According to the profitability ratios of GP/Sales, we see that Glasgow depicted an increase in the gross profit ratio in the period between 2010 (37.78%) and 2011 (50%). At the same time there was a decrease in London offices from 46.43% to 35.00% in 2010 and 2011 respectively. However, in Leeds Offices the gross profit, in relation to sales, remained the same in those two years. An increase, decrease or stability of gross profit, in relation to sales, does not solely imply that a company was not profitable. This is because a decrease or increase can be caused by various reasons. For example, the cost of goods may have increased, and the selling price has remained the same, thus causing a decrease in the gross profit, while a decrease in the cost of goods and selling price remaining constant may cause an increase in the gross profit. A greater waste of materials or theft may have been experienced, thus decreasing the gross profit/sales ratio. There could also be a change in the selling price – a decrease or an increase causing corresponding consequences to the gross profit/sales. Moreover, there could be no change in any of the above, thus the gross profit would remain the same.
When we look at the profit before interest and tax/sales, we see that in Glasgow there was an increase of 8.33%, while in London, there was a decrease of 11.43% and in Leeds, there was a decrease of 5.02%. Profit before interest and taxes/sales means a lot as an increase in PBIT/Sales means the firm is highly sensitive to any changes of its sales. A small increase in sales may cause high profits, but at the same time, a small decrease in sales may cause high losses. Therefore, we note that Glasgow experienced profit due to increase in the PBIT/Sales while there were losses in both Leeds and London.
When we look at the RP/Sales, we note an increase of 9.44% in Glasgow, a decrease of 2.68% in London and an increase of 0.06% in Leeds. An increase in RP/Sales indicates that there was an upward movement in sales, and a decrease in RP/Sales means there was a decrease in sales. Therefore, according to the analysis, there was an increase in sales both in Glasgow and Leeds, but there was a decrease in London.
When we look at the ROCE, we find that there was an increase of 14.7% in the Glasgow offices, a 14.64% decrease in London and a decrease of 6.11% in Leeds. This means that Glasgow made a good use of its capital employed, thus realizing a higher ROCE in 2011 compared to 2010. In both London and Leeds we see that there was a decrease meaning their capital invested was not well utilized.
Efficiency ratios: we start with the stock turnover ratio. In Glasgow, we see an increase of 52.1 days, a decrease of 125.7 days in London and an increase of 24.4 days in Leeds. An increase in the stock turnover ratio indicates that there is a proper control of the stock. While stock turnover ratio is used to measure how effective a business is in maintaining a proper stock level, a decrease as in the case of London offices shows that there was either an undermining of control over their stock, their business was slowing down or there was a stock pile up.
Looking at the receivables, we note that there was a decrease of 46.3days in Glasgow, an increase of 15.2 days in London and no significant changes in Leeds. Receivable ratios are used to evaluate the time taken by the debtors to pay up what they owe the business. An increase in the duration, as in the case of London, may indicate poor credit control system. A decrease, on the contrary, as viewed in the case of Glasgow, indicates a proper credit control system.
Payables are the debts that the company or the business owes its creditors. In all the three offices, we see that there was an increase in duration taken to pay up their creditors. An increase in the time taken to pay creditors may have different reasons and, despite the fact that this is used to evaluate the business performance, sometimes increase in days may have misleading answers. This is because there are several issues that may cause an increase in this period. These may include a company’s norms, the business size and an argument or misunderstanding with the creditors. Therefore, we cannot say that these offices failed in their performance in regard to the period they took to pay up their creditors, as we do not know what really caused their delay.