Question 3

Comparator assembles computer equipment from bought in components and

distributes them to various wholesalers and retailers. It has recently subscribed to an
inter-firm comparison service. Members submit accounting ratios as specified by the
operator of service, and in return, members receive the average figures for each of
the specified ratios taken from all the companies in the same sector that subscribe to
the service. The specified ratios and the average figures for the Comparator’s sector
are shown below:

Ratios of companies reporting a full year’s results for periods ending 30 September
2012

Return on capital employed 22.1%

Net assets turnover 1.8

Gross profit margin 30%

Net profit (before tax) margin 12.5%

Current ratio 1.6:1

Quick ratio 0.9:1

Inventory holding period 46 days

Accounts receivable collection period 45 days

Accounts payable payment period 55 days

Debt to equity 40%

Dividend yield 6%
Comparator’s financial statements for the year ended 30 September 2012 are set
out below:

Income statement

Rs’000

Sales revenue 2,425

Cost of sales (1,870)

Gross profit 555

Other operating expenses (335)

Operating profit 220

Interest payable (34)

Profit before tax 186

Income tax (90)

Profit after tax 96

Statement of financial position as at 30 September 2013

Assets Rs’000 Rs’000

Non -Current assets 540

Current assets

Inventory 275

Accounts receivable 320

Bank nil 595

Total assets 1,135

Equity

Equity shares (25 cents each) 150

Accumulated profits 185

Total Equity 335

Non- current liabilities

8% loan notes 300

Current liabilities

Bank overdraft 65

Trade accounts payable 350

Taxation 85

500

Total Equity and Liabilities 1,135

Notes

1) The market price of Comparator’s shares throughout the year averaged Rs

6.00 each
2) Dividend paid Rs 90,000
3) Operating expenses include an exceptional loss on disposal of Rs 120,000

Required:
(a) Calculate the ratios for Comparator equivalent to those provided by the
inter-firm comparison service. [10 marks]

(b) Write a report analysing the financial performance of Comparator based on

a comparison with the sector averages. [12 marks]

(c) Explain the problems that are inherent when ratios are used to assess a
company’s financial performance. [8 marks]

[Total: 30 marks]