Question One

The condensed results from the books of The Green Basket for the year 2001 was as follows

Fixed Assets 475,000 Capital & Reserves 475,000

Current Assets 10% Loan 125,000

Stock 45,000
Debtors 75,000 Current Liabilities 50,000
Bank 55,000 175,000
‘---------- ------------ ------------
650,000 650,000
====== =======

Turnover 820,000
Gross Profit 410,000
PBIT 300,000

Data available from the industry report included the following

Current ratio 2.73 : 1 Roce 32%

Acid test ratio 1.02: 1 Gearing 40%
Fixed asset t-over 4.32 times Stock t-over 6.21 times
Debtors t-over 8.65 times Gross profit margi 47%
Net profit margin 22% Working capital t-over4.58 times
Return on assets 32%

Required :

a. calculate appropriate ratios for the firm for the year

b. using the industry averages stated above, comment on the performance of the Green
Basket in relation to the industry.

c. what other information would you require in order to make a more detailed analysis
Solution
Industry Ratios Company Ratios Comment
Liquidity
Current ratio 2.73 3.5
Acid test ratio 1.02 2.6 It is evident that the firm is operating at a very good liquidity position.
Essentially, these ratios indicate that the firm is operating at a little higher
liquidity position than other firms within the industry. Though these ratios are
good, the entity must ensure that it watches and manages its liquidity position so
the ratios do not get too high, which would point to a mismanagement of the firms
liquid assets.
Asset Management

We are definitely not utilizing our fixed assets as effective as other firms within
Fixed asset t-over 4.32 1.73 the industry. A solution would be to implement measures to increase our sales.

We are however, taking less time to collect from debtors than firms in the industry
Debtors t-over 8.65 10.93 which is a good cash management strategy.
Likewise, we are taking a shorter time to use our stock which minimize the risk of
Stock t-over 6.21 9.11 tying up capital in stocks.
Nonetheless, we are utilizing our working capital better than firms in the industry
Working capital t-over 4.58 6.56 to generate sales.
Overall, we are managing our current asset better than industry players, however,
we need to management our fixed assets better.
Profitability

The gross profit margin as well as the net profit margin are a good measure of cost
Net profit margin 22% 37% control. Essentially, 37% of the sales represent net income, while 50% of sales
represent gross profit.This is good position for the firm in comparison to the
industry performance, which means that the firm is managing its cost more
Gross profit margin 47% 50% effectively than the average firm within the industry.

A measure of the efficient use of assets can be noted from the return on asset
ratio. This ratio though slightly higher than the industry is probably not the best it
can be as we noted in the fixed asset turnover ratio that our fixed assets were not
being utilized as well as those of other firms within the industry. In addition, we
also found from a review of the current asset turnover ratios that the firm is
managing its current assets well, thus, effective management of current assets may
Return on assets 32% 46% have lead to this ratio being higher than the industry.

This is substantially higher than other firms within the industry which means that
on average investors of our firm are reaping a higher return on their investment
Roce 32% 50% than the average investor within the industry.

Solvency
 Evidently, from the gearing ratio it can be stated that Green Basket is less riskier
than most firms within the industry. This indicates that financially the firm is
stronger than the average firm within the industry. Essentially, stockholders own
Gearing 40% 21% most of the interest in the firm, which reduce the risk of takeover.
The following data was obtained from the books of The Great Gatsby :

BALANCE SHEET AS AT DECEMBER 31,

1995 1996
$ $
NON-CURRENT ASSETS NBV NBV
Tangible Assets 522,100 692,000
Goodwill 65,000 50,000
587,100 742,000

CURRENT ASSETS
Stock 35,000 12,000
Short Term Investment 10,000 35,000
Debtors 7,200 13,000
Bank 0 54,000
Cash 7,000 59,200 12,000 126,000
646,300 868,000

EQUITY & LIABILITIES

CAPITAL & RESERVES
Ordinary Shares @ $1 200,000 250,000
10% Preference Shares @ $0.50 20,000 35,000
General Reserves 37,000 47,000
Retained Earnings 121,000 257,000
378,000 589,000
NON-CURRENT LIABILITIES
10% Debenture 212,300 217,000

CURRENT LIABILITIES
Creditors 22,000 18,000
Tax Payable 14,000 19,000
Dividends Payable 20,000 56,000 25,000 62,000
646,300 868,000

CONDENSED INCOME STATEMENT 1995 1996

$ $
Sales 580,000 870,000
Gross Profit 360,000 350,000
Net Profit before Tax 244,000 248,000
Tax -61,000 -62,000
Profit After Tax 183,000 186,000
Dividends:
Ordinary 23000 36500
Preference 2000 -25,000 3500 -40,000
Transfer to Reserves -37,000 -10,000
Profit for the year 121,000 136,000
Retained Earnings b/d 0 121,000
Retained Earnings c/d 121,000 257,000

Market price per share $2.30 $2.95

Required :

a. Calculate appropriate ratios for the firm in the areas of liquidity, solvency,
profitability, turnover and investment

b. Comment on the performance of the firm over the years

Solution for ratios

LIQUIDITY RATIOS 1995
Current Ratio CA/CL 1.06
Acid Test Ratio (CA-Stock)/CL 0.43

LONG TERM SOLVENCY RATIOS

Total Assets to Total Liabilities TA/TL 2.24
Total Debts to Total Equity lower the better (NCL + PSC)/com eq 0.65
Gearing lower the better [(NCL + PSC)/Cap Em]*100 39%

PROFITABILITY RATIOS
Gross Profit Margin (GP/Sales)*100 62%
Net Profit margin (PAT/Sales)*100 32%
Return on Assets (PBIT/TA)*100 41%

Returns on Investment
Return on Capital Employed (ROCE) (PBIT/Cap em)*100 45%
Return on Shareholders Equity [(PAT - P.D.)/Com Eq]*100 51%

ASSET MANAGEMENT OR TURN OVER RATIOS

Stock Turnover (times) COS/Ave. stock 6.29
(Days) (Ave. stock/COS)*365 58
Working Capital Turnover (times)
(Days)
Fixed Assets Turnover (times)
(Days)
Debtors Turnover (times) Sales/Debtors 81
(Days) (Debtors/Sales)*365 5
Creditors Turnover (times) Purchases/Creditors 11.59
(Days) (Creditors/Purchases)*365 31

INVESTMENT RATIOS
Earning per Share

Dividend Cover, Times

Interest Cover,

Dividend Yield, Percentage

Market - Book times

Price Earnings
 1997
$
NBV
732,000
30,000
762,000

15,000
40,000
15,000
62,500
9,300 141,800
903,800

250,000
35,000
52,000
402,000
739,000

100,000

15,300
22,000
27,500 64,800
903,800

1997
$
930,000
375,500
250,000
-65000
185,000

41500
3500 -45000
-5000
145,000
257,000
402,000

$3.60
 1996 1997
2.03 2.19
1.84 1.96

2.76 4.52
0.45 0.19
31% 16%

40% 40%
21% 20%
31% 29%

33% 31%
33% 26%

22.13 41.07
16 9

67 62
5 6
27.61 36.44
13 10
Question Three

Fred and Barney are two firms in the same line of business in the city of Bedrock Rubble. Their financial re

BALANCE SHEET FRED BARNEY

$ $ $ $ $ $
FIXED ASSETS COST DEPN NBV COST DEPN NBV
Tangible Assets 550,00 40,000 510,000 650,000 65,000 585,000

CURRENT ASSETS
Stock 18,000 21,000
Short Term Investment 25,000 22,000
Debtors 14,000 6,000
Bank 0 6,500
Cash 7,000 1,500
----------- -----------
64,000 574,000 57,000 642,000

CURRENT LIABILITIES
Creditors 12,000 11,500
Tax Payable 14,000 10,000
Dividends Payable 10,000 36,000 11,500 33,000
---------- ----------- ------------ -----------
Working Capital 28,000 24,000
----------- -----------
Net Assets 538,000 609,000
======= =======

CAPITAL & RESERVES

Share Capital ( $1 Ord Shares) 200,000 250,000
Share Premium 20,000 35,000
General Reserves 49,000 47,000
Retained Earnings 121,000 136,000
----------- ------------
390,000 468,000
10% Debenture 148,000 141,000
------------ ------------
538,000 609,000
======= =======
 CONDENSED INCOME STATEMENT FRED BARNEY
$ $
Sales 580,000 870,000
Gross Profit 420,000 160,000 530,000 340,000
Net Profit before Tax 256,000 270,800 285,000 299,100
Tax -61,000 -62,000
Profit After Tax 195,000 223,000
Dividends -25,000 -40,000
Transfer to Reserves -49,000 -47,000
Profit for the year 121,000 136,000

Required :

a. Prepare appropriate ratios for both firms in the areas of liquidity, solvency,
profitability, and turn over.

b. Comment on the performance of the two firms for the year

c. What other information would you require in order to make a more indepth analysis of
the two firms

Solution for ratios

LIQUIDITY RATIOS FRED BARNEY

Current Ratio 1.78 1.73
Acid Test Ratio 1.28 1.09

LONG TERM SOLVENCY RATIOS

Total Assets to Total Liabilities 3.12 3.69
Total Debts to Total Equity 0.47 0.37
Gearing 28% 23%

PROFITABILITY RATIOS
Gross Profit Margin 72% 61%
Net Profit margin 47% 34%
Return on Assets 47% 42%

Returns on Investment
Return on Capital Employed (ROCE) 50% 49%
Return on Shareholders Equity 50% 64%

ASSET MANAGEMENT OR TURN OVER RATIOS

Stock Turnover (times) 8.89 16.19
(Days) 41 23
Working Capital T (times) 20.71 36.25
(Days) 18 10
Fixed Assets Turno (times) 1.14 1.49
(Days) 321 245
Debtors Turnover (times) 41.43 145
(Days) 9 3

INVESTMENT RATIOS
Earning per Share $ 0.98 $ 1.20

Dividend Cover, Times 7.80 5.58

Interest Cover, 18.30 21.21

k Rubble. Their financial results at the end of 1995 was as follows :
COGS
PBIT