION
In the financial year 2016, Majestic Wine PLC performed very well. The profitability
ratios, leverage ratios and liquidity ratios were commendable except the debt
to equity ratio which showed an over reliance on debts as opposed to equity. In
2017 however, it made a net loss which affected some of the vital ratios. The
aim of a business it to generate income and thus this is expected. Two years is
a short time to judge a company as 2018 can be quite different.
When it comes to financing, Majestic wines show an over
reliance on debts as opposed to equity in the two years. The company is
incurring a lot of debts in an attempt to increase its value. This is a good
financing strategy but it comes at a cost inform of the high interest charges.
It can raise it from external sources or from the current shareholders. I would
recommend Majestic Wines as once the debts issues are dealt with it can be a
good investment opportunity. Right now it is the debts that are eating up on
the profits as other aspects of the business are doing very well.
References
Choi, F.D., Hino, H., Min, S.K., Nam, S.O., Ujiie, J. and
Stonehill, A.I., 1983. Analyzing foreign financial statements: The use and
misuse of international ratio analysis. Journal of International
Business Studies, 14(1), pp.113-131.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm
performance using financial ratios: A decision tree approach. Expert
Systems with Applications, 40(10), pp.3970-3983.
Gombola, M.J. and Ketz, J.E., 1983. A note on cash flow and
classification patterns of financial ratios. Accounting Review,
pp.105-114.
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