A number of financial ratios were calculated and analysed to obtain a balanced view of Highlow Engineering Co. Ltd. These ratios fall under different heading according to the factors they are measuring. The Profitability Ratios express each of the gross profit, net profit and various overhead costs as a percentage of sales used, as an indication of how well the company was controlling its costs.
The gross profit ratio, which represents the amount of gross profit Highlow Engineering made for every ï¿½100 of sales revenue, showed a 2 % increase from 2001 to 2002 and a 3.2 % increase from 2002 to 2003. For 2001 the company made 27.80 gross profit for every ï¿½100 of sales while in 2002 it made ï¿½29.80 and in 2003 it made ï¿½33.00. This trend indicated that the company was improving its profitability from year to year. Further analysis showed that this occurred as a result of increasing both its sales and its gross profit each year.
Overheads to sales ratios
The distribution cost to sales ratio showed a small increase each year from 2001 to 2003. This was as a result of an increase in 11 and 29% increase in the distribution cost for 2002 and 2003 respectively will only a corresponding increase of 7 and 9.5% increase in sales. Given that there was a 3% inflation per annum, when this is considered as shown below there is still an increase in actual sales.
Administration cost to sales was constant in 2001 and 2002 but decreased by 1.6 percentage points in 2003. The changes in the administration cost which was approximately 6% increase was proportional to the increase in sales for the period, while there was a 5.8% decrease in administration cost and a 9.5% increase in sales hence the decrease in the ratio for 2003.
The Employee cost per sale ratio showed a trend of constant improvement moving from 37.5% in 2001 to 36.1 in 2002 and 34.7% in 2003. The increase in sales appears to be the helping factor in reducing this ratio since the wage cost was constantly rising.
As mentioned earlier the returns on sales trend showed an increase from 11% in 2001 to 13% in 2002 to 16.5% in 2003. The fact that this increased despite the increase in sales indicated that the increase in the PBIT was significantly more than the growth in sales. The increase in this ratio also mirrors the increase in the gross profit margin, which showed that the handling and control of expenses were consistent.
Returns on Investment ratio shows the profit as a percentage of the total capital employed, where the capital employed used was the fixed assets plus the current assets minus current liabilities. The return on investment showed improvement each year. There was an increase 1.2% in 2002 and an increase of approximately 4% in 2003. It appears that the firm is getting more efficient at using its resources and if this trend continues they may attract investors if they so desire.
Asset or Investment Turnover Ratios: These are used to indicate how efficiently the company used its fixed assets. Efficient use of assets should yield higher rates of return. Sales to fixed assets ratio measures the turnover of the firm's fixed assets, that is, how much each 1 invested in fixed assets generates in sales.
The firm had fix assets in the form of vehicle, equipment and property and its sales to fixed asset ratio decreased from 2.55 to 1.96 to 1.64 from 2001 to 2003. This could have been because the company was not generating enough sales/business in terms of volume from its assets after such major investments as discussed earlier. It could also be that the company is fairly new hence large capital expenditure to properly set up the business before realising the requisite returns. If this is not the case Highlow will need to find ways of increasing its sales or it should disposed some assets or do a calculated combination of both