Safety Styles Current Ratio and Quick Asset Ratio

Decision
It would be my recommendation to grant Safety Styles their application for additional finance. Profitability: Safety Styles Pty Ltd has demonstrated in is able to generate and increase its profits as demonstrated through the healthy Gross and Net Profit Margins. It should be noted during this three year period Safety Styles Pty Ltd has maintained and increased the Gross Profit margin, Safety Styles Pty Ltd has also maintained a healthy Net Profit Margin.
Although dropping slightly the second year they have managed to improve this in their third year increasing their overall profitability Safety Styles has also increased both its Return on Assets and Return on Equity, this demonstrates the ability of the company to efficiently make use of its assets and equity which ultimately reduces requirements for more funding and reduces cost making better use of what they currently have. Efficiency: Safety Styles Pty Ltd appears on average over the last three years to be improving its efficiency to make better use of their assets and turning over their inventory.

Safety should also focus on this area and strive to improve their efficiency. Whilst the values may seem quiet higher their total sales amount has raised which may not be taken into account with averages. Safety Styles may need to revisit their inventory strategy as their turn over period is quite high; this would be a benefit for them in the long term by having quicker access to cash for investment in other assets. They should also pay attention to their Accounts Receivable Turnover and aim to reduce this. Liquidity:
Whilst Safety Styles Current ratio and Quick asset ratio is declined they are both still very healthy numbers. Safety Styles non-current assets have been increasing annually. They may want to pay attention to reducing their inventory levels and accounts receivable to give them more cash and the opportunity to invest into non-current assets or reduce their liabilities as they currently has a low level of cash compared to inventory and accounts receivable. This will make the company more “liquid” in the short term.
Safety Styles also has a very healthy quick asset ratio compared to the industry standard of 2. It should be noted that Safety Styles currently do not have a high level of liabilities and seem to be maintaining their levels of dent in relation to their assets Capital Structure: Safety Styles currently have a very low gearing ratio and are using retained earnings for most of their financing. External sources of financing will be a benefit to Safety Styles to help them grow and invest in additional non-current assets. Executive Summary
Safety Styles appear to be utilizing their assets and equity very well currently to help produce their profit and maintain both healthy gross and net profit. If this is maintained they should be able to repay their long term liabilities and possibly improve their current asset liquidity. ?
Appendix Formulas

Return on Assets = (Net profit before interest and taxation / Average total assets) x 100
Return on Equity = (Net profit after tax and preference dividends / average ordinary shareholder’s funds) x 100
Gross Profit Margin = (Gross profit / sales) x 100 Net Profit Margin = (Net profit before interest and taxation / sales) x 100
Asset Turnover Ratio = ( Sales / Average Total Assets)
Inventory Turnover = (Average inventory / cost of sales) x 365
Accounts Receivable Turnover = (Average accounts receivable / credit sales) x 365
Current Ratio = (Current assets / current liabilities)
Quick Asset Ratio = (Current assets (excluding Inventory and prepayments) / current liabilities)
Gearing Ratio = (Long-term liabilities / share capital + reserves + long-term liabilities) x 100 Ratio definitions

Return on Assets The Return on Assets (ROA) demonstrates how effectively a company is using its assets to generate profit. The higher the ROA the better as the company is earning more off less investment
Return on Equity oThe Return on Equity (ROE) demonstrates the amount of net profit generated as a percentage of the shareholders equity. A higher ROE is better as it displays how much profit is generated based on shareholder investment.
Gross Profit Margin oThe Gross Profit Margin (GPM) is used to display the percentage difference between sales and the cost of sales before any other costs are factored in.
A higher GPM is better as the company is making a higher profit off its sales
Net Profit Margin oThe Net Profit Margin (NPM) is used to display the net profit as a percentage of the revenue generated. A higher NPM is better as it indicates a more profitable company and how effective a company is at controlling its costs
Asset Turnover Ratio oThe Asset turnover Ratio (ATR) displays how well a business can use its assets in generating sales or revenue. A higher ATR is better as it demonstrates the amount of dollars generated by one dollar of the company’s assets
Inventory Turnover The Inventory Turnover formula display how often the company sells and replaces its inventory. A low Inventory turnover is preferred as this means cash is not being held in inventory, is producing more revenue and has access to an ongoing source of cash
Accounts Receivable Turnover oThe Accounts Receivable turnover displays the average settlement period (days) credit purchased are settled by the customer. A shorter average settlement period is preferred as this means funds are not tied up and can be
Current Ratio This ratio is compares a company’s current assets and current liabilities to measure the liquidity. A higher ratio is preferred as it generally means the business can meet their commitments

Quick Asset Ratio
The Quick Asset Ratio (QAR) also known as the “Acid Test Ratio” measures if a company can meet its short term liabilities with its current assets less its inventory as you can’t always rely on inventory to be converted into cash quickly. A higher ratio means the company is in a better position •Gearing Ratio The Gearing Ratio (GR) measures how much capital is financed by long term finance. A high gearing ratio means a company will depend of long term loans, a low gearing ratio displays higher reliance on financing through equity investment. Typically a high level of gearing means a higher level of risk for the company.
Ratio Calculations

Return on Assets o2010 – (647 / ((2122 + 2163) /2)) x 100 o2011 – (685 / ((2233 + 2122) /2)) x 100 o2012 – (712 / ((2291 + 2233) /2)) x 100
Return on Equity o2010 – (585 / ((1774 + 1813) /2)) x 100 2011 – (619 / ((1865 + 1774) /2)) x 100 o2012 – (644 / ((1916 + 1865) /2)) x 100
Gross Profit Margin o2010 – (2321 / 4033) x 100 o2011 – (2834 / 4928) x 100 o2012 – (2875 / 4963) x 100
Net Profit Margin o2010 – (647 / 4033) x 100 o2011 – (685 / 4928) x 100 o2012 – (712 / 4963) x 100
Asset Turnover Ratio o2010 – (4033 / ((2122 + 2163) / 2)) o2011 – (4928 / ((2233 + 2122) / 2)) o2012 – (4963 / ((2291 + 2233) / 2))
Inventory Turnover o2010 – (((((216 + 175) + (223 + 283)) / 2) / 1712) x 365) o2011 – (((((235 + 298) + (223 + 283)) / 2) / 2094) X 365) 2012 – (((((235 + 298) + (230 + 325)) / 2) / 2088) X 365)
Accounts Receivable Turnover o2010 – ((((561 + 552) / 2) / 4033) x 365) o2011 – ((((561 + 591) / 2) / 4928) x 365) o2012 – ((((637 + 591) / 2) / 4963) x 365)
Current Ratio o2010 – (1257 / 305) o2011 – (1324 / 323) o2012 – (1272 / 325)
Quick Asset Ratio o2010 – (((1257 – (223 + 283)) / 305) o2011 – (((1324 – (235 + 298)) / 323) o2012 – (((1272 – (230 + 325)) / 325)
Gearing Ratio o2010 – (((43 / (70 + 1704 + 43)) x 100) o2011 – (((45 / (70 + 1795 + 45)) x 100) o2012 – (((50 / (70 + 1846+ 50)) x 100)

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