Finance For Managers Assignment Example | Topics and Well Written Essays - 5000 words

Finance For Managers - Assignment Example 1 Profitability Ratios â€Å"It is impossible to assess profits or profit growth properly without relating them to the amount of funds (capital) that were employed in making the profits. The most important profitability ratio is therefore return on capital employed (ROCE), which states the profit as a percentage of the amount of capital employed† (BPP 2009). Profitability ratios are usually calculated in order to perform vertical analysis or to compare one year with another. These ratios include net profit margin and gross profit margin, return on capital employed (ROCE), earning per share (EPS) and price earning (P/E) ratio. The net profit margin, gross profit margin and ROCE are the only ones that are relevant for this exercise. The calculations for the four divisions are shown in Table 1 in the Appendix. Profitability The ROCE may be used to assess how well the management of the divisions have performed (BPP 2009, p. 306). Two ratios may be used to help explain ROCE. They a re profit margin and asset turnover. These ratios are described as secondary ratios while ROCE is described as a primary ratio. Profit margin is calculated under profitability while asset turnover has been included with efficiency ratios. ROCE can be used to determine whether the divisions are getting value for money from borrowings to make it worthwhile. Quality Products Division The figures for ROCE suggest that there have been consistent improvements over the three year period. The figures have increased from a negative 6.9% return to a 7.7% return in 2008 and a 9% increase in 2009. However, management indicates that the division needs to achieve a 10% return on investment (ROI) and it is currently below that level. The figures also indicate that the profit margin of the Quality Products Division has improved over the past years from a negative 5.7% in 2007 to 5.7% in 2008 and 6.4% in 2009. The gross profit margin has also increased consistently from 38.9% in 2007 to 40.4% in 200 8 and then to 41.4% in 2009. Kitchen Division There was a significant decline in the ROCE from 16.9% in 2007 to 11.9% in 2008, followed by and small decline to 11.4% in 2009. This is above the 10% ROI that the division needs to achieve. There have been inconsistencies in the profit margin over the period. The profit margin declined from 5.3% in 2007 to 3.6% in 2008. However, there was a marginal increase to 3.9% in 2009. The gross profit margins for the period declined from 39.2% in 2007 to 36.2% in 2008 and increased to 37.6% in 2009, which is not consistent with the changes in net profit. This was due to a more than proportionate increase in cost of sales. Bedroom Division The ROCE declined from 11.8% in 2007 to 11.2% in 2009. This is above the 10% ROI required by management. However, the profit margin is very small even though it increased from 3.5% in 2007 to 4.1% in 2008 and declined to 4% in 2009. This was in spite of the consistent decline in turnover. The gross profit margin increased from 26.4% in 2007 to 31.4% in 2008 and a decline to 29.8% in 2009. This was so because the ratio of cost of sales to turnover was proportionately higher in 2007 then in 2008 and 2009. Office Division The ROCE declined for 14.2% in 2007 to 11.2% in 2008. However, it improved during 2009 to 12.5%. These percentages are above the ROI of 10% required by the management. There was a decline in