HRM 11416 Assignment B: Balance Sheet as at 31 October 2016

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* Calculate the following ten ratios for both companies, clearly showing the ratio formula and figures used: -
The return on capital employed = net operating profit /employed capital (MyAccountingCourse, 2017)
=99/540
ROCE for Andrew =0.183 or 18.3%
The return on capital employed for Charlotte =24/ 969
=0.024 or 2%
Gross profit for Andrew = revenue – cost of sales
=596-394
=202
Gross profit percentage Andrew =gross profit / total revenue x 100
=202/596 x 100
=33.89%
Gross profit for Charlotte = revenue – cost of sales
= 678-526
=152
Gross profit percentage charlotte = gross profit / total revenue x 100
152/678 x100
= 22.41%
Operating profit Andrew – gross profit – administrative expenses and selling and distribution expenses (Investinganswers, 2017)
=202- (36+53)
=113
Operating profit percentage Andrew = operating profit/revenue x 100
=113/596 x 100
=18.9%
Operating profit charlotte- gross profit – administrative expenses and selling and distribution expenses
=152- (45+56)
=43
Operating profit percentage charlotte = operating profit/revenue x 100
=43/678 x 100
=6.34%
Profit of the year Andrew = profit before tax – tax
=113-14
=99
Profit of the year charlotte = profit before tax –tax
=43-19
=24
Current ratio Andrew = current assets/ current liabilities
=(138+69+96)/(60+10)
= 4.32
Current ratio charlotte = current assets/ current liabilities
=(167+98+9)/(120+1+30)
=1.81
Inventory days Andrew = inventory/ cost of sales
= 138/ 394 x365
=127.75
Inventory days Andrew = inventory/ cost of sales
=167/526 x365
=114.49
Trade Receivables collection period (days) Andrew = 356/ accounts receivables (Bragg, 2017)
= 365/ 69
=5.28
Trade Receivables collection period (days) Charlotte = 356/ accounts receivables
=365/98
=3.72
Trade Payables payment period (days) Andrew= 365/ Trade Receivables
= 365/60
=6.08
Trade Payables payment period (days) Charlotte= 365/ Trade Receivables
=365/120
=3.04
Gearing ratio % Andrew =long term liabilities/ capital employed x 100
= 70/ 540x 100
=12.96%
Gearing ratio % Andrew =long term liabilities/ capital employed x 100
=231/1049 x100
=22.12%
Interest cover Andrew =earnings before interact and taxes/ interest expense
= 170
Interest cover Charlotte =earnings before interact and taxes/ interest expense (Kennon, 2017)
=69/ 1
=69
* Using the ratios calculated in part (a) prepare a report for the investor providing analysis of the performance and position of Andrew and Charlotte. Your answer should suggest reasons for any difference in performance.
As an investor, understanding if a company is doing well is a crucial skill. This is relative to the risks involved in making investments in dead-end companies that cost the investors millions. A balance sheet is an easy way of establishing if a company is strong or is weak financially (DiLallo, 2017). As such, the ability to read a balance sheet is one of the subtle ways of establishing if one should invest in a company or keep searching for other opportunities. The balance sheet is a document that offers the investors with a snapshot of what the company owns and how it has paid for it. When comparing between the two companies there some interesting facts that come up and they are crucial for any investor that is looking into the companies to invest (DiLallo, 2017). One of the rations that should be considered in the comparison is the return on the capital employed (MyAccountingCourse, 2017). This is a ration that measures the efficiency levels of a company with reference to the ability to generate profits from the capital employed. It is for this reason that it compares the net operating profit and the capital employed. In the case of the two companies Andrew has the higher return on capital employed, coming in at 18%, while Charlotte comes at a mere 2%. This is a close indicator, that Andrew has a higher efficiency when it comes to generating profits from the capital that brought in. as such, when an investor brings in their capital, they should expect much faster rates of turning a profit. At this rate, Charlotte is not a good investment option (DiLallo, 2017).
The other ratio that comes in handy is the gross profit. This is the profit that a company makes after it had deducted the costs associated with selling the products it deals in. in the case of the two companies, Andrew also comes out on top in this category. This is relative to the fact that, it has a gross profit of 202 compared to that of Charlotte of 152. Clearly, Andrew made more profit compared to Charlotte an aspect that any investor should consider, when investing in either of the two. At this point the best investment option of the two companies is the Andrew Company.
One other ration that is crucial for investors when they are considering which company to invest in is the operating profit (Investinganswers, 2017). This is measure of income and is used by investors to assess how much ...