Chapter 3 • Financial statements and their interpretation
Jackson plc
Accounting ratios for the years ended 31 December
2007 2008
Profitability ratios
Return on capital employed (%) 14.9 19.0
Return on ordinary shareholders’ funds (%) 13.1 19.1
Gross profit margin (%) 43.8 42.9
Operating profit margin (%) 13.8 16.1
Activity ratios
Sales revenue to capital employed (times) 1.08 1.18
Inventories turnover period (days) 78.8 62.0
Settlement period for trade receivables (days) 56.2 41.9
Settlement period for trade payables (days) 83.9 64.4
Liquidity ratios
Current 0.99 : 1 1.96 : 1
Acid test 0.73 : 1 1.48 : 1
No credit period (days) (54.0) 13.6
Capital gearing ratios
Gearing 0.54 : 1 0.42 : 1
Interest cover (times) 2.9 4.5
Investors’ ratios
Earnings per share (£) 0.23 0.39
Price/earnings 15.2 13.1
Dividend yield (%) 2.4 2.2
Dividend cover (times) 3.1 3.9Comment on Jackson plc’s ratios
In 2008 there was a significantly higher ratio for return on capital employed than was
the case in 2007, which would normally be seen as desirable. This has been achieved
mainly through an increased sales revenue to capital employed ratio, which more than
overcame the small decrease in the gross profit margin. Thus the business was more
effective at making sales in 2008 than it was in 2007. Operating profit margin rose
because of the strong increase in turnover (sales revenue), despite an increase in the
amounts spent on overheads.
Liquidity improved dramatically from a level that was probably an unhealthy one,
to one that would probably be considered fairly strong. This was achieved through the
reduction in both the amount of time for which inventories were held and the time
taken to collect amounts owed by credit customers. Trade payables were more
promptly settled in 2008 than they were in 2007. This represents a reduction over the
year in the extent to which the business took advantage of the availability of this the-
oretically cost-free form of finance. This may have been done deliberately with a view
to improving relations with suppliers.
Partly through the elimination of the overdraft, and partly as a result of relat-
ively high ploughed-back profit expanding reserves, the gearing ratio dropped
significantly.
The increased profit with no increase in the number of shares issued led directly to
an increase in earnings per share. The price/earnings ratio diminished despite a much
better profit performance by the business in 2008. This can be explained by the fact
that the share price is driven by investors’ expectations of the future of the business.