BUSS3 January 2013

Ratios In pairs: write everything about the following ratios (use the formula sheets to help): ROCE Gearing Current ratio Limitations of ratios You have five minutes

Ratio Analysis In order to succeed a firm must (1) make a profit (profitability/performance ratios) e.g. ROCE, (2) manage cash so it can meet payments (liquidity ratios) e.g. current ratio, (3) plan long-term financing (gearing ratios), (4) control its financial transactions efficiently (financial efficiency ratios), (5) remain attractive to existing and prospective shareholders (shareholders’ ratios) Capital employed measures the value of the firm and shows where the firm got its money from (non current liabilities, share capital and retained profit). Could compare ROCE to bank interest rates but there is no risk in putting money in a bank so the average ROCE for UK firms should be higher (13.5% in 2000) Liquidity ratios compare short-term (current) assets with short-term (current) liabilities to see if a firm can pay its debts. The current ratio = current assets : current liabilities (aka liquidity ratio) Firms want a current ratio of 1:1.5 or 1:2 as some current assets can’t be sold immediately to pay debts BUT firms with high rates of stock turnover can operate with lower ratios; Below the suggested value => insufficient cash; Above the suggested value => holding too many current assets: better to purchase fixed assets (which produce the goods that provide profit) Gearing looks at the capital structure of the firm i.e. where does the firm get its money from. High gearing > 50% ; Problems: must pay interest and so increased risk of liquidation when interest rates are high; increased risk when profits are low; pressure from the need to repay debts at a certain date; Advantages of high gearing > 50% : good when interest rates are low and/or falling; good when profits are very high (interest payments tend to be lower than paying dividends so firm can retain more profit for future expansion); easier to keep control of the firm as there are relatively few shareholders; Low gearing < 25% : Problems: high % of shareholders’ capital so may have to pay a high % of profits as dividends; ownership may be diluted; Advantages: high percentage of owners’/ shareholders’ capital so less likely to face liquidation from creditors; don’t have to pay interest or worry about volatile interest rates; In the UK the average gearing ratio in 1999 was 47.9%, by 2004 it was 60.4%; Gearing can be reduced by – Either pay off loans (i.e. reduce the top number) or increase share capital (i.e. increase the bottom number) Limitations: Ratios are good as they “provide a rigorous, scientific basis for decision making” BUT they are very limited in isolation. They need to be compared over time and with: competitors; industry standards; own firm; current interest rates; Also need to consider: corporate aims and objectives; external factors e.g. interest rates; reliability of the data; the past versus the future i.e. accounts only show what has happened but not necessarily what will happen; why things have occurred; other factors are important such as the quality of staff

Use the case study & numbers (1) Read the case study and the questions (2) In pairs, look at the appendices (A to C): what do they tell you? Which questions are they relevant for? (3) What do the ratios show? (4) Work out the ROCE for print and for digital, what do they show? You have five minutes

Question 1: using the data in Appendix D, analyse the possible consequences for Roberts Media if activity G and activity E are both delayed by four weeks. (1)What will you start with in your answer? (2)What is the current critical path? (3)Amend the network diagram in appendix D (4) Explain what has changed AND what this will mean for the business You have ten minutes

Question 2: Lisa argues that a significant marketing budget would be the most important component of the new marketing plan. To what extent do you agree? (1)What will you start with in your answer? (2)What can you find the case study? Use the numbers. (3)Plan your answer – remember to argue both sides! (4) Come to a conclusion - what is your opinion? Why? Why did you not choose the other view? What does it depend on?

Question 3: Harry wants to make radical changes to the way the business is run. Will it be possible to maintain effective employer/employee relations? (1)What will you start with in your answer? (2)What can you find the case study? Use the numbers. (3)Plan your answer – remember to argue both sides! (4) Come to a conclusion - what is your opinion? Why? Why did you not choose the other view? What does it depend on?

Question 4: analyse the key arguments for and against Harry’s proposal. (1)Use three headings (2)Include the ROCE ratios you have worked out. (3)Plan your answer – remember to back up every point using the case study and explain why it is relevant (4) Come to a conclusion - what is your opinion? Why? Why did you not choose the other view? What does it depend on? (10 marks out of 34)