a. Return on Capital Employed= PBIT/capital employed*100
2015) 20000/109000*100 = 18.3%
2014) 14000/86000*100 = 16.3%
b. Net Profit = PBIT/Net Sales*100
2015) 20000/108000*100 = 18.5%
2014) 14000/64000*100 = 21.9%
c. Accounts receivable period= Trade receivable/Net Sales*365
2015) 14000/108000*365 = 47 days
2014) 10500/64000*365 = 59 days
d. Trade accounts payable Period= Trade payable/cost of sales*365
2015) 9400/75600*365 = 45 days
2014) 6800/40000*365 = 62 days
e. Debt = Total liability/Total assets
2015) 80400/129400 = 0.6213
2014) 74200/100200 = 0.7405
- Required :- based on the above accounting ratios , answer the following question ?
1- Explain what you can deduce from the ratios as at 31 December 2015 and from comparing them with those for 2014. ( comment on each accounting ratio )
a- Return on Capital Employed has increased when compared with last year, so it indicate that the more profit it’s creating out of every dollar of capital investment it uses in its operations.If a company has a return on capital employed of 18.3%, it means it’s generating a net return of 18.3 cents from every dollar of capital it employs. so a higher ratio result indicates that a business is making good use of its long-term financing strategy.
b- There has been a reduction in net profit, although in absolute terms, both profit and sales are higher. it indicate that the firm has lowered the price of goods to increase sales. There is inefficient management of the affairs of business
c-The debtors’ collection period, already satisfactory, has decreased still further from 60 to 47 days. There is not enough information to say whether this is all due to good credit control, or whether some sales are being made on shorter credit terms or for cash.
·d- The creditors payment period has shortened. Possibly the company has become more efficient at paying creditors, or perhaps it is purchasing goods on shorter credit terms.
e- · The debt to equity ratio has reduced in 2015. The reduction is lower than 1 , so it indicate that the more financially secure a company is, since the majority of its operations are being funded by investor equity rather than by debt.
2- State two points which could cause the movement in the gross profit percentages between the two years and explain how they could bring the change about.
The answer :-
– An error in counting closing stock.
– An increase in prices from suppliers not passed on to customers.
– Deliberate reduction in margin in an attempt to increase sales volume.
3- State the extent to which you agree or disagree with the following and give brief reasons for your answers:-
a) The current ratio and the quick ratio help to assess whether a company is able to meet its debts as they fall due. Therefore the higher these ratios are the better placed the company is.
The answer : –
The position is not quite as clear-cut as this statement would suggest. Liquidity is important, and a company ought to be able to pay its debts as they fall due. However, an excessively high current ratio means that resources are tied up in stock, debtors and cash instead of producing profits. Current assets should generally be kept as low as is compatible with efficient production and paying creditors as they fall due.
b) A high gearing ratio is advantageous to shareholders, because they benefit from the income produced by investing the money borrowed.
The answer : –
There is some truth in this statement. High gearing means greater risk, but also, in good times, greater returns. It is important that the percentage return to shareholders is greater than the percentage rate of interest being paid on the borrowings.
Important notes // please paraphrase the answer and arrange it