The application of proper accounting ratios revealed that the profitability of Dollar Tree Store slightly deteriorated from 2005 to 2006. Managers were less efficient in the generation of profits from the firm’s resources as shown by the 1. 09% decrease in the return on capital employed ratio, which is considered as the primary profitability ratio. A high percentage in the return on capital employed means that the company’s profits are substantially safe from unexpected changes in the business environment, such as new competitive measures, adverse economic changes and more.
In this respect, the return on capital employed of Dollar Tree Store exceeds 25%, which is a good profit level. The gross profit margin and operating income margin of the enterprise also faintly diminished complimenting the return on capital employed ratio. This implies that the net profit derived from every $100 of sales revenue is lower, revealing inferior control on the firm’s operating costs. By examining the shifts in the main variables in the profit and loss account, one can see that they are in line with the profitability ratios analyzed above, which reveal a minimal decrease in the overall financial performance for the organization.
The changes in such basic variables are shown below: The changes in the key variables reveal show an increase in sales revenue and gross profit. The decrease in the gross profit margin stems from the fact that the rise in sales revenue was in a less proportion than the increase in gross profit leading to a lower gross profit margin. Indeed in their report, the directors of the firm highlighted the point that the company operates in a highly competitive market and thus lower profits have to be made in order to sustain control on the firm’s market share.
The selling, general and administrative costs increased too. One can also see a drastic boom in the interest expense. These rises led to a lower profit before interest and taxation and net profit. This adheres to the point mentioned above that weaker control was exercised on costs. As regards interest charges, these arise from higher debts, which the company has obtained. Such issues will be examined later on in the investors section. Liquidity of Dollar Tree Store The current ratio of Dollar Tree Store Limited minimally deteriorated during the years examined.
This shows particular concern on working capital management of the firm, because such ratio reveals the ability of the organization to pay its current liabilities out of the current assets. However the acid test ratio, which represents the capability of the firm to cover the current liabilities out of the most liquid assets improved during the years. Therefore we can contend that the decrease in working capital probably arose primarily from a decrease in inventory.
Thus the corporation’s ability to meet current liabilities improved from 2005 to 2006. Even though the inventory level decreased by the organization, the stock turn ratio indicates that management was more effective in the management of stock. Indeed the stock turn ratio increased from 3. 53 times to 3. 7 times. This portrays that managers were more able to dispose of the stock held faster. This is very positive for the liquidity of Dollar Tree Store because the higher the ratio, the less the money tied up in stock.
Several organizations encounter cash flow problems due to the high amount of stock they hold which diminishes the availability of money and increases the holding costs of stock. This does not apply to the company examined. The organization selected operates as a discount variety store offering merchandise at fixed prices. The majority of the sales are made by cash, cheque or MasterCard/Visa credit cards. The materiality of trade receivables from debtors is thus low as indicated in the Balance Sheet itself. Therefore we did not determine the ratios on debtors collection period due to its insignificance.
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