Calculate the following financial ratios for both years: return on capital employed, operating profit margin, gross profit margin, current ratio, acid test ratio, settlement period for trade receivables, settlement period for trade payables, and inventories turnover period. Also, comment on the performance of Threads Limited for trade credit.

Formula:

$$\text{Operating profit margin} = \frac{\text{Operating profit}}{\text{Sales revenue}} \times 100\%$$

Sales revenue = Cost of sales + Gross profit
$1000 + 500 = 1500$ (£'000)
Substitute:

$$\frac{200}{1500} \times 100\%$$

Simplify:

$$\frac{200 \times 100}{1500} \% = \frac{20000}{1500} \% = \frac{4}{3} \% \approx 13.3\%$$

Sales revenue = Cost of sales + Gross profit
$1500 + 900 = 2400$ (£'000)
Substitute into formula:

$$\frac{300}{2400} \times 100\%$$

Simplify:

$$\frac{300 \times 100}{2400} \% = \frac{30000}{2400} \% = 12.5\%$$

Part (a)(ii): Gross profit margin

Formula:

$$\text{Gross profit margin} = \frac{\text{Gross profit}}{\text{Sales revenue}} \times 100\%$$

Sales revenue = 1500 (£'000) from above
Substitute:

$$\frac{500}{1500} \times 100\%$$

Simplify:

$$\frac{500 \times 100}{1500} \% = \frac{50000}{1500} \% = \frac{10}{3} \% \approx 33.3\%$$

Sales revenue = 2400 (£'000) from above
Substitute:

$$\frac{900}{2400} \times 100\%$$

Simplify:

$$\frac{900 \times 100}{2400} \% = \frac{90000}{2400} \% = 37.5\%$$

Part (a)(iii): Current ratio

Formula:
$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$ (times)
Substitute:

$$\frac{200}{60}$$

Simplify:

$$\frac{200}{60} = \frac{10}{3} \approx 3.3$$

Substitute:

$$\frac{300}{87}$$

Simplify:

$$\frac{300}{87} \approx 3.4$$

Part (b): Gearing ratio

Substitute:

$$\frac{100}{200} \times 100\% = 50\%$$

Substitute:

$$\frac{200}{300} \times 100\% = 66.7\%$$

Comment: The gearing ratio has increased from 50% in 20X0 to 66.7% in 20X1. This indicates higher financial leverage and greater financial risk due to a relatively larger proportion of debt financing compared to equity. Non-current liabilities doubled while equity increased by 50%, contributing to the upward trend in gearing.

$$\boxed{20X0: operating\ 13.3\%,\ gross\ 33.3\%,\ current\ 3.3;\ 20X1: operating\ 12.5\%,\ gross\ 37.5\%,\ current\ 3.4;\ gearing\ increased\ 50\%\ to\ 66.7\%}$$