Suggested answers to selected problem questionsThe downturn in gross profit margin must have been caused by an increase in the cost
of sales relative to sales revenue. (Note that this does not mean that cost of sales has
increased; it may, for example, have reduced, but if so, revenue has reduced even more.)
The fact that operating profit margin has declined by exactly the same percentage (10
per cent) as gross profit margin implies that the decline in the net margin was entirely due
to the decline in gross profit.
The increase in the settlement period for trade receivables is something that needs invest-
igating. It may be a deliberate strategy to encourage trade. It is often the result of a lack of
control, however. The increase in the settlement period for trade payables may well be
beneficial, because the business is gaining more free credit than was the case last year. How-
ever, this may be at the cost of discounts for prompt payment and/or supplier goodwill.
The current ratio has declined although not necessarily to an alarming extent, given the
nature of the business, which probably has a fairly fast inventories turnover period. The
acid test ratio has also declined. This may be of concern since it could indicate weakness to
potential suppliers of credit.
By general standards the gearing ratio looks uncomfortably large and should probably
be investigated.
Some comparison with other businesses in the industry would probably be very help-
ful. ‘Internal’ time series analysis is very limited in this context. We have information on
only two years on which to base our assessment.3.3 Persona LtdReturn on capital employed×100%×100% 20.0%×100% 16.3%Return on ordinary shareholders’ funds×100%×100% 12.3%×100% 4.6%Gross profit margin×100%×100% 32.9%(^179) ×100% 29.7%
602
164
499
Gross profit
Sales revenue
6
130
16
130
Profit for the year
Share capital +reserves
31
190
37
185
Operating profit
Share capital +reserves +non-current liabilities
Last year This year
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