Account Essay Example | Topics and Well Written Essays - 1000 words

Account - Essay Example Return on capital employed or Return on Total assets measures the firm’s overall effectiveness in generating the profits. This ratio has gone up a little from 0.6 in 2005 to 0.7 in 2006. This increase does not signify much. The assets of the company are underutilized. Similarly return on net assets (also known as return on equity- ROE) measures the return earned on owners’ investments. Arriva Plc. earned 0.22 on equity or net assets in 2005 and 0.21 of net assets in 2006. The earnings are certainly not encouraging. Debtors’ collection period and Creditors’ payment period reflects average age of accounts receivable and accounts payable respectively. These collection and payment periods have shown a little improvement. Average collection period has come down from 47.98 days in 2005 to 46.04 in2006. Also average payment period has also come down from 95.78 days in 2005 to 82.67 days in 2005. This reflects the working capital problems or cash shortage being faced by Arriva Plc. Creditors have started doubting the company because of its dwindling liquidity position. That is why creditors have reduced the credit period. Gross profit ratio cannot be calculated as there are no trading activities involved. But the net profit ratio shows an improvement from 5.9% in 2005 to 6.06% in 2006. This is certainly an achievement despite cash crunch and difficulties in meeting short term obligations faced by Arriva Plc. during the year 2006. Finally it has been observed that Arriva Plc. is a low geared company. With complete reliance on equities Arriva Plc. is finding it difficult to mobilize funds. It is suggestible for Arriva to reconsider about capital mix. It may be beneficial to bring in more debts not only to improve working capital position but to utilize assets to their full capacity. One of the fastest growing industries in world is travel and tourism. Its financial managements assume importance as under noted issues impact the volumes and costs