Premium Essay

Out and About Plc

In: Business and Management

Submitted By hockey8
Words 740
Pages 3
Gearing = 280/780 X 100 = 35.9%

ROCE = 16/780 x 100 = 2.0%

Stock turnover = 137/64 = 2.14 or 170 days

Gross profit = 53.6%
Current ratio = 0.88:1

Out and About have a very low gearing ratio, of only 35.9%. A gearing ratio of 35.9% means that for every 100 pounds invested in this firm, only £35.90 is borrowed money. This could result in the potential for further borrowing because the ratio is very low. The higher the level of borrowing, the higher the risks to a business, since the payment interest and repayment of debts are not optional in the same way as dividends. The ratio indicates that a significant proportion of the 14 million could be borrowed, as Out and About seem to be a well-established business that would be financially stable to finance its activities using debt. Out and About plc could raise their capital because the gearing uses long-term debt, which is normally cheap, and reduces the amount that shareholders have to interest in the business. An advantage is that it will reduce interest payments, so more investment can occur elsewhere and the firm can have more cash flow to take on bigger and potentially more profitable projects. This would be helpful in the consideration of extending and diversifying their business. However, the poor profitability and liquidity problems could deter potential creditors. The current ratio is 0.87:1 and the acid test is 0.47:1. This shows significant liquidity problems, which further relates to the point above.

Furthermore, the stock turnover is 2.14 or 170 days. This is very low for this type of business. The quicker a business turns over its stocks, the better. But, it is more important to do that profitably rather than sell stocks at a low gross profit margin or worse at a loss. This could be a problem when the gross profit margin is 53.5% because it could cause problems in

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