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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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