Contents

Part A............................................................................................................................................................. 2 Profitability.................................................................................................................................................... 2 Liquidity......................................................................................................................................................... 2 Management efficiency Or Efficiency ratio .................................................................................................. 3 Gearing Ratios ............................................................................................................................................... 3 Debt/Equity Ratio...................................................................................................................................... 3 Investment Ratios ......................................................................................................................................... 4 Dividend cover ratio .................................................................................................................................. 4 Part B............................................................................................................................................................. 4 Subject ...................................................................................................................................................... 4 Introduction .............................................................................................................................................. 4 Profitability ratios ......................................................................................................................................... 5 Gross profit ratio ....................................................................................................................................... 6 Net profit ratio .......................................................................................................................................... 6 Liquidity......................................................................................................................................................... 6 Current ratio ............................................................................................................................................. 6 Management efficiency Or Efficiency ratio .................................................................................................. 7 Average Stock Turnover period ................................................................................................................ 7 Average Debtors Settlement Period ......................................................................................................... 7 Payables payment period ......................................................................................................................... 7 Gearing Ratios ............................................................................................................................................... 8 Interest Cover Ratio .................................................................................................................................. 8 Investment Ratios ......................................................................................................................................... 9 Dividend cover ratio .................................................................................................................................. 9 Conclusion ..................................................................................................................................................... 9 REFERENCES ................................................................................................................................................ 10

Part A

Ratios
Profitability
Return on capital employed

2010

2009

= 27.3%

=21.73%

Gross profit ratio

=38%

=34.9%

Net profit ratio

=8.6%

=5.5%

Liquidity
Current ratio
= 2.4

Asset Test Ratio

= 0.58 = 1.2

Management efficiency Or Efficiency ratio

Average Stock Turnover period

Average Debtors Settlement Period

Payables payment period

Gearing Ratios
Capital Gearing Ratio

Debt/Equity Ratio

Interest Cover Ratio

= 22.94%

=12.2 times

Investment Ratios

Dividend cover ratio

= 2.3 times =1.8 times

Part B
To Director of Aerconwy From Finance Advisor Date 04-05-2012

Subject
The financial performance of Aerconwy Ltd. Over two years and Alternative sources of finance available to it.

Introduction
The financial statements of Aerconwy Ltd over two years have been presented for consideration. In order to provide further information on the position and performance of the company and to advise on what would the best source of finance available to Aerconwy Ltd the ratios have been calculated. Before going further it is informed that there are some assumptions which are taken in to consideration during the calculations. First of all it is assumed that Aerconwy Ltd has used the same accounting policy over different periods. Secondly it is also informed that there a certain acceptable ways to calculate the ratios. There for different way may generate different results. So the findings may be different. It may also be useful to view the cash flow of Aerconwy Ltd in order to see the exact cash position of the company and what cash is required.

Main Body Basically ratios are a relation which gives information about a companys activities. From these it can be seen that where the company is standing and where it is going to be in the coming years and how could the activities of the company could be carried out in order to achieve the required objectives of the company. In the case of Aerconw y Ltd. A comparison of the financial ratios of two years is carried out which are 2009 and 2010. By looking at these ratios the future condition of the company could be considered. From the figures in the profit and loss accounts it can be seen that the profit has increased from 384000 to 426000 giving a 10.9% increase. Firstly it can be seen that the sales in 2009 was 384000 which increased to 426000 by 2010 giving a 10.9% increase in sales. Furthermore there was an increase of gross profit of 20.9%. The in expense is increased by 10.9% going directly with the line of sales. Looking at the ratios

Profitability ratios
Profitability ratios are normally calculated in order to see the earnings of the business as compared to its expenses. There are different ratios which can be calculated in order to see the profitability.

Return on capital employed This normally measures the percentage of return on the capital which is employed. By calculating this ratio it can be seen whether the company makes enough profits in accordance to the capital invested and is one of the main factors to see the performance of the investment. It is calculated to see whether the company is using its capital assets efficiently. It is normally calculated as profit before interest and tax divided by the amount of capital employed. (Martin S. Fridson, 2011) 2010 2009

= 27.3%

=21.73%

In case of Aerconwy Ltd the return on the capital employed has increased from 21.73% in 2009 to

27.3% in 2010. This increase may be due to number reasons which may include controlling the cost by purchasing the raw materials on a cheaper price or by any other possible way. This increase would boost the confidence of the investors or the shareholders as they can see a clear increase in the percentage against their capital given. The greater the better is the performance of the company.

Gross profit ratio

This ratio measures the percentage of profit on the sales of a company during the year. By calculating this ratio it can be seen that how efficient the operations of a company are going. This ratio is mainly affected by increasing the sales and selling price.
2010 2009

=38 %

=34.9%

Aerconwy Ltd shows an increase in the sales from 34.9% to 38% which is a very good sign and is due to an increase is the sales price or by the reduction in purchasing cost.

Net profit ratio

This ratio measures how efficiently the company is managing its cost and converting the revenue into the profit. The greater this ratio is the more efficient the company is in its cost management. 2010 2009

=8.6

=5.5

The net profit of also shows an increase from 5.5% to 8.6% which very effective for the company.

Liquidity
This ratio measures the ability of a business to convert its assets to cash. This sees how much current assets the business have to meet its payment. This include current and asset test ratio.

Current ratio
This measures the ability of the company to meet its short term obligations. This is really important for the shareholders to see the financial performance of a company. The higher this ratio the less is the risk. 2010 2009
= 2.4

It can be seen that the current ratio has increased from 2.4 to 1.6 this is of the reason because of bank overdraft. In 2009 there was no bank overdraft but in 2010 there is bank over draft resulting an increase in the current ratio. (Frank K. Reilly, 2009)

Management efficiency Or Efficiency ratio

Efficiency ratios are normally calculated to see how the working capital of a company is being managed and where further improvements could take effect.

Average Stock Turnover period

This ratio shows how well the stock of a company is being managed. The greater it is the better it is for the company. 2010 2009

In Aerconwy Ltd it can be seen that in 2009 the inventory turnover ratio was 73 days which then

increased to 84.4 days. Normally the less days the inventory takes for the turnover the better it is.

Average Debtors Settlement Period

This measures the time the debtors take to pay their amount which they owe to the company. It normally depends on the ability of the debt control department, how efficient the debt control department with in a company is operation. This is equalent to give an interest free credit.

2010

2009

It can be seen that in Aerconwy Ltd the debtors settlement period is constant this shows the consistant efficiency of the credit control department which is good for the company.

Payables payment period

This is a measure of the time the company takes to pay its debts normally the greater days taken may be better as its normally like taking an interest free credit. 2010 2009
\

It can be seen that in Aerconwy Ltd the payables days have increased from 34 days to 37 days. This may be a policy of the company to take advantage of the cash in hand. On the other hand this may also show the weakness of the company to pay the debts within the specific time. Paying the amount late may also have a negative effect on the company. (Woelfel, 1994)

Gearing Ratios
This is normally used to see the capital structure of a company. This is one of the main focus of investors as the can see the current capital position of a company through this ratio. The companies which are more geared are considered to be more risky as are relying on loans to run the day to day activities of a business. 2010 2009

In 2009 Aerconwy Ltd had no external loan so the gearing ratio was zero the reason for this is that the company may have sufficient funds so it had no need to barrow any external funds hence giving 0% gearing in 2009 but if its looked in 2010 it can be seen that the ratio has increased up to 18.7%.This rise in the gearing ratio is because of the 10% debentures. These may be issued for any major investment purpose. (Bull, 2008)

Interest Cover Ratio

This ratio normally measures how many times a company can pay its interest. Its shows the safety of a company to pay the interest. Greater this ratio more easily the business can fulfill its interest. If this ratio is less it means that the business has less earnings to pay the interest.

2010
=12.2 times

2009

It can be seen hat in 2009 there was no interest this is because there were no borrowings but in 2010 this ratio as 12.2 times meaning that profits were sufficient to pay the interest 12 times which is a good sign.

Investment Ratios
These ratios are normally needed by invosters to see the position of the company regarding the investment. (W. Steve Albrecht, 2008)

Dividend cover ratio

2010
= 2.3 times

2009
=1.8 times

This ratio in 2009 was 1.8 times which increased in 2010 to 2.3 times which is attractive to the investors.

Conclusion
The report shows a comparison of ratios of 2009 and 2010. It should be kept in mind the limitation of the ratios as well. The profitability ratios showed an increase this is because of the increase in the sales amount. This increase may be of increase in sales. Even the net profit ratio shows an increase. This is because of a good control in the expense. The efficiency ratios show that the debtors day are almost constant in both the years which is a good sign on the other hand the payables periods have increased which may also better for the company as its equalent to take an interest free loan. Gearing ratio in 2009 was zero as there was no debt taken but in 2010 because of debt it increased. If the company needs any further finance its better to go for the internal sources first as it has remaining profit after paying dividend . In the external sources it could go for bank loan. The overall performance of a company is better showing good profits and is attractive for the stakehokders.

REFERENCES
Bull, R. (2008) Financial Ratios, Oxford: CIMA Publishing. Frank K. Reilly, K.C.B. (2009) Investment Analysis and Portfolio Management, 10th edition, Canada: Nesson education. Martin S. Fridson, F.A. (2011) Financial Statement Analysis, 4th edition, Canada: John wiley & sons. W. Steve Albrecht, E.K.S.J.D.S. (2008) Financial Accounting, 11th edition, USA. Woelfel, C.J. (1994) Financial Statement Analysis, USA.