Digital Marketing

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Net Profit Margin –

Net Profit ÷ Sales x 100 = Answer %

31/03/2012

31/03/2013

× 100%[pic 23]

= 30%

× 100%[pic 24]

= 29%

[pic 25]The Net profit margin measures how much is earned for every £1 of sales by Morvern Enterprise. It is then translated into profits. A low profit margin will indicate a low margin of safety e.g. it means that the company has a higher risk that a decline in sales will erase profits and result in a net loss.

This ratio will also indirectly measure how well a Morvern Enterprises manages their expenses relative to its net sales. This is why companies strive to achieve higher ratios. They can do this by either generating more revenues while keeping expenses constant or keep revenues constant and lower expenses. Since most of the time companies generate additional revenues it is more difficult than cutting expenses. This means managers will generally tend to reduce spending budgets to improve their Net Profit ratio.

Like most profitability ratios, this ratio is best used to compare like sized companies in the same industry. This ratio is also effective for measuring the past performance of a company.

In contrast to this we can see that in 2012 Morvern Enterprises converted 30% of their sales to profit but in 2013 they only converted 29% of their sales into profits. This could be because they have spent more on expenses to help improve the company or they are not selling enough goods to consumers. With the net profit decreasing Morvern Enterprises this could indicate they are moving into the low margin of safety were expenses could potentially out weigh profits made.

Return on Capital Employed –

Net Profit ÷ Capital + Net Liabilities x 100 = Answer %

31/03/2012

31/03/2013

× 100%[pic 26]

= 36.3%

× 100%[pic 27]

= 25.5%

Return on capital employed is a profitability ratio that measures how efficiently a company can generate profits from its capital employed. The return on capital employed shows investors how much profit is earned for every £1 of capital employed. It is also a long-term profitability ratio because it shows how effectively Morvern Enterprise’s assets are performing while taking into consideration long-term financing.

As we can see in the year ending 31/03/2012 Morvern Enterprise earned 36.6 pence of capital employed for every £1 sale but in the year ending 31/03/2013 they dropped to 25.5 pence of capital for every £1 sale. A higher ratio here would be more favourable because it means that more pounds of profits are generated by each pound of capital employed. A lower value of indicates lower profitability. A company having less assets but same profit as [pic 28]its competitors will have higher value of return on capital employed and therefore a higher profitability. Investors are interested in the ratio to see how efficiently a company uses its capital employed as well as its long-term financing strategies. Companies' returns should always be higher than the rate at which they are borrowing to fund the assets. For example, if companies borrow at 10% and can only achieve a return of 5%, they are going to lose money.

[pic 29]Liquidity Ratio

These Liquidity ratios demonstrate a Morvern Enterprises ability to pay its current obligations. They relate to the availability of cash and other assets to cover accounts payable, short-term debt, and other liabilities. According to Reference for business (2013) “All businesses require a certain degree of liquidity in order to pay their bills on time, though start up and very young companies are often not very liquid”

On the other hand mature companies that show low levels of liquidity can indicate poor management or the need for additional capital. According to the article Fa in Financial (2012) “Any company's liquidity may vary due to seasonality, the timing of sales, and the state of the economy.” Liquidity ratios can also provide business managers with useful limits to help them regulate borrowing and spending.

Current Ratio-

Current Assets : Current Liabilities

31/03/2012

31/03/2013

1607 : 549

= 2.9 : 1

1929 : 573

= 3.3 : 1

This measures the ability of Morvern Enterprise to pay its near-term obligations. "Current" is usually within one year. Though the ideal current ratio depends to some extent on the type of business. For a business to pay its near-term obligations it should have at least 2:1 ratio. In the calculation above we can see that at the year ending 31/03/12 there was a ratio of 2.9:1 showing that current assets are 2.9 times bigger than current liabilities. Whereas in the year ending 31/03/13 it is seen to rise to 3.3:1, so current assets are now 3.3 times bigger than current assets. Within a company if it has been shown to have a lower current ratio it means that the company may not be able to pay its bills on time. With Morvern Enterprise seeing an increase in 2013 it indicates that the company has money in cash or safe investments that could be put to better use in the business (Investopedia, 2014)

[pic 30]Acid Test Ratio –

Current Assets – Inventory : Current Liabilities

31/03/2012

31/03/2013

1607 – 300 : 549

1307 : 549

= 2.4 :1

1929 – 425 : 573

1504 : 573

= 2.6 :1

According to Reference for Business 2013, “Quick Assets (cash, marketable securities, and