The Gross Profit Margin of Mark Equipment Pty Ltd Essay

The Gross Profit Margin of Mark Equipment Pty Ltd - Essay Example The Gross Income Margin is a financial measure to evaluate an organization’s financial wellbeing by disclosing the percentage of cash left after considering the cost of goods sold into account. The gross income value of an organization serves as the basis for the payment of further expenses and future reserves. The gross income margin of an organization can be calculated as the ratio of its revenue less its cost of sales to its revenue value. i.e., Gross Income Margin = (Revenue – Cost of Sales)/ Revenue The cost of sales refers to the direct expenses involved in the manufacturing of the products sold by the organization. The cost of sales value includes the cost of resources utilized in the manufacturing of the products along with the labor expenses utilized in the production of the products. Thus, the cost of sales can be computed as, Cost of Sales = Opening Stock + Purchases – Closing Stock The computation of the cost of sales of a company does not comprise of any indirect costs involved in the process of sale of the products. Thus, the repair and maintenance charges, costs of depreciation of tools and equipments, rent expenditure, wages and charges of water and electricity have been excluded from the calculation of the cost of sales and hence from the computation of the gross profit of the company . Therefore, the cost of sales of Mark Equipment Pty Ltd for the present year and the previous year would be, The assessment of the financial health of Mark Equipment Pty Ltd can be carried out by the examination of the financial ratios of the company. The analysis of the current ratio shows that it has increased from 1.28 in the previous year to 1.34 in the present year. Ideally, the company should have current assets by current liabilities ratio of 2:1, in order to be in a position to comfortably repay their short-term liabilities. Thus, though the percentage of current assets of the company is a little higher than that of the current liabilities, the company should try to improve its current ratio in order to enhance its liquidity. The company also needs to focus on its cash assets so as to improve its creditworthiness. The debt ratio and the debt to equity ratio indicate the financial leverage of the organization. Debt ratio signifies the relationship between the total liabilities and the total assets. The debt ratio of Mark Equipment Pty Ltd has slightly increased from 0.57 to 0.69 during the period. The debt to equity ratio helps in deriving a reasonable relationship between the debt and the equity value of a company . The present value of the debt to equity ratio also increased a little from 0.17 in the previous year to 0.21. Since the values of the mentioned ratios are moderately low, it can be implied that the company is in a position to raise long-term debts, in case it wants to, considering the moderately low interest rate. The fixed asset turnover ratio of Mark Equipment is 22.51 in the present year, whereas the fixed asset turnover of the company for the previous year has been 18.07. The total asset turnover for the previous year was 5.23, whereas it decreased to 3.63 in the present year. It implies that Mark Equipment had been able to generate more volume of sales in relation to the fixed assets it holds . Thus, the company had utilized and managed its fixed assets quite fairly, though it needs to improve the utilization of its overall assets.