JACOBSTOWE Essay Example | Topics and Well Written Essays - 1500 words

JACOBSTOWE - Essay Example Jacobstowe found it difficult in 2007 to meet its working capital requirements. With low gearing, tight liquidity problems, working capital could not be utilized to its best. But despite all these adversaries, Jacob declared good dividend in order to maintain the market price of its scrips at certain predetermined level. All ventures in the business are executed to earn the profits, and that is one of the most important tasks of business managers. Three ratios are used, namely Net Profit Margin, Return on Assets, and Return on Equity in order to evaluate the profitability of Jacobstowe Plc. a) Net Profit Margins: Jacobstowe Plc.’s net profit margins have gone down to 5.17% in 2007 from 6.42% in 2006. Despite the fact that there is increase in turnover from 5,622m to 5,996m, Jacobstowe has not been able to increase net profit margins. There could be a number of reasons for such a fall in profitability. One would notice that current ratio of Jacobstowe has also fallen in the year 2007 as compared to 2006 even when total ‘Receivables’ have increased; it makes sense here to state that turnover would have increased at the cost of reduction in prices, and thus there are reduction in net margins. Initially with the reduction in prices gross margin would have gone down but as there was also increase in operating costs (those increased from 5099m in 2006 to 5486m in 2007), both factors would have worked together to bring down the net margins. b) Return on Assets (ROA): Another measure to assess profitability is Return on Assets (ROA). Return on assets in 2007 is 4.93 as compared 5.75 in 2006. Assets have performed if not less than their optimum capacity but certainly the performance was what it was in the year 2006. For calculation purposes average capital employed in 2006 is taken as in 2007. This is because of non- availability of information about ‘total assets employed’ in 2005. Profitability on this count was also not very encouraging. The