ABC Supermarket PLC
Case Analysis
Ratio Analysis
The results of ABC Supermarket's financial performance are very different from the comments shared by the Chairman in the 2009 Annual report. Based on the evaluation below, the company's cash, profitability, and liquidity positions all weakened between 2006 and 2009. They also had an issue with managing inventory. However, the stock price increased successively over this period of time. This may have been a factor of raising more debt.
Return on Capital Employed (ROCE)
The Return on Capital Employed ratio (ROCE) tells us how much profit we earn from the investments the shareholders have made in their company. It is also the rate of return a business is making on the total capital employed in the business. Capital will include all sources of funding (shareholders funds + debt).
The single most important indicator of the inherent excellence of a business is the return on capital employed. There is a popular statement that applies to this ratio: "it takes money to make money." Those that understand compounding know that the goal is to make as much money with as little invested as possible while avoiding the dangers of leverage.
ABC Supermarket's ROCE ratio decreased successfully over the past four years. In fact, the ratio dropped 10 points between 2006 and 2009. This is in indication that the company did not leverage investor funds appropriately.
Return on Equity (ROE)
One of the most important profitability metrics is return on equity. Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. It's what the shareholders "own." Shareholder equity is a creation of accounting that represents the assets created by the retained earnings of the business and the paid-in capital of the owner
The Return on Equity profile for ABC Supermarket is weakening. Similar to its performance with the Return on Capital Employed ratio, this suggests that...
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