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BFK 450 Assessed Task 1: Guidance Document
Contents
1. Introduction
2. Structure
3. Recommended Approach for the Main Body of
Your Report
4. Definitions of Categories of Ratios and of
Individual Ratios
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1. Introduction
This guidance complements the detailed marking scheme to be found in the
Assignment section on Bb.
First, just to clarify, you are writing your report as if the date is (say) February 14th,
2034. In other words, you have the 2033 results, but your team has not yet made its
decisions for 2034. You should not, therefore, refer to the actual decisions or results
for your business from 2034 onwards.
Second your report for Task 1 should go beyond merely ‘describing’ what has
happened to the financial health of your business. You should provide an ‘analysis’.
‘Analysis’ requires the following:
• explain what caused the changes in the ratios
• comment on the significance of the changes and
• provide recommended actions which will result in an improvement in
the ratio under consideration.
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2. Structure
We recommend you adopt the following structure:
To: Board of Directors
From: [Enter Your Candidate Number Here]
Date: 14th February 2034
Subject: Financial Analysis of [Enter Your World Number and Company Name
Here] at 31st December 2033
Introduction
This should briefly explain the purpose and scope of the report and provide
some brief contextual information (e.g. regarding the business’ strategy and
performance).
Financial Performance
Profitability
Efficiency
Financial Position
Liquidity
Stability
Limitations of the Analysis
You should briefly explain two key limitations of the analysis you have
performed.
Conclusions / Summary
This section should briefly summarise the main findings of your analysis
making specific reference to your business’ profitability, efficiency, liquidity
and stability.
Appendix
Include a table in the appendix with an appropriate title showing the detailed
workings for the calculations of all 12 ratios (for 2033 only):
Profitability:
1. Return on capital employed
2. Operating profit margin ratio
3. Gross profit margin ratio
4. Operating expenses to sales
Efficiency:
5. Revenue on capital employed
6. Inventory holding period
7. Receivables days
8. Payables days
Liquidity:
9. Current ratio
10.Acid-test ratio
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Stability:
11.Gearing ratio
12.Interest cover
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3. Recommended Approach for the Main Body of Your Report
• Organise your ratios into the following sections financial performance
(profitability and efficiency) and financial position (liquidity and stability).
• For each category of ratios (profitability, etc.):
• First explain the meaning of the category (see definitions in section 4
below)
• Then provide an overall assessment of your business’ financial health
with respect to this category.
• For your 8 selected ratios:
• Explain the meaning of the ratio (using the definitions in section 4
below).
• Briefly describe the movement year-on-year and the comparison with
industry averages (and where appropriate with the conventional target
values too). In other words, comment on whether the ratio improved or
deteriorated, and on whether the ratio is better or worse than the
industry / conventional target. (Use charts, graphs, or tables to help
the reader understand the detailed numerical movement in the ratios
year on year and the comparison with industry averages / conventional
target values).
• Comment on the significance of the movement / comparison.
• For those ratios which are explained by others via the ‘ROCE tree’
relationships, explain the nature of the relationship with those other
ratios, and then move on to the next relevant ratio to continue your
analysis.
• For ratios which are not themselves explained by others, explain the
business factors and/or business decisions which explain the
movement in the ratio or the comparison to the industry
average. (Please avoid ‘mathematical explanations’ such as ‘…the
ROCE increased because the operating profit increased by $300m and
the capital employed remained the same’. This might be correct but is
not very helpful).
• Where appropriate, provide recommended actions for improving the
ratios under consideration and make clear how the action taken will
impact on the ratio under consideration. You should aim to provide 4
recommendations. Please number each recommendation to help the
reader.
• Please note: you may need to mention more than 8 ratios in your report to
demonstrate an understanding of the ROCE tree relationships.
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4. Definitions of Categories and of Individual Ratios
Use the following definitions to explain the meaning of the four categories of ratios
and the meaning of those 8 individual ratios you have selected for detailed analysis:
a) Categories of ratios:
1. Profitability: Profitability ratios measure the business’ ability to generate
profits from its resources and from revenue.
2. Efficiency: Efficiency ratios measure the business’ ability to generate
revenue from its resources.
3. Liquidity: Liquidity ratios measure the business’ ability to meet short-term
obligations.
4. Stability: Stability ratios measure the business’ ability to meet longer-term
obligations, and in particular the degree of risk created by the business’ use of
debt (interest-bearing) finance.
b) Individual ratios:
1. Return on capital employed: Return on capital employed measures the
business’ ability to generate operating profits from the amount of capital it
uses.
2. Operating profit margin ratio: The operating profit margin ratio meas7ures
business’ ability to convert its sales revenue into operating profit, therefore
after operating expenses have been deducted.
3. Gross profit margin ratio: The gross profit margin ratio measures the
business’ ability to convert its sales revenue into gross profit, therefore before
operating expenses have been deducted.
4. Operating expenses to sales ratio: The operating expenses to sales ratio
measures the proportion of sales revenue consumed by operating expenses.
5. Revenue on capital employed: The revenue on capital employed ratio
measures the business’ ability to generate sales revenue from the amount of
capital it uses.
6. Inventory holding period: The inventory holding period indicates the length
of time the business holds inventory before it is sold.
7. Receivables days: Receivables days indicates the length of time it takes the
business to collect cash from customers for sales made on credit.
8. Payables days: Payables days indicates the length of time it takes the
business to pay suppliers for purchases made on credit.
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9. Current ratio: The current ratio measures the business’ ability to meet its
short term obligations with available current assets.
10.Acid-test ratio: The acid-test ratio measures the business’ ability to meet its
short term obligations with more liquid current assets, in other words
excluding inventories as these might not be quickly convertible into cash.
11.Gearing ratio: The gearing ratio measures the proportion of total finance
used by the business in the form of interest-bearing obligations.
12.Interest cover: Interest cover measures the number of times the net finance
cost expense is covered by operating profit.