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Springbox Case Essay

2054 words - 9 pages

Financial consultant reportAs a Financial consultant for Springbox plc, I will be considering four tasks which have been set to consider an investment within the business.My first task is to produce a commentary on the recent financial performance of the business. After comparing the figures from 2005 and 2006 it is apparent the sales turnover has not increased, this is a worrying start when considering any business’s accounts as the sales turnover should increase even slightly. The cost of sales has risen and this could be a result of poor management, price elasticity of demand and or suppliers may have increased prices yet the business has not increased the price to cover costs. There ...view middle of the document...

Each of the ratios completed (appendix 1) can be broken in these areas and firstly looking at the business’s profitability. The return on capital employed is a fundamental measure of business performance, net profit margin relates to the net profit for the period to the sales revenue during that period and the gross profit margin relates to the gross profit of the business to the sales revenue generated for the same period. Each of these ratios have decreased within the period of a year, this indicates there could be a problem with pricing of stock, loss of control of expenses or it is possible the cost of goods being sold has increased. This is a big concern for the business and should be investigated further by management.The efficiency of the business involves looking at the average stock turnover this represents a significant investment in the business, debtor’s collection period is how long on average credit customers are taking to pay, creditor’s collection period is how long the business take to pay their trade creditors and finally sales revenue to capital employed ratio examine how effectively the assets of the business are being used to generate sales revenue. The stock turn over has increased which mean stock is being held longer in the business, this is not a good. The sales revenue has also increased reflecting on long-term capital investment in assets being used more productively in the generation of the revenue. The debtors collection period has decreased with is a positive ratio result, this means customers are paying faster. Creditor’s collection period has also decreased and this has proved not to be a problem as debtors are paying in advance of this period.There are two ratios related to the liquidity of the business, these are the current ratio compare the liquid assets of the business with the current liabilities and the acid test ratio is very similar to the current ratio but it requests more stringent test of liquidity. The current ratio for the industry is said to be 2:1 and Springbox plc in 2005 had a ratio of 1:6 this is below the industry level and in 2006 it had risen but not as high as the industry level to 1:9. This could be due to stock being held too long in the business. The acid test ratio has also risen and this is also due to stock not being sold and being stored in the business.Financial gearing takes place when a business is financed, at least in part by borrowing and not by the owners. A business gearing level is an important assessment of the risk being taken. The gearing ratios are the interest cover ratio and the gearing ratio itself. These ratios are actually below the industry level presented in the case study information. This is due to substantial increase in the long term loan in 2006. The interest cover ratio has altered so much due to the profitability of the business decreasing.Investment ratios are as follows: dividend payout ratio and dividend yield ratio. The ratio shows a...

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