Acid test ratio for burberry plc

Category: Accounting

Q.1. Part-A Calculation of financial ratios Liquidity ratios: Current Ratio = Current Assets Current Liabilities Year wise Current ratio of Burberry Plc Burberry Plc 2007 2008 2009

£m

£m

£m

Current Assets

423.7

588.4

742.4

Current Liabilities

330.4

436.2

546,8

Current Ratio

1.28:1

1.34:1

1.34:1

Quick Ratio or Acid test ratio = Quick Assets (current assets - stock) / current liabilities

Year wise Current ratio of Burberry Plc

Burberry Plc

2007

2008

2009

£m

£m

£m

Quick Assets

423.7

588.4

742.4

Current Liabilities

330.4

436.2

546,8

Quick Ratio

1.28:1

1.34:1

1.34:1

Acid Test Ratio For Burberry Plc

2007

£m

Current Assets - Stocks: Current Liabilities

423.7-149.8/ 330.4

273.9: 330.4

2008 £m

Current Assets - Stocks: Current Liabilities

588.4 - 268.6 / 436.2

301.8 : 436.2

2009

£m

Current Assets - Stocks: Current Liabilities

742.4 - 262.4 / 546.8

479.8 : 546.8

Profitability Ratio:

Gross Profit Margin

=

Gross Profit

* 100

Turnover

Remember:

Turnover = Sales

Gross Profit = Turnover - Cost of Sales

Gross profit Ratio For Burberry Plc

2007

£m

Gross Profit Margin

=

521.3

* 100

850.3

61.3%

2008 £m

Gross Profit Margin

=

617.7

* 100

995.4

62%

2009

£m

Gross Profit Margin

=

665.8

* 100

1201.5

55.4%

Net Profit Margin

=

Net Profit

* 100

=

Profit before Interest and Taxation

* 100

Turnover

Turnover

Remember:

Net Profit = Gross Profit - Expenses

Net profit Ratio For Burberry Plc

2007

£m

Net Profit Margin

=

156.3

* 100

850.3

61.3%

2008 £m

Net Profit Margin

=

195.7

* 100

995.4

62%

2009

£m

Net Profit Margin

=

-16.1

* 100

1201.5

-1.33%

Ratios

2007

£m

2008

£m

2009

£m

Operating Profit/Net Assets

157/396.9 =39.5%

201.7/495.3=40%

-19.9/543.9=-1.8%

Return on Capital Employed)

Net Profit/Sales

156,3/850.3=18.38%

195.7/995.4=19.66%

-16.1/1201.5=-1.33

Operating profit margin)

Sales/Net Assets

850.3/396.9=2

995.4/495.3=2

1201.5/543.9=2.2

Net asset turnover)

Gross Profit/Sales

512.3/850.3 =60.24%

617.7/995.4=62%

665.8/1201.5=55.4%

Sales/Fixed Assets

850.3/162.7=5

995.4/177.5=5.6

1201.5/258.6=4.4

Expenses/Sales

Sales/Current Assets

850.3/423.7= 2

995.4/588.4=1.7

1201.5/742.4=1.6

Cost of Sales/Sales

329/850.3=38%

337.7/995.4=33.9%

535.7/1201.5=44.58%

Fixed Assets/Current Assets

162.7/423.7=0.38:1

177.5/588.4=0.30:1

258.6/742.4=0.35:1

Return on Asset ratio: Net profit before Tax

Total Assets

2007£m

156.3/749.7=20%

2008£m

195.7/953.2=20%

2009£m

-16.1/1125.7=-1.4

Rate on Investment return: Net profit before Tax

Net Worth

Total Assets

2007£m

156.3/396.9=39.38%

2008£m

195.7495.3=39.5%

2009£m

-16.1/543.9=-2.96

Q. B. Interpretation of ratios

Comparison

Current

Acid Test

2007

1.28:1

0.82: 1

2008

1.34:1

0.69 : 1

2009

1.34:1

0.88: 1

Acid test ratio is similar to the current ratio as it highlights liquidity of the company. Company may struggle to raise money

Q.2

Q.2.A

Pay back period for project A and project B for Boston Ltd

Payback period and cash flows

The payback method is the simplest way of looking at one or more major project ideas. It tells you how long it will take to earn back the money you'll spend on the project. The formula is:

Payback Period (years) = Investment Outlay

Cash inflows

Project-A

100,000/30,000=3.3= 3 years and four months

Project- B

200,000/28000=7.1 =seven years and 1.7 month (Aprrox:)

WACC

$

Cost

$

Shares

50,000

12%

6,000

Debt

50,000

8%

4000

4% risk premium, then this would need to be added on to the WACC.

4%

2000

100000

42000

0.12

Q. 2. B

Part A BOSTON LTD

WACC %

Investment A

12

End year

Outflow

Inflow

Taxation

Net Cash

Discount

Present

Factor

Value

0

(Now)

-100,000

-100,000

1.0000

-100,000

1

- 20,000

50,000

30,000

0.8929

26,787

2

- 20,000

50,000

60,000

0.7972

47,832

3

- 20,000

50,000

90,000

0.7118

64,062

4

- 20,000

50,000

120,000

0.6355

76,260

5

- 20,000

50,000

150,000

0.5674

85,110

6

- 20,000

50,000

180,000

0.5066

91.188

Net present value

291293

WACC %

Investment B

12

End year

Outflow

Inflow

Taxation

Net Cash

Discount

Present

Factor

Value

0

(Now)

-200,000

-200,000

1.0000

-200,000

1

-12,000

40,000

28,000

0.8929

2,5000

2

-12,000

40,000

56,000

0.7972

44,643

3

-12,000

40,000

-

74,000

0.7118

52,673

4

-12,000

40,000

112,000

0.6355

71,176

5

-12,000

40,000

140,000

0.5674

79,436

6

-12,000

40,000

168,000

0.5066

85,109

7

- 12,000

40,000

196,000

0.4525

88.690

8

-12,000

40,000

224,000

0.4040

90,496

Net present value 337223

On the basis of the above, Investment A would be more marginally more advantageous to Boston Ltd

Q.2.c

Net present value: It is the difference between the present value of cash inflow and present value of cash out flow. NPV is used in capital budgeting to analyze profitability of future cash inflows which an investment or project will yield in the future. Formula:

NPV is the sum of all terms,

\frac{R_t}{(1+i)^{t}},

Internal rate of return: It is the rate of return used in capital budgeting to measure and compare the profitability of investment made. It is also called discounted cash flow rate of return. IRR is the rate quantity and an indicator of efficiency quality or yield of investment. This is in contrast with net present value. NPV, which is an indicator of value or magnitude of investment.

An investment is considered acceptable if its rate of return is greater that a cost of capital. It is profitable).

Accounting rate of return: It is a financial ratio used in capital budgeting. It is the simple way of gauging return on an investment in project or purchase.

ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return. If the ARR is equal to or greater that the required rate of return, the project is acceptable. If the ARR is less than desired rate then project should be rejected. The Accounting Rate of Return is calculated from the formula;

Average annual operating profit x 100

Average Capital employed.

Q.2.C

ARR for project A: 30,000/100,000= 30%

ARR for project B: 28,000/200,000= 14%

Therefore project should be selected for Boston Ltd

Q.3. Zero-based Budgeting

It is a method of budgeting in which all the expenses must be justified for each new period. Zero- based budgeting starts from a Zero and every function in the organization is analyzed for its needs and costs. A budget is made for the need irrespective if that it is higher or lower.

It is used in high level strategic goals Zero budgeting can lower the cost by avoiding blanket increase or decrease to a prior period of budget.

Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. However, it is time consuming and may take longer that traditional cost-based budgeting.

Zero based budgeting requires one to justify all planned expenditures for each new business period.

Zero based budgeting is widely used in charitable organization and Government budgets because expenses can easily go out of control.

Unique features:

It requires justification and prioritization of all activities before allocating any resources.

All business forecasts must start from base by justifying all expenses

It requires grouping all relevant activities in decision package.

Advantages:

Efficient allocation of resources on based needs

Managers find cost effective ways to improve functions.

It helps to detect inflated forecast.

Useful for service business

Increase staff motivation by giving responsibility in decision making

Increases communication and co-ordination

It helps in identifying opportunities for outsourcing.

It identifies and eliminates wastage and obsolete operations.

Cost centers identify their mission and relationship to over all goals.

Disadvantages:

Very time consuming and difficulty in defining decisions

It requires justifications of every detail related to expenditure.

Research and development activities are threatened.

Managers needs training for zero budgeting

Difficulty in reading volume of forms in the large company

Honesty of managers must be reliable and uniform