FINANCIAL DECISION

Financial Decision Making Assignment Sample

Introduction

Construction and materials industry is one of the fastest moving industries in the UK, and James Halstead Plc is a major player in this field. The company is containing £848.53 million market capital which is the main attraction point for consideration of this company in financial analysis. Several financial ratios have been determined in this part of the report to evaluate profitability, efficiency, liquidity and solvency status of the organization. Corporate governance and strategic financial analysis have been made throughout the report. The significance of this research to provide vision and strategic financial goals of James Halstead Plc to AIM company.

Section A

1. Profit ratios

Profitability Ratios  2020 2019 2018 2017 2016
Revenue   2,38,630.00   2,53,038.00   2,49,510.00   2,40,784.00   2,26,141.00
Gross profit   1,00,368.00   1,08,802.00   1,04,517.00   1,04,810.00      95,964.00
Gross profit margin (%) 42.06% 43.00% 41.89% 43.53% 42.44%
 
Profitability Ratios  2020 2019 2018 2017 2016
Revenue   2,38,630.00   2,53,038.00   2,49,510.00   2,40,784.00   2,26,141.00
Net Profit      34,355.00      37,792.00      36,708.00      36,510.00      35,256.00
Net margin (%) 14.40% 14.94% 14.71% 15.16% 15.59%
Profitability Ratios  2020 2019 2018 2017 2016
Total Assets   2,16,379.00   2,15,715.00   1,97,016.00   2,00,546.00   1,83,922.00
Net Profit      34,355.00      37,792.00      36,708.00      36,510.00      35,256.00
Return on Assets (%) 15.88% 17.52% 18.63% 18.21% 19.17%
Profitability Ratios  2020 2019 2018 2017 2016
Shareholders’ Equity   1,37,475.00   1,33,057.00   1,28,817.00   1,14,060.00      97,467.00
Net Profit      34,355.00      37,792.00      36,708.00      36,510.00      35,256.00
Return on Equity (%) 24.99% 28.40% 28.50% 32.01% 36.17%

Table 1: Profit ratios

(Source: Created by the learner)

  • Gross profit margin

Gross profit ratio is used to measure profitability conditions based on the analysis of gross profit and total revere of James Halstead Plc. As per the view of Husain and Sunardi (2020), the gross profit margin is evaluated after subtracting costs of sales from the total revenue of the organization. Hence, it is essential for this part of the report to assess the financial performance of James Plc from the perspective of direct expenses. James Halstead Plc has made 42.44% of gross profit ratio in the financial year 2016, which has been decreased to 42.06% in 2020. The reason behind the decrease in gross profit margin in 2020 is the cost of sales of the organization has increased over the past years. It is required to note that the gross profit margin of James Halstead Plc was 43.00% in 2019, and in 2020 it decreased by approximately 1% (Jameshalstead.com, 2021).

  • Net margin

Net profit is the final profit which is distributed among the shareholders, and it is essential for the investors to make a brief analysis of the profit. This ratio analysis has been formulated by dividing net profit with total revenue of James Halstead Plc. According to Bayrakdarogluet al. (2017), the relation between net income and revenue of an organization is enlightened throughout the net profit margin. Based on the calculator made in table 1, the net profit margin was 15.59% in 2016, and it deteriorated to 14.40% in 2020. This decrease in profitability margin is an indication; the company is unable to sustain its operating expenses. James Halstead Plc made a high net income (35,256.00 thousand) while having low revenue (2,26,141.00 thousand) in 2016. Hence, the company needs to sustain its operating and financial expenses in the upcoming financial year (Jameshalstead.com, 2021).

  • Return on assets

Return on asset (ROA) ratio is calculated to compare profitability performance of James Halstead Plc with existing wealth in the past five years. As opined by Laitinen (2017), ROA is one good profitability ratio which is widely used by management to assess profit earnings efficiency as compared to the assets available in the business. James Halstead Plc made 15.88% of ROA in 2020; however, in 2019, it was 17.52% (Jameshalstead.com, 2021). As per the outcome in table 1, the ratio percentage has been deteriorating gradually each year which is causing a bad impression over the financial performance of the company. Highest ROA of James Halstead in the past five years was in 2016 as the ratio was 19.17%.

  • Return on equity

Return on equity (ROE) is another profitability ratio associated with a balance sheet statement where the ratio covers analysis of shareholders equity with a net profit of the organization. According to Laitinen (2017), a comparison of income with shareholders equity is effective to analyse earnings performance from the view of shareholders investment. As per analysis of return on equity of James Halstead Plc, the company made 24.99% of ROE in 2020 however in 2019 it was 28.40% thus, a decrease of 3.40% is observable in 2020 (Jameshalstead.com, 2021). The main reason behind such a bad performance of ROE is that the company has increased shareholders equity over the past five years.

2. Efficiency ratio

Efficiency ratio of James Halstead Plc refers to the management of assets and liabilities to calculate the turnover of receivables (40 in 2020), inventory days (181 in 2020) and accounts payable (78 in 2020). It highlights different aspects of the company, such as time taken to collect cash from customers and convert inventory into cash. In general, improvement of efficiency ratio directly reflects improvement of profitability of the company.

Efficiency Ratios 2020 2019 2018 2017 2016
Inventory 68,542.00 69,921.00 71,096.00 72,936.00 62,828.00
Cost of Goods Sold 1,38,262.00 1,44,236.00 1,44,993.00 1,35,974.00 1,30,177.00
Inventory Days             181             177             179             196             176
Efficiency Ratios 2020 2019 2018 2017 2016
Accounts Receivable 26,372.00 30,361.00 32,040.00 31,176.00 31,834.00
Revenue 2,38,630.00 2,53,038.00 2,49,510.00 2,40,784.00 2,26,141.00
Accounts Receivable Days             40             44             47             47             51
Efficiency Ratios 2020 2019 2018 2017 2016
Accounts Payable 29,596.00 41,971.00 32,610.00 41,309.00 32,806.00
Cost of Goods Sold 1,38,262.00 1,44,236.00 1,44,993.00 1,35,974.00 1,30,177.00
Accounts Payable Days              78             106              82             111              92

Table 2: Efficiency ratio

(Source: Created by the Learner)

  • Inventory days

Inventory days or also known as inventory outstanding is the number of days it takes for inventory to turn into sales. As stated by Ouyang and Yang (2020), the inventory days of an organization varies from industry to industry based on the nature of work. However, usually, a lower inventory day is preferred as it indicates that inventory is turning to sales faster. Inventory days are calculated by finding the ratio of average inventory and cost of goods sold multiplied by the number of days in the fiscal year. Monitoring inventory days is beneficial to optimize inventory management, improve cash flow, prepare better pricing decisions, reduce risks of spoilage and plan for the future.

In the case of James Halstead Plc, it is observed that in 2016 the outstanding inventory ratio was 176, which signifies that the organization required 176 days to turn inventory to sales. The value increased to 181 in 2020, and thus the company now takes 181 days to turn inventory into sales (Jameshalstead.com, 2021). Therefore, as per the analysis, the inventory days have increased signifying deteriorated inventory management.

  • Accounts receivable days

Accounts receivable measures the time taken to clear the accounts and collect the invoice. It is beneficial to determine collection of short-term payments of the organization. However, if the receivable days is greater than 25% above standard payment terms in invoice, it would be recommended to optimize account receivable (Berachaet al. 2019). On the other hand, if a receivable day is too less, it would denote that the company credit policy is too harsh. Accounts receivable days are calculated by finding the ratio of accounts receivable and revenue and multiplying it by number of days in the fiscal year. In the case of James Halstead Plc, the receivable days was 51 for 2016, which turned out to be 40 days in 2020 (Jameshalstead.com, 2021). It signifies that the organization has improved its receivable credit policy.

  • Accounts payable days

Accounts payable days refers to the number of days a company takes to pay the suppliers its due payments. Hence, if the number of days is more, then the company is paying the suppliers slowly. Conversely, if the number of days is too low, then it may denote supplier bargain power is quite high, and the company has high credit risk (Chang et al. 2017). It is calculated by identifying the ratio of account payable and cost of goods sold and then multiplying the solution with the total number of days in a year. James Halstead Plc had accounts payable days of 92 in 2016, which turned out to be 78 days in 2020 denoting that the company has improved its payment system over the years (Jameshalstead.com, 2021). Although the number also states that supplier demand has increased, the organization has the option to spread its purchases around and reduce supplier power.

3. Liquidity ratio

Liquidity Ratios 2020 2019 2018 2017 2016
Current Assets   1,64,421.00   1,71,773.00   1,54,786.00   1,57,060.00   1,41,177.00
Current Liabilities      51,668.00      62,457.00      52,609.00      64,543.00      59,761.00
Current Ratio               3.18               2.75               2.94               2.43               2.36
Liquidity Ratios 2020 2019 2018 2017 2016
Current Assets   1,64,421.00   1,71,773.00   1,54,786.00   1,57,060.00   1,41,177.00
Inventory      68,542.00      69,921.00      71,096.00      72,936.00      62,828.00
Current Assets – Inventory      95,879.00   1,01,852.00      83,690.00      84,124.00      78,349.00
Current Liabilities      51,668.00      62,457.00      52,609.00      64,543.00      59,761.00
Quick Ratio               1.86               1.63               1.59               1.30               1.31
Liquidity Ratios 2020 2019 2018 2017 2016
Total Cash and cash equivalent      67,445.00      68,664.00      51,650.00      52,948.00      44,529.00
Current Liabilities      51,668.00      62,457.00      52,609.00      64,543.00      59,761.00
Cash Ratio               1.31               1.10               0.98               0.82               0.75

Table 3: Liquidity ratios

(Source: Created by the learner)

  • Current ratio

Current ratio is the reflection of analysis of current assets and current liabilities; this ratio is effective to find out the cash availability condition in the business. As cited by Madushanka and Jathurika (2018), a high current ratio is expected from the business in order to reflect a secure financial condition of the business. Current ratio of James Halstead was 2.36:1 in 2016, which has reached to 3.18:1 by the end of 2020 (Jameshalstead.com, 2021). The ideal current ratio should be 2:1, which indicates high current assets and low current liabilities in the business. James Halstead has maintained high current assets and low current liabilities in the business; as a result, liquidity condition of the business has been improved.

  • Quick ratio

The quick ratio is another comprehensive liquidity ratio that ignores inventory value in the calculation process. As cited by Chiaramonte and Casu (2017), the quick ratio of stable business organizations should be at least 1:1. James Halstead Plc has above 1:1 quick ratio in the past five years, which is representing stability in business liquidity condition. As per the calculator made in table 1, the quick ratio of James Halstead was 1.31:1 in 2016 and in 2020, it increased to 1.86:1 (Jameshalstead.com, 2021). Hence, based on the overall analysis of quick ratio, it can be stated that the reason behind improvement in quick ratio is reduction in current liabilities.

  • Cash ratio

Cash ratio is a liquidity ratio that specifically focuses on cash and cash equivalent balance of organization. As cited by Tabash (2018), A high cash ratio in the business is appreciated by the organization as it emphasizes availability of liquid cash balance in the business. The cash ratio of James Halstead Plc in 2016 was 0.75, which has gradually improved, and finally, it reached 1.31 in 2020 (Jameshalstead.com, 2021). Hence, the liquidity condition of James Halstead has been improved over the past years, and currently, the company has good cash balance in the account. The main reason behind the improvement in cash ratio is decrease in current liability balance and stable increase of cash balance.

4. Investment ratio

Investment ratio refers to the ability of James Halstead Plc to achieve enough returns for the shareholders of the organization. Investor ratio is used to identify earnings per share (16.51 in 2020) and dividend per share (12.12 in 2020) of the business dealings. Too high P/E ratio denotes high value of stock price relative to earnings which may result in getting possibly overvalued. Conversely, a very low P/E ratio indicates low stock price relative to the earnings vice-versa and possibly undervalued (Hilkevics and Semakina, 2019).

Investors Ratios 2020 2019 2018 2017 2016
Net income 34,355.00 37,792.00 36,708.00 36,510.00 35,256.00
Basic Shares Outstanding 2,08,135.70 2,08,071.60 2,07,965.70 2,07,620.40 2,07,431.30
Earnings per share (£p)         16.51         18.16         17.65         17.58             17.00
Investors Ratios 2020 2019 2018 2017 2016
Dividend paid 25,236.00 28,405.00 27,245.00 25,438.00 39,867.00
Basic Shares Outstanding 2,08,135.70 2,08,071.60 2,07,965.70 2,07,620.40 2,07,431.30
Dividend per share (£p)         12.12         13.65         13.10         12.25             19.22

Table 4: Investment ratio

(Source: Created by the Learner)

  • Earnings per share

Earnings per share are calculated by dividing the net income of the organization with the basic shares outstanding of stock. As mentioned by Nalurita (2017), the resulting value denotes the company’s profitability and thus higher the value of earning per share, the more profitable the company is in the market. For James Halstead Plc, the earnings per share are £17.00 in the year 2016, which has been rising over the years. In 2019 the value of earnings per share of the company was £18.16, which is the highest in the last five years (Jameshalstead.com, 2021). However, due to the COVID 19 pandemic, the earnings per share of James Halstead Plc have dropped to £16.51, which denotes reduced profitability.

  • Dividend per share

Dividend per share is important as the amount of dividend paid out by the company relates to the amount of income of shareholders. According to Musciottoet al. (2018), a growing dividend per share means that the company can sustain its earnings growth over time. On the contrary, a low dividend per share signifies that the company is paying out a large proportion of earnings as dividends. It is observed that James Halstead Plc had a dividend per share of £19.22 in 2016, stating that the company has spare earnings. However, over time it is observed that the dividend per share has reduced and ultimately in 2020, it plummeted to £12.12 (Jameshalstead.com, 2021).

5. Solvency ratio

Solvency ratio is a critical metric to calculate the company’s ability to meet its long-term debt obligations (Kadimet al. 2020). Solvency ratio indicates whether James Halstead Plc would default on debt obligations or has the good cash flow to meet the long-term liability.

Solvency & risk Ratios 2020 2019 2018 2017 2016
Total Debt 78,904.00 82,658.00 68,199.00 86,486.00 86,455.00
Total Equity 1,37,475.00 1,33,057.00 1,28,817.00 1,14,060.00 97,467.00
Debt to Equity Ratio             0.57             0.62             0.53             0.76             0.89

Table 5: Solvency ratio

(Source: Created by the Learner)

  • Debt to Equity Ratio

The debt-to-equity ratio is the measurement of a company’s financial leverage and is calculated by total debt by total equity. As cited by Satryoet al. (2017), low debt to equity ratio refers to a low amount of financing by debt whereas a high ratio denotes that the company is getting more finance by borrowing money. According to the general consensus of the UK, the ratio should not increase 2.0. James Halstead Plc had a ratio of 0.89 in 2016, which went down over the years to 0.57 in 2020 (Jameshalstead.com, 2021). Low debt to equity ratio is good for the business as it means interests are better protected in case of business decline.

Section B

1. Corporate Governance

The Board of Directors of James Halstead Plc firmly believes that good corporate governance plays a vital role in the long-term success of the business. The success of the company till now has been the result of James Halstead Plc management and their key focus on business strategies to implement services of the highest business standards. James Halstead Plc has incorporated strict corporate regulations in the system in an attempt to accomplish their strategic goals. As stated by Agusta and Hati (2018), the committees such as executive committees, audit committees and compensation committees of James Halstead Plc are responsible for developing the company policies and enforce the rule of authority in the business.

Throughout the years, the company has managed to achieve success by following the listed policies. The company recognises the importance of social responsibility and corporate governance as a key driver to enhance the growth of the business (Bhagat and Bolton, 2019). Moreover, as corporate governance is one of the crucial means to enhance brand reputation, James Halstead Plc has incorporated the QCA code to stay committed to their statements. The QCA code is applicable to AIM companies, and thus, it can be argued that James Halstead Plc has been successful in making a positive impact through its corporate governance and leadership commitments (jameshalstead.com, 2021).

2. Financial Strategies

There are countless financial strategies which can be adopted by James Halstead Plc to improve its financial position and get one step closer to being listed in FTSE 100 (jameshalstead.com, 2021). Among the many strategies, the best financial strategies recommended to James Halstead Plc are as follows:

  • Lowering expenses is one of the critical ways to ensure better performance. It can be achievable by securing a good position in the market and reducing the cost of delivery (Bae et al. 2018). Another alternative is to use machinery to reduce manual labour work and increase timing. Keeping insurance policies is an effective way to reduce risk of financial losses due to injuries and accidents.
  • Currently one of the best ways to increase customer base is through online promotion. James Halstead Plc can use their website to attract customers and boost their market awareness. For example, call to action (CTAs) are powerful tools to convert visitors into customers and offer limited-time discounts (Angineret al. 2018). As increasing the customer base would directly help the company to increase business sales, it is one of the best strategies to get closer to FTSE 100.
  • Due to COVID 19, James Halstead Plc has incurred a loss of financial value and the cost of commodities has increased. As stated by Ojha et al. (2020), in this scenario, every construction organization and customers would be comparing different websites and searching for cheaper products. Therefore, a penetration pricing strategy can be beneficial in this case to gather all the customers towards the organization.

Conclusion

In this assignment, the financial ratios such as profitability, efficiency, liquidity, investment and solvency ratios have been calculated. It has been found that the company is thriving in the business and has maintained optimal operations to stay in the market. James Halstead Plc is aiming for a position in the FTSE 100 and is trying to bring a change in their system by leveraging new technologies and innovations. It can be analysed that they are using their assets efficiently to steadily build up their financial strength and dominate the market. Apart from this, the corporate governance of the firm and its impact on brand reputation is highlighted as well. Additionally, financial strategies have been proposed so that James Halstead Plc can acquire a place in the FTSE 100.

References

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Anginer, D., Demirguc-Kunt, A., Huizinga, H. and Ma, K., 2018. Corporate governance of banks and financial stability. Journal of Financial Economics130(2), pp.327-346.

Bae, S.M., Masud, M., Kaium, A. and Kim, J.D., 2018. A cross-country investigation of corporate governance and corporate sustainability disclosure: A signaling theory perspective. Sustainability10(8), p.2611.

Bayrakdaroglu, A., Mirgen, C. and Ezgi, K.U.Y.U., 2017. Relationship between profitability ratios and stock prices: an empirical analysis on BIST-100. PressAcademia Procedia6(1), pp.1-10.

Beracha, E., Feng, Z. and Hardin, W.G., 2019. REIT operational efficiency: Performance, risk, and return. The Journal of Real Estate Finance and Economics58(3), pp.408-437.

Bhagat, S. and Bolton, B., 2019. Corporate governance and firm performance: The sequel. Journal of Corporate Finance58, pp.142-168.

Chang, Y.T., Lee, S. and Park, H.K., 2017. Efficiency analysis of major cruise lines. Tourism Management58, pp.78-88.

Chiaramonte, L. and Casu, B., 2017. Capital and liquidity ratios and financial distress. Evidence from the European banking industry. The British Accounting Review49(2), pp.138-161.

Hilkevics, S. and Semakina, V., 2019. The classification and comparison of business ratios analysis methods. Insights into Regional Development1(1), pp.47-56.

Husain, T. and Sunardi, N., 2020. Firm’s Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review2(2), pp.13-26.

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Website

Jameshalstead.com, (2021). Annual report of James Halstead Plc. Available from: http://www.jameshalstead.com/investors/reports-and-accounts/ [Accessed on: 28th January, 2021]

Jameshalstead.com, (2021). Corporate governance and leadership. Available at: https://www.jameshalstead.com/investors/corporate-governance/ [Accessed on 27th January 2021]

Bibliography

Monnet, E. and Vari, M., 2019. Liquidity ratios as monetary policy tools: Some historical lessons for macroprudential policy. International Monetary Fund.

Appendices

Appendix 1: Profit ratios

Profitability Ratios  2020 2019 2018 2017 2016
Revenue   2,38,630.00   2,53,038.00   2,49,510.00   2,40,784.00   2,26,141.00
Gross profit   1,00,368.00   1,08,802.00   1,04,517.00   1,04,810.00      95,964.00
Gross profit margin (%) 42.06% 43.00% 41.89% 43.53% 42.44%
 
Profitability Ratios  2020 2019 2018 2017 2016
Revenue   2,38,630.00   2,53,038.00   2,49,510.00   2,40,784.00   2,26,141.00
Net Profit      34,355.00      37,792.00      36,708.00      36,510.00      35,256.00
Net margin (%) 14.40% 14.94% 14.71% 15.16% 15.59%
Profitability Ratios  2020 2019 2018 2017 2016
Total Assets   2,16,379.00   2,15,715.00   1,97,016.00   2,00,546.00   1,83,922.00
Net Profit      34,355.00      37,792.00      36,708.00      36,510.00      35,256.00
Return on Assets (%) 15.88% 17.52% 18.63% 18.21% 19.17%
Profitability Ratios  2020 2019 2018 2017 2016
Shareholders’ Equity   1,37,475.00   1,33,057.00   1,28,817.00   1,14,060.00      97,467.00
Net Profit      34,355.00      37,792.00      36,708.00      36,510.00      35,256.00
Return on Equity (%) 24.99% 28.40% 28.50% 32.01% 36.17%

(Source: Created by the learner)

Appendix 2: Efficiency ratios

Efficiency Ratios 2020 2019 2018 2017 2016
Inventory 68,542.00 69,921.00 71,096.00 72,936.00 62,828.00
Cost of Goods Sold 1,38,262.00 1,44,236.00 1,44,993.00 1,35,974.00 1,30,177.00
Inventory Days             181             177             179             196             176
Efficiency Ratios 2020 2019 2018 2017 2016
Accounts Receivable 26,372.00 30,361.00 32,040.00 31,176.00 31,834.00
Revenue 2,38,630.00 2,53,038.00 2,49,510.00 2,40,784.00 2,26,141.00
Accounts Receivable Days             40             44             47             47             51
Efficiency Ratios 2020 2019 2018 2017 2016
Accounts Payable 29,596.00 41,971.00 32,610.00 41,309.00 32,806.00
Cost of Goods Sold 1,38,262.00 1,44,236.00 1,44,993.00 1,35,974.00 1,30,177.00
Accounts Payable Days              78             106              82             111              92

(Source: Created by the Learner)

Appendix 3: Liquidity ratio

Liquidity Ratios 2020 2019 2018 2017 2016
Current Assets   1,64,421.00   1,71,773.00   1,54,786.00   1,57,060.00   1,41,177.00
Current Liabilities      51,668.00      62,457.00      52,609.00      64,543.00      59,761.00
Current Ratio               3.18               2.75               2.94               2.43               2.36
Liquidity Ratios 2020 2019 2018 2017 2016
Current Assets   1,64,421.00   1,71,773.00   1,54,786.00   1,57,060.00   1,41,177.00
Inventory      68,542.00      69,921.00      71,096.00      72,936.00      62,828.00
Current Assets – Inventory      95,879.00   1,01,852.00      83,690.00      84,124.00      78,349.00
Current Liabilities      51,668.00      62,457.00      52,609.00      64,543.00      59,761.00
Quick Ratio               1.86               1.63               1.59               1.30               1.31
Liquidity Ratios 2020 2019 2018 2017 2016
Total Cash and cash equivalent      67,445.00      68,664.00      51,650.00      52,948.00      44,529.00
Current Liabilities      51,668.00      62,457.00      52,609.00      64,543.00      59,761.00
Cash Ratio               1.31               1.10               0.98               0.82               0.75

(Source: Created by the Learner)

Appendix 4: Investment ratio

Investors Ratios 2020 2019 2018 2017 2016
Net income 34,355.00 37,792.00 36,708.00 36,510.00 35,256.00
Basic Shares Outstanding 2,08,135.70 2,08,071.60 2,07,965.70 2,07,620.40 2,07,431.30
Earnings per share (£p)         16.51         18.16         17.65         17.58             17.00
Investors Ratios 2020 2019 2018 2017 2016
Dividend paid 25,236.00 28,405.00 27,245.00 25,438.00 39,867.00
Basic Shares Outstanding 2,08,135.70 2,08,071.60 2,07,965.70 2,07,620.40 2,07,431.30
Dividend per share (£p)         12.12         13.65         13.10         12.25             19.22

(Source: Created by learner)

Appendix 5: Solvency ratio

Solvency & risk Ratios 2020 2019 2018 2017 2016
Total Debt 78,904.00 82,658.00 68,199.00 86,486.00 86,455.00
Total Equity 1,37,475.00 1,33,057.00 1,28,817.00 1,14,060.00 97,467.00
Debt to Equity Ratio             0.57             0.62             0.53             0.76             0.89

(Source: Created by learner)

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