90 ACCOUNTING FOR MANAGERS
Case study: Ottakar’s – interpreting financial statements
Ottakar’s has 74 bookshops and 900 employees. It is the second largest specialist
bookseller in the UK after Waterstone’s. The information in Tables 7.2 and 7.3 has
been extracted from the company’s annual report.
The number of shares issued was 20,121,000 in 2001 and 20,082,000 in 2000.
Ratios for profitability are shown in Table 7.4.
There was a strong sales growth between 2000 and 2001. Despite this growth,
the gross margin remained constant and operating profit to sales increased. This
is because the proportion of sales consumed by overheads (selling, distribution
and administration costs) reduced from 36.6% [(22, 707 + 3 ,986)/72,922] to 34.8%
[(26, 219 + 3 ,797)/86,287]. Operating profit more than doubled (from £1,678 to
£3,516) and profit after tax increased from £463 to £1,792 (all figures are in £’000).
As shareholders’ funds increased by only 10% and capital employed by only 6%,
the return on both measures ofinvestment showed a strong improvement.
Ratios for liquidity are shown in Table 7.5. While the working capital ratio is
healthy, indicating that the company has adequate funds to pay its debts, the
acid test reveals that after deducting inventory, the company has only about 22%
of assets to cover its current liabilities. This means that it is dependent on sales
of books in stock to pay suppliers for those books. The efficiency measures (see
below) support this.
Table 7.2 Ottakar’s Profit and Loss account
in £’000 2001 2000
Turnover 86,287 72,922
Cost of sales −52,755 −44,551
Gross profit 33,532 28,371
Selling and distribution costs −26,219 −22,707
Administration expenses −3,797 −3,968
Operating profit 3,516 1,678
Profit/(loss) on disposal of fixed assets 4 − 336
Profit before interest and taxation 3,520 1,342
Other interest receivable and similar income 3 2
Interest payable and similar charges − 727 − 562
Profit on ordinary activities before taxation 2,796 782
Taxation on profit on ordinary activities −1,004 − 319
Profit for the financial period 1,792 463
Dividend and appropriations − 503 − 302
Retained profit for the period for equity shareholders 1,289 161
Earnings per share 8.91p 2.31p