Financila reporting for Summer bodysuit Ltd (SBL) startup company Essay

Financila reporting for Summer bodysuit Ltd (SBL) startup company - Essay Example This problem is so serious that the bank has requested the company to reduce its overdraft for the next six months, hence worsening its already ailing cash slow. As a member of Drake Management Consultants, who have been mandated to advise the company regarding financial issues, I have undertaken to write this report, citing the key problems and offering some recommendations regarding the problems that the company is undergoing. Analysis of the company’s financial statements Return on capital employed (ROCE) The ROCE for Summer Bodysuit Ltd (SBL) has increased from 15.9% to 23.8%, which is a favorable trend. This shows that the business has efficiently invested its resources to create profits. However, the management should be careful to ensure that this rate is maintained at a higher rate than that of borrowing; otherwise its benefit may not be realised (Baker and Wurgler 30). Year before last Last year Profit before Tax 1,668 3,706 Capital Employed 10,474 15,600 ROCE = ((Pro fit before Tax) / (Capital Employed)) * 100. 15.9% 23.8% Return on Equity (ROE) It is remarkable that ROE has increased from 0.38 to 0.54, because this shows that the company’s profitability is on an upward trend, hence an assurance to the shareholders that their capital is being used efficiently to make profits. This trend should be maintained by continuing to invest in profitable opportunities, though the management should be very careful not to engage in investment decisions that can slow down this positive trend in the future. Net Income 1,248 2,926 Shareholder's Equity 3,274 5,400 ROE = Net Income/Shareholder's Equity 0.38 0.54 Gross Profit Margin The company’s gross profit margin has increased slightly, from 46% to 48%. Although, a slight increase in this ratio is a positive indication of financial health, the management should work hard to ensure the cost of sales is reduced at a more increasing rate so that the company’s growth can be speeded up. Inciden tally, as the company work out on strategies that can increase the firm’s revenue, it should not be forgotten that reducing marginal cost of sales is also very essential. Furthermore, what is left after netting cost of sales from the revenue is used for paying for additional expenses as well as for future savings (Barry 256). Year before last Last Year Revenue 14,006 22,410 COGS 7,496 11,618 0.46 0.48 Net Profit Margin The Net profit Margin has increased from 8.9% to 13%, which is financially very healthy; if this trend continues in the future, the company is likely to grow in leaps and bounds. The management should be on the lookout for the costs that could be increasing at a greater rate than the revenues and control them because this could cause the growth in the net profit margin to decelerate in the future (O’Connor 758). Year before last Last year Net income 1,248 2,926 Revenue 14,006 22,410 Net profit margin = (net income/ revenue)*100 8.9% 13% Inventory Turnove r Ratio The company’s inventory turnover ratio has declined from 5.79 times to 3.85 times. This declined trend can cause alarm if it is as a result of any goods selling slowly. However, if it is caused by a company’s new strategy that has led to increased inventory, and which will lead to overall growth, then this should not be a cause of alarm. However, the management sh