Capital structure

The net assets of the company can be financed by a mixture of owners’ equity and long-term debt. Gearing ratios analyse this mixture by measuring the contributions of shareholders against the funds provided by the lenders of loan capital. Retail Stores Plc has no long-term debt; but the significant ratio is:

The profit and loss account provides another useful angle on the capital structure. Is there healthy margin of safety in the profits to meet the fixed interest payments on long-term debt? An overgeared company may show signs of running out of profit to pay this fixed burden.

To be sure that their dividend is safe, shareholders will want profits compared with the dividend payable:

Activity and efficiency

The ratios showing stock turnover and average collection period help managers and outsiders to judge how effectively a company manages its assets. The figure of sales is compared with the investment in different assets. The following rapid stock turnover is typical of the retail sector. Manufacturing companies tend to show much slower turnover.

The following rapid collection period is typical of the retail sector which tends to avoid substantial credit sales. Manufacturing companies’ collection period can often creep up to 60 days and more.

Similarly, managers should aim to extend the period of credit taken to pay suppliers. Too long a period, however, will lead to poor trade relations with suppliers, and may even be an indication of cash flow problems.