Blue Inc. - Perform Ratio Analysis to Measure the Profitability, Liquidity and Efficiency of a Given Organisation

Unit 5

P5: Perform Ratio Analysis to Measure the Profitability, Liquidity and Efficiency of a Given Organisation

In this part of unit 5 I am going to do a ratio analysis for Blue Inc. Ratio Analysis covers three areas, profitability, lucidity and activity. Profitability rations measure how much profit an organisation makes. Liquidity ratios calculate the organisation’s ability to turn assets into cash in order to pay debts, and activity ratios look at things like how long it takes for stock to be turned into cash.

Profitability

1. Gross profit margin

Gross Profit/Sales x 100 = 47.80%

430,200/900,000 x 100 = 47.80%

Gross profit Margin is a company's revenue minus its cost of goods sold. Gross

profit is a company's profit after selling a product they sell and deducting the

cost need to produce it.  This is a useful tool to use within a business to measure

their performance.

2. Net profit margin

Net Profit/Sales x 100 = 10.74%

96,670/900,000 x 100 = 10.74%

Net Profit Margin can tell you how much revenue a business makes before tax.

The higher the percentage the more revenue the business will keep therefore the

higher the percentage the better the company is.

3. Return on capital employed (ROCE)

Net Profit/Capital Employed X 100 = 80.87%

96,670/119,536 x 100 = 80.87%

Return on Capital employed (ROCE) is a measure of how much a business can

get back from their investments. If a business has a high ROCE, it shows that

their business is very efficient as they are putting their money from this towards

goods and stock or other investments which would lead to a percentage rise.

Liquidity

4. current ratio

Current Assets/Current Liabilities = 0.76 : 1

56,800/74,934 = 0.76 : 1

Current ratios are used to determine a business’s ability to meet its short-term

debts owed to another business. The smaller the Ratio is, the better the Blue Inc will be at paying back their short term loans in the future. This is therefore useful as if they are paid back quickly it show that you are reliable and may not have to pay as much due to interest.

5. Acid test ratio

Current Assets - minus Stock/Current Liabilities = 0.35 : 1

56,800 – 30,200/ 74,934 = 0.35 : 1

Acid test ratio can be very helpful for a business to determine whether they have