412 ACCOUNTING FOR MANAGERS
Operating profit/sales
profit before
interest and tax
sales
27. 2
141. 1
= 19 .3%29. 5
138. 4
= 21 .3%Sales growth
sales year 2
−sales year 1
sales year 1
141.1−138.4
=2.7
138. 4
=+ 1 .95%Expense growth
expenses year 2
−expenses year 1
expenses year 1
113.9−108.9
= 5
108. 9=+ 4 .6%Gearing ratio
long-term debt
shareholders’ funds
+long-term debt
96. 7
131.5+96.7
=228.2= 42 .3%
146. 1
126.6+146.1
=272.7= 53 .5%Asset turnover
sales
total assets
141. 1
266.7+28.3
= 295= 47 .8%138. 4
265.3+ 35
=300.3= 46 .1%ROI and ROCE have both reduced. There has been a very small sales growth (less than 2%,
i.e. less than the rate of inflation) but expenses have increased by 4.6%. Consequently, oper-
ating profit has fallen, as has profit as a percentage of sales. The fall in profits and the increase
in shareholders’ funds and capital employed have resulted in the decline in ROI and ROCE.
Gearing has also fallen as a result of a largereduction in long-term debt. Asset turnover
has improved marginally.
Although two years is too short a period to draw any meaningful trends, we can say
that Drayton needs to increase its sales and/or contain its expenses.
7.2
Conclusions include:
žProfit has declined on each of the measures.
žLiquidity: Working capital has deteriorated and debtors are taking longer to pay
their accounts.
žGearing: Long-term debt has increased in proportion to shareholders’ funds and there
is less profit to pay a higher amount of interest.
žAssets are being used less efficiently to generate sales.
Overall, Jupiter’s performance on all four criteria has been worse in the current year.