Task one: Performance Measurement
Numerous reasons necessitate measure of the financial performance of companies. The first important reason is that measuring performance enhances the process of setting goals for future activities. Effective planning can only occur when the management of an institution understands the institution’s current standing. Correspondingly, the aspect of measuring performance helps in justifying the programs that the management undertakes as well as the costs that such projects incur.
Measuring performance can also be an important tool for management both within and without the organization. Through measuring performance, the employees experience improved communication (Rodgers, 2008, 92). It is because the collection and analysis of information can only be effective under circumstances of the proper communication. Similarly, the process improves communication with the customers and other stakeholders.
Another significant reason for measuring performance is that it helps to improve the image of the company as one that is accountable. It is because the measurement of financial performance takes place under circumstances that require the institution to lay bare its financial data. Consequently, it provides an image of accountability of the firm.
Task Two: Profitability Ratios
Gross profit Ratio
The ratio relates the value of the gross profit and the value of the net revenue from sales. The gross profit ratio enables the evaluation of the firm’s operational performance, and its calculation is as follows:
Gross Profit Ratio = Gross profit X 100
Sales
Gross profit Ratio for 2012-2013 financial year
Gross profit = revenue – cost of goods sold
Cost of goods sold = cost of material consumed + Purchase of products for sale + changes on finished goods, work in progress and products for sale
Therefore, Cost of goods sold = 27, 244.28 + 5864.45 = 33,108.73
Gross profit = 46,853.92 – 33,108.73 = 13,745.19
Sales = total revenue
Therefore, Gross profit ratio = 13,745.19 X 100
46,853.92
= 29.3%
Gross profits ratio for 2013/2014
Cost of goods sold = 20,492.87 + 5,049.82 = 25,542.69
Gross profit = 38,121.14 – 25,542.69 = 12,578.45
Therefore, Gross profit ratio = 12,578.45 X 100
38,121.14
= 33.0%
An analysis of the results for the two periods indicates that the ratio has risen from 29.3 % to 33.0%, which indicates a 3.7% growth. It is a huge increase, and it is indicative of the company’s growth. The company has strengthened its productivity in terms of sales, and it is in a better position to settle all its expenses and remain with a sufficient profit margin.
Net Profit Ratio
Net Profit Ratio = Net profit X 100
Sales
For 2012/2013
Net Profit = Profit after tax for the year from continuing operations
Therefore, Net profit Ratio = 301.81 X 100
46,853.92
= 0.64%
For 2013/2014
Net profit ratio = 334.52 X 100
38,121.14
= 0.88%
A comparison of the net profit ratio for the two periods indicates a rise in the ratio from 0.64% to 0.88% (Tata Motors, 2013, 120). It shows a 0.24% rise in the net profit ratio. The rise is attributable to the increased profitability the company experienced during the 2013/2014 financial year. The rise in the ratio indicates the firm’s ability to pay its shareholders a better dividend as well as to reinvest the profits.
Return on Net Assets Ratio (RONA)
RONA = Profit before interest and tax X 100
Total assets less current liabilities
For 2012/2013
Total assets less current liabilities = Non-current assets + current assets – (Current liabilities)
Total assets less current liabilities = 42,049.81 + 10,134.96 – (21,104.61) = 31,080.16
Profit before interest and tax = 174.93
Therefore, RONA = 174.93 X 100
31,080.16
= 0.56%
For 2013/2014
Total assets less current liabilities = 49,734.42 – (18,797.53)
= 30,936.89
Profit before interest and tax = 1,025.80
Therefore, RONA = 1,025.80X 100
30,936.89
= 3.32%
The return on net assets has increased for the 2013/2014 financial year by 2.76 (Tata Motors, 2014, 130). Such an increase could be indicative of the firm’s ability to improve the efficiency of its fixed assets and working capital to create more revenue. It could also be an indication of improving management practices.
Task 3: Working Capital Ratios
