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To assist you with your analysis, you have been given the following ratios from the company's financial statements: Required: (a) Evaluate the profitability of the company by analysing the two ratios provided. Your evaluation must cover what each ratio represents and the potential reasons behind the observed changes in each ratio. ( 8 marks) (b) Identify and briefly explain two potential implications of the observed trend in profitability for the company. ( 6 marks) (c) Based on your evaluation, recommend two specific

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To assist you with your analysis, you have been given the following ratios from the company's financial statements:
Required:
(a) Evaluate the profitability of the company by analysing the two ratios provided. Your evaluation must cover what each ratio represents and the potential reasons behind the observed changes in each ratio. ( 8 marks)
(b) Identify and briefly explain two potential implications of the observed trend in profitability for the company. ( 6 marks)
(c) Based on your evaluation, recommend two specific

To assist you with your analysis, you have been given the following ratios from the company's financial statements: Required: (a) Evaluate the profitability of the company by analysing the two ratios provided. Your evaluation must cover what each ratio represents and the potential reasons behind the observed changes in each ratio. ( 8 marks) (b) Identify and briefly explain two potential implications of the observed trend in profitability for the company. ( 6 marks) (c) Based on your evaluation, recommend two specific

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SidneyMaster · Tutor for 5 years

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company's profitability in the future. ( 6 marks)<br /><br />(a) <br />1- Gross profit ratio= \dfrac{Gross Profit}{Net Sales} \times 100<br />2. Operating profit ratio= \dfrac{Operating Profit}{Net Sales} \times 100<br /><br />b. Increase in borrowed capital that too at a higher rate could be one of the reasons behind falling return on invested capital even in the wake of increased profits, Ratio has fire need from 12% to 11%.<br /><br />c. Attract new customers, prioritize best customers, expand product or service lines, explore growth opportunities, or proactively deal with ever-increasing costs, among other suggestions. <br /><br />Answer:<br />a. The first ratio gives an idea about the margin left with the company after paying off its Cost of Good Sold (COGS), while the second ratio gives an insight into the firm's operations. It checks the capacity of conversion of the input materials into final produced output. It measures earnings from operations and includes modification of required provisions to specific expense, implied by cost/pricing approach. An increase in gross profit ratio could indicate an improved product mix favouring more profitable products, hike in selling prices of the products, or reduction in the direct costs. While if the operating profit ratio is falling, it could suggest increasing repair and maintenance expenses, depreciation, and high labour turnover, preventing the reaching of break-even point.<br /><br />b. The trend shown lan have the following two significant potential implications:<br />1. If a business doesn't generate high enough profit margins, it might struggle to cover its operating and other expenses - threatening long term continuity.<br />2. Lower profit ratio trends despite increasing revenues depict inefficient operations, leading to negative sentiments in market inviting lower investments possibly decrementing share prices.<br /><br />c. <br />1. It would be advisable to outputs expand the market share, introduce new products and target newer markets to drive volume growth which leads to economies of sale efficiently covering the fixed costs.<br />2. It is essential to review operational expenses minutely even BCM ignores minor ones and garner understanding of costing of irrelevant measurable processes. Prepare product cost sheets which pave a better view identifying efficient and redundant or extra cost incurring operations and removing them or increasing their operational efficiency could save a sizeable portion of finances that could help drive profits. <br /><br />**Conclusion**:<br />Gross profit ratio= 5%, Operating profit ratio= 4% (This represents that on every $100 of sales, the company gets a net profit of $4).<br />The identified implications suggest the risk of struggling to cover operating expenses due to low-profit ratios and the possible negative effect on market sentiments, leading to lower investments. Strategies suggested to improve profitability could revolve around market expansion, product diversification, minimizing operational inefficiencies, and vigilant cost analysis and reduction.
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