The management of Hove Ltd has calculated the following statistics from its results for the year ended

Question:

The management of Hove Ltd has calculated the following statistics from its results for the year ended 31 December 2014. Equivalent average figures from a relevant trade association are also given.

Hove Ltd Trade average Gross margin 50% 40%

Net margin 10% 8%

Return on capital employed 16% 12%

Acid test 1:1 1.5:1 Gearing 80% 30%

(a) Explain the significance of, and the basis of calculation for, each of the five statistics listed above.

(b) Explain why, if you were informed that Hove Ltd’s current ratio was 6:1, compared with a trade average of 2:1, this might not indicate a satisfactory situation.

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