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Accounting Principles And Ratios Essay

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Ratio meanings and interpretations
Profitability Ratios
Gross Profit
2010 2009
Fantastic Holdings Ltd 45.7% 44.9%
Nick Scali Ltd 62.7% 58.1%
‘Indicates an entity’s ability to maintain an adequate selling price above its costs.’ (Carlon et al 2009/2010, p.829)
NSL’s higher gross profit ratio indicates it has a better ability to maintain selling prices at an adequate level above costs to achieve profitability.

Operating Expense Ratio
2010 2009
Fantastic Holdings Ltd 40.6% 39.2%
Nick Scali Ltd 46.8% 49.9%
This is the other ratio that directly affects profit margin; it is ‘costs incurred to support each dollar of sales. ’ (Carlon et al 2009, p.830)

NSL spends more per dollar of sales on operating expenses than FHL. NSL offers a premium product and incurs costs involved to position the business as such. These include high quality marketing campaigns, and staff with more training who are offered sales incentives.

Cash Return on Revenue
2010 2009
Fantastic Holdings Ltd 0.05 0.06
Nick Scali Ltd 0.20 0.13
‘The profit generated by each dollar of sales’ (Carlon et al 2009, p.839)

The slight decrease for FHL can be attributed to the increase in cash payments to suppliers and employees from 2009 to 2010. NSL saw an improvement in their cash return on revenue resulting from the increase in the receipts from customers being greater than the increased revenue from sales of goods.

Return On Assets (ROA)
2010 2009
Fantastic Holdings Ltd 16 cents 21 cents
Nick Scali Ltd 42 cents 21 cents
‘The overall profitability of assets in terms of the rate earned on each dollar invested in assets. ’ (Carlon et al 2009, p.828).

This ratio is an indicator of management’s effectiveness in generating profits. This shows that Nick Scali’s sales strategy of positioning their product as a premium product and charging a premium is more effective that FHL’s positioning as a budget...

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