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Independent Business Report


(explanation of the ratio) It is a key indicator of the business's profitability. (analysis of ratio in relation to benchmarks and industry average) This ratio has experienced a serious decline from 21.07% to 8.73% and is well below the internal benchmark of 20% and the industry average of 12.55%. (interpretation of the ratio) The increased cost of goods sold which was discussed previously in relation to the gross profit ratio has had a further impact on the net profit. The expenses which need to be analysed are wages and depreciation on buildings. Two further expenses which escaped being identified due to the benchmarks which have been set but could be investigated are postage and telephone expenses. Both have more than doubled. (evaluation of the ratio) This poorly performing ratio has not set up the business to make an acceptable return on the owner's investment.
             Return on Equity .
             (significance of ratio) The return on equity ratio indicates the retun on the amount invested in the business by the owner. (explanation of the ratio) It is an indicator of how a sound a financial investment the owner has made in the business. (analysis of ratio in relation to benchmarks and industry average) with a return on equity of 10.03% the business has reached its internal benchmark of 10% and is above the industry average of 7.3%. Although the owner's investment from the previous accounting period has shown a serious ddecline of 15%. (Interpretation of the ratio) The best indication of whether or not this return is effective is to compare it with current interest and less risky investments, such as government bonds. Interest rates are currently 7% and returns on government bonds are 7.5%. Therefore it is considered that the owner's investment in the business is satisfactory. (Evaluation of the ratio) This result indicates that the business may not be efficiently managed and that the owner may need to reassess their investment in the business.


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