Shareholders of Hot Fashions Essay
Return On Capital Employed= 53.18%
Return on capital employed (ROCE) is the ratio of net operating profit of a company to its capital employed. It measures in percentage terms whatever the net profit is generated to overall value of the company in terms of capital employed. In the case of hot fashions, they have managed to generate a return on their capital employed of 53.18% net profit in one year.
The business had a great strength as their return on capital employed is over 50%. For a business to gain more than 50% in one year is a could sign. This is due to bigger businesses such as next had a return of capital of 68% in a year and Hot Fashions is a small business and nearly reached to Nexts PLC’s return of capital employed. As well as, the return of capital employed for a clothing sector is 15%, and Hot Fashions business had a massive increase than that which displays they have done very well. However, the business should try a bit harder and aim to reach next percentage of 68%, although they’re a small business.
Gross Profit Margin= 38.88% Gross profit margin measures how well a company controls its cost.
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This is good because the retail clothing industries gross profit margin is usually around 25%. For a business to gain more than 25% is a good sign. Looking at bigger businesses such as Nexts PLC’s gross profit ratio, theirs is also over 25% as their gross profit ratio is 32.55%. This displays that Hot Fashions business is above average in the retail clothing industries as well as, Nexts PLC’s business.
This demonstrates that Hot Fashions are doing very good. On the other hand, Hot Fashions business needs to be careful with their gross profit margin. Gross profit margin can cause many problems if it’s too low or too high. If it’s thought to be low, the business may reduce the cost of its purchases. This may involve looking for a cheaper supplier, but the firm must try to ensure that this does not affect the quality of the product. Alternatively, it may try to increase sales without increasing the cost of goods sold. For Hot Fashions to keep track of their gross profit they need to ensure they avoid pricing problems and a loss of money from sales. This then would lead the business to carry on doing well and being successful.
Net Profit Margin= 8.49%
This ratio looks at net profit as a percentage of sales turnovers. This ratio is often referred to as the net profit margin. It shows for every £1 made in sales how much of it is left as net profit after all expenses have been deducted. Looking at Hot Fashions business their net profit percentage of sales is 8.49%, therefore means that for every £1 of sales made, 8p is left as net profit. The business had a great strength as their net profit margin is over 7.98%. The reason this is a good sign is because the retail clothing industries average net profit margin is 7.98%.
However, the business also has weaknesses. Looking at bigger businesses such as Nexts PLC net profit margin it shows 14.99%. Hot Fashions should try to reduce its expenses and try hard to increase its sales. This is due to Hot Fashions had only increased by 2.49% from the average retail clothing industries. They should aim to increase to a higher percentage like Next PLC although Hot Fashions is a small business. If the Net Profit does increase the investor has a chance of receiving dividends, and more money is given back into the company, and the business would have a better label and reputation as investors would most likely be interested in their business.
Current Ratio= 1.02%
This ratio shows the amount of current assets in relation to current liabilities and is expressed as x:1. Hot Fashions current ratio is 1.02:1. This means for every £1 it owned in current assets it owed 20p in current liabilities and this would generally be acceptable. If, however, a business had a current ratio of 0.5:1, this would mean that for every 50p it owned in current assets, it owed £1 in current liabilities. This means if the businesses bank demanded it repaid its overdraft immediately and creditors demanded payment, the business would not be able to cover these demands from current assets. This is therefore a dangerous position to be in.
Taking this further, this displays Hot Fashions business is on average with their current Ratio. It’s not too low nor is it too high. This indicates the business is doing well and should try avoiding the net profit to decrease as well as increase. If it increases it shows the business is sitting on too much cash, that is owed a lot of money by its customers or that it needs to operate with a huge amount of inventory. However, looking at bigger businesses such as Next PLC’s current ratio, it is 1.33%. This is a little higher than Hot Fashions businesses current ratio. The business could slightly try increasing their current ratio which would lead them to being successful.
Acid Test Ratio= 0.47%
The acid test is thought to be a tougher measure of a business’s liquidity. Like the current ratio, it shows the amount of current assets in relation to current liabilities, but it does not include stock. This is because stock is considered to be the hardest current asset to turn into cash quickly. The business has to make sure it has enough short-term assets to cover its immediate liabilities without selling inventory. This ratio tells creditors how much of the company’s short term debt can be met by selling all the company’s liquid assets at very short notice. The result is expressed as x:1. Hot fashions acid test ratio is 0.47:1. This means that for every £1 the business owes in short-term debts, it only has 47p in liquid assets (current assets excluding stock).
This figure shows the business to be illiquid (not easily converted into cash), as it could not meet its short-term debts if immediate repayment was demanded. This displays that Hot Fashions may face difficulty in paying their short-term debts which means they are not stable. This is a weakness for the business which they need to resolve in order to do well. Linking this to a bigger business such as Nexts PLC.’s acid test ratio, their ratio is 0.9201. Hot Fashions business aim should be to reach near Next’s PLC’s acid test ratio. They could do this by selling some of their assets. However, as Hot Fashions is a small business this does not affect the business as much. This is a weakness for Hot Fashions business.
Capital Gearing= 21.06%
The degree to which a company acquires assets or to which it funds its on-going operations with long- or short-term debt. Capital gearing will differ between companies and industries, and will often change over time. This is a key measure of a company’s long term liquidity and hence its ability to survive and grow in the future. This means, the gearing ratio is also concerned with liquidity. It focuses on the long-term financial stability of a business. Gearing measures the proportion of assets invested in a business that are financed by long-term borrowing. Hot Fashions capital gearing is near to 21%.
This is strength for the business as it isn’t a high capital gearing. High capital gearing could cause many problems, such as; business might find it difficult to raise further finance, if they have low profit the shareholders may receive no dividends and if profits are poor, the business may not be able to pay the interest due on its fixed interest capital. This would be a risk for the business. However, Hot Fashions business is safe because their capital gearing is below 50%. Hot Fashions is successful in this as they are in the section of having ‘low gearing’.
Asset Turnover= 625.5%
This measures the productivity of the business (i.e. how many pounds worth of sales revenue can be generated from the assets employed?) over one year. In this case of Hot Fashions, they have managed to generate an asset turnover of 625.5% in one year.
This is strength for the business as the higher the ratio, the more sales that a company is producing based on its assets. A business would rather have a higher ratio than a lower ratio. Hot Fashions business have more sales with fewer assets which means they have s higher turnover ratio which displays it as a good company. This is due to the business using their assets efficiently. For example: Hot fashions have sales of £9000000 and assets of £143870. This indicates their higher turnover as they can generate more sales with fewer assets. This leads to the business being successful.
Stock Turnover= 18.2%
Stock turnover is the average amount of time an item of stock is held by a business. It measures the number of times in a 12-month period that a business sells its stock. (I.e. how many times it turns its stock into cash). The rate of stock turnover is very much dependent upon the nature of the business. Hot fashions have a stock turnover roughly around 18%. The quicker the business turns over its stocks, the better. However, Hot Fashions rate of stock turnover appears high for the nature of the product; this might result in stock going out of date or out of fashion. For Hot Fashions to avoid holding such stock they should: Sell-off or dispose of slow-moving or obsolete stocks.
Introduce lean production techniques to reduce stock holdings Rationalise the product range made or sold to reduce stock-holding requirements Negotiate sale or return arrangements with suppliers – so the stock is only paid for when a customer buys it As well as, looking at bigger businesses like Nexts PLC’s stock turnover, which is 6.4. Hot fashions are 3x more than Next PLC business. This displays that Hot Fashions business is holding too much stock which may increase inventory holding costs. This could have a big effect on their business. Payable Days= 30.2 days.
Payable (creditor) days are a measure of the number of days on average that a company requires to pay its creditors. It is an indication of a company’s creditworthiness in the eyes of its suppliers and creditors, since it shows how long they are willing to wait for payment. . The Hot Fashions payables ratio measures on average how long it takes their business to pay for goods and services bought on credit; it is expressed as a number of days. Hot Fashions business has a creditors’ payment period of 30 days, this means on average there is a one-month gap between the business buying the good or service and paying for it. A business with cash flow problems would try to lengthen its creditors’ payment period. However, Hot Fashions business never had the need to lengthen the days which shows the business is paying its creditors on time as it doesn’t have a low payable day ratio. This is a strength to their business.
Receivable Days= 2.23 days This shows how long, on average, a business takes to collect the debts owed to it by customers who have purchased their goods on credit. It is an indication of a company’s efficiency in collecting monies owed. Linking this to payable days, Hot Fashions business pays their creditors within 30 days. Whereas, the business gets their debts every few days (2-3 days). This is strength for the business, as they have time to collect their debts owed by customers, and then pay their creditors at the end of the month.
Conclusion & Recommendations:
Overall, the business has done well being a small business. The business has much strength as most their ratios are roughly near to bigger businesses such as Next. However, they were still in debt, and that was mostly due to holding too much stock and not using their loan wisely. The business had too much stock, and to solve this they should have sold their merchandise at a low price, ensuring their stock is being sold and not held in the business to get out of fashion. As well as, Hot Fashions business stayed up to date with their debts and creditors and ensured they made them pay on time.
Also looking at their Asset turnover, their ratio was high which is a good signs, as they produced many sales. The business is profitable however; they are running out of cash due to poor liquidity. As the business could not meet its short-term debts if immediate repayment was demanded the business was illiquid.
This displays that Hot Fashions may face difficulty in paying their short-term debts which means they are not stable. The business should lower their expenses and increase their sales to get a flow of liquidity. Furthermore, the business had a good net profit margin ratio as it was over the retail clothing industries average net profit margin is 7.98%. However, there are bigger businesses such as Next that have a higher ratio which is double more than Hot Fashions. Hot fashions business should aim to reach bigger ratios related to bigger businesses in order to do well. Overall the business has done very well. .