Case 25.

1: Patel Computers System

ASSETS
Fixed assets
Property 6,750
Less: Accumulated depreciation 500 6,250
Systems equipments 5,500
Less: Accumulated depreciation 1,350 4,150
10,400
Current assets
Stocks 3,300
Trade debtors 7,550 10,850
Less current liabilities
Trade creditors 11,450
Proposed dividend 130
Taxation 780
Bank overdraft 1,300 13,660
Net current assets -2,810
Net Assets 7,590
Capital and Liabilities
Ordinary shares, Rs 10 par 3,000
Reserve & surplus 2,090
Net worth 5,090
Secured loan (15 %) 2,500
Total Funds 7,590

Revenue 82,000
Less : Cost of sales
Opening stock 2,700
Purchases 52,800
55,500
Less : Closing stock 3,200 52,300
Gross profit 29,700
Less : Selling and distribution expenses 21,710
Administration expenses 4,700
Finance expenses 390 26,800
Net profit before taxation 2,900
Corporation tax 1,000
Net profit after taxation 1,900
Proposed dividend 1,000
Profit transferred to reserve & surplus for the year 900
Financial Analysis: Ratios
Current ratios
Current ratio 0.79
Acid test ratio 0.55
Activity ratios
Assets turnover: Revenue/NA 10.80
Fixed assets turnover: Revenue/NFA 7.88
Current assets turnover: Revenue/CA 7.56
Stock turnover: COS/Stock 15.85
Stock (inventory holding period), days 23
Debtors turnover: Revenue/debtors 10.86
Collection period, days 33
Capital structure ratios
Debt-equity: D/E 0.49
Financial leverage: NA/NW, (1 + D/E) 1.49
Debt ratio: D/CE 0.33
Times interest earned 8.44
Profitability ratios
Gross margin: EBIT/Revenue 4.0%
Net margin: PAT/Revenue 2.3%
ROI(before tax): EBIT/NA 43.3%
ROE: PAT/NW 37.3%
Profitability analysis
Assets turnover: Revenue/NA 10.80
Gross margin: EBIT/Revenue 4.0%
ROI(before tax) : EBIT/NA 43.3%
Income leverage: PAT/EBIT 0.58
Financial leverage: NA/NW 1.49
Leverage factor 0.86
ROE: PAT/NW 37.3%
Retention: RE/PAT 47.4%
Growth 17.7%
Patel Computers is financially a strong company. Its before-tax ROI is 43.3% and ROE 37.7%.
The company distributes more than half of its earnings as dividends. Given its high ROE and
dividend payout (or retention), its internal growth is 17.7%. In spite of low margins, the company
has been able to achieve high performance due to the effective utilisation of assets as shown by
the turnover ratios. The company has a low collection period and low inventory holding. The
company's debt-equity ratio is less than 1; hence, it is conservatively financed. The company has a
lower leverage factor. It's possible for the company to employ more debt and improve ROE
further.