Question 2 (Fiction Plc) FINANCIAL RATIOS

FICTION PLC
FOR THE YEARS ENDED 31 DECEMBER
2001 2002
(i) GROSS PROFIT MARGIN

= GROSS PROFIT 4,750 5,700

X 100 X 100
SALES 9,500 11,400
50% 50%

(ii) NET PROFIT (BEFORE TAX) MARGIN

= PROFIT BEFORE INTEREST & TAX 2,050 2,800

X 100 X 100
SALES 9,500 11,400
21.58% 24.56%

(iii) RETURN ON CAPITAL EMPLOYED (ROCE)

= PROFIT BEFORE INTEREST & TAX 2,050 2,800

X 100 X 100
CAPITAL EMPLOYED(EQUITY + LONG TERM DEBT) 5,100 8,440
40.20% 33.18%

(iv) CURRENT RATIO

= CURRENT ASSETS 2,360 4,100

CURRENT LIABILITIES 1,310 1,460
1.80 : 1 2.81 : 1

(v) ACID TEST RATIO/ QUICK RATIO/ LIQUID RATIO

= CURRENT ASSETS - INVENTORY- prepayments (2360 - 1330) (4100 -1800)

CURRENT LIABILITIES 1,310 1,460
0.79 : 1 1.58 : 1

(vi) GEARING RATIO

DEBT TO CAPITAL EMPLOYED RATIO
OR CAPITAL GEARING RATIO
LONG TERM LIABILITIES 1,000 2,000
X 100 X 100
CAPITAL EMPLOYED(EQUITY + LONG TERM DEBT) 5,100 8,440
19.61% 23.70%

(vii) DEBTORS (TRADE RECEIVABLES) COLLECTION PERIOD

= DEBTORS (TRADE RECEIVABLES) x 365 1,030 1,500

X 365 X 365
CREDIT SALES 9,500 11,400
40 DAYS 48 DAYS
(viii)CREDITORS / ACCOUNTS PAYABLES PAYMENT PERIOD

= ACCOUNTS PAYABLES x 365 400 600

X 365 X 365
CREDIT PURCHASES 4,830 6,170
30 DAYS 35 DAYS
PURCH = CLOSING INV + COS - OPENING INV
(ix) STOCK HOLDING PERIOD:

AVERAGE INVENTORY X 365 1,290 X 365 1,565 X 365

COST OF GOODS SOLD 4,750 5,700
99 DAYS 100 DAYS

PURCHASES = COGS + CLOSING INVENTORY - OPENING INVENTORY

2001: 4,750 + 1,330 - 1250 = 4,830
2002: 5,700 + 1800 - 1330 = 6,170

2001 2002
OPENING INVENTORY 1,250 1,330
PURCHASES 4,830 6,170
6,080 7,500
LESS: CLOSING INVENTORY 1,330 1,800
COST OF GOODS SOLD 4,750 5,700

2001 2002
SUMMARY OF RATIOS:
(i) GROSS PROFIT MARGIN 50% 50%

(ii) NET PROFIT (BEFORE TAX) MARGIN 21.58% 24.56%

(iii) RETURN ON CAPITAL EMPLOYED (ROCE) 40.20% 33.18%

(iv) CURRENT RATIO 1.80 : 1 2.81 : 1

(v) ACID TEST RATIO/ QUICK RATIO/ LIQUID RATIO 0.79 : 1 1.58 : 1

(vi) GEARING RATIO 19.61% 23.70%

(vii) DEBTORS (TRADE RECEIVABLES) COLLECTION PERIOD 40 DAYS 48 DAYS

(viii)CREDITORS / ACCOUNTS PAYABLES PAYMENT PERIOD 99 DAYS 100 DAYS