I would like to know the following in Finance:

• two ways in which you think this extract demonstrates a good application of ratio analysis
• two areas where you think this extract could be improved.

Refer to below and answer the above:

Zippy Hire PLC

This is a report on the investment potential of Zippy Hire plc based on the financial statements for the year ended 31 March 20XX.

From a shareholder's perspective there are two main issues:

a)The company's trading position; and

b)The way in which the company is financed and the impact on potential for future investment.

Considering each in turn:

1.0 Trading performance

1.1 Profitability

The company appears to be trading strongly with increasing levels of turnover and profit and slightly increased profit margins. Year on year turnover has increased by 10% to 20m and both gross profit and operating margins have improved by 1%. Some of this growth has come from acquisitions made during the year (page 2[1]) but the majority has come from organic growth (page 31). There are however some signs that the company may not be able to maintain this level of growth as the industry becomes increasingly competitive.

Although the company is trading strongly there is some evidence of competitive pressure. Tool hire is a highly competitive market which has "suffered in the past from predatory pricing strategies" (page 91). Whilst improvements in profit margins have been made this is has been achieved through a major restructuring initiative, and significant investment in specialist equipment, opportunities for further efficiency savings may be limited.

Whilst profit margins and overall profit has increased the higher assets have generated a small fall in ROCE and return on shareholder funds.

Zippy Hire mainly supplied tools to the construction sector and has developed a strategy of developing a wider but more specialised product base which command higher margins but lower usage. However, this investment has not been matched by proportionately increased sales or profits. Consequently, although absolute sales and profit levels have risen, return on capital employed has fallen slightly from 11.25% to 11.21%. In the longer term this may be an area to keep under review.

[1] All page numbers refer to the Annual Report and Financial Statements of xx plc.