ACC1110 - Limitations of Ratio Analysis - Financial Accounting Assignment Help
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[Description] Operating profitability measures management performance by comparing operating profit to sales. Merlin suffered a fall in operating profitability whereas Cineworld achieved a small increase, albeit that it works on a significantly lower percentage than Merlin.
[Analysis and context] Merlin reported that increased threats of terrorism combined with poor and extreme weather conditions affected trading during the year. The fall in profitability may, therefore, be exceptional, and an increase might be expected for 2018.
Cineworld reported increases in admissions (up 3.5% overall) and increases in ticket average prices (up 4.1% in the UK). This was, in part, because of the strong performance of the top 3 releases in the year (Beauty & the Beast, Star Wars and Dunkirk) which generated nearly £50m more in revenues than the top 3 films in 2016. It also recently acquired a US chain, Regal, and 75% of revenues now come from the US, perhaps insulating it from the UK/Europe based problems experienced by Merl
2. Working capital
Working capital ratios are of interest to lenders and investors but for different reasons. The ratios are closely related to liquidity which refers to the availability of cash to meet immediate financial liabilities.
Working capital ratios measure the success of the company in using current assets and liabilities and to maintain liquidity. The current ratio is a measure of liquidity: the ability of the company to meet its financial obligations as they fall due. It is simply the current assets of the business divided by the current liabilities. Neither company has significant inventory holdings or trade receivables (they are consumer businesses) so many of the working capital ratios are not particularly revealing.
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