Review of SSP’s financial performance and position Profitability Overall SSP plc has increased turnover by nearly 15%, however, this appears to be at the expense of operating profit which has fallen by 20%. The company’s Return On Capital Employed (ROCE), which indicates how well the business has used the financial resources which have been invested in it, has fallen from 31. 9% to 23. 3%. Although the ROCE for 2004 in absolute terms appears quite satisfactory (it is certainly higher than the cost of capital), this ratio shows a decline from the previous years and must be further investigated.
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The gross profit margin (which effectively compares the cost of goods sold with the selling price) has been maintained at 60%. However, the net profit ratio (which measures operating profit as a proportion of sales) has fallen from 12. 1% to 8. 5%. This indicates that the fall in profitability is due to a disproportionate rise in expenses in relation to turnover. In particular, administrative expenses have increased by 26% which is more than the increase in sales.
This overall drop in the profit margin will be a major factor in the drop in the ROCE and further analysis must be undertaken to ascertain what specific expenses were responsible. Liquidity All firms need liquid assets to meet day to day payments. Cash is the life-blood of any business, no matter how large or small. If a business has no cash and no way of getting any cash, it will have to close down. The liquidity ratios highlight the ability of the firm to convert its assets to cash.
SSP’s current ratio (which compares current assets with current liabilities) has improved from 1. 56 to 1. 78. However, the acid test ratio, which excludes stock values (which are seen as less ‘liquid’ than other current assets) has dropped from 0. 76 to 0. 64. It is not the absolute value of this ratio which might cause concern but the fact that it has fallen over the year. An examination of the constituent parts of this ratio reveals that the main factor driving the figures down is the decrease in cash balance by ? 86,000. The cash flow statement indicates that, encouragingly, the company is still generating significant cash flow from normal operating activities, however, it appears that new fixed assets have been acquired without any injection of new long term finance — resulting in a bank overdraft where there was a healthy cash balance previously. If this situation is allowed to continue the overall liquidity of the organisation could be threatened. Efficiency
