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MAC Ratios - All Formulaes

Management Accounting (University of South Africa)

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MAC3761/QB002

SOLUTION 01: EDCARS (120 marks; 3½ hours)

Profitability ratios

Ratios 2016 2015 Possible reasons

Gross Profit Margin: > Higher margins in non-

clothing brands
= 43,88% = 41,85% > Good relations with
suppliers - discounts

EBIT Margin: > Cost of marketing

campaigns
= 12,23% = 13,66% > Running of new stores
& promotional costs

EBITDA Margin: > Market campaigns

> Running of new stores

= 14,35% =15,06% & promotional costs

Net Profit Margin: >More income

generated from non-
operating activities
= 8,86% = 7,07%
> Low finance costs

Effective tax rate: >Poor tax planning

(penalties & interests)
= 30 % = 27,79% > Some expenses not
tax allowed

Bad debt as % credit sales: >Stricter lending policies

> Sound debt collection

= 6,02% = 6,52% processes

> Non-clothing retail

customers better
creditworthiness

Total op costs per store: > Deteriorating of Rand

for non-Dollar expenses
= R2,90m =R2,42m > The introduction of
new stores (setup costs)
& extra costs to promote

Revenue per employee: > Incentives to staff to

sell products and hit
targets
= R1,06m = R0,88m
> High value products

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MAC3761/QB002

ii. Return on invested capital

Ratios 2016 2015 Possible reasons

Return on other investment: > Investments made

towards end of year
= 23,4% = 27,19% > Strain in the economy
decreasing dividends

Return on Assets (RoA): > Better utilisation of

assets/longer trading
hours
= 13,18% = 12,37%
> Assets fully deployed
at start of a branch

Return on Equity (RoE): >Profits boosted by non-

operating activities
= 21,21% = 20,94% > Investors are getting
better return than what
the industry offers

Return on Capital Employed > Indication that new

(RoCE): stores are generating
profits early for the
= 15,93% =15,70% company

Non-current asset turnover: >Better utilisation of

assets
= 2,79 times = 2,22 times > New stores and
equipment not kept
idling for long period

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MAC3761/QB002

iii. Liquidity ratios

Ratios 2016 2015 Possible reasons

Current ratio: >Increase of sales might

have led to more debtors
= 2,14: 1 = 2,01: 1 > Possible revaluation of
stock at hand.

Acid-test ratio: > Slight improvement

improved cash
generated from
= 1,33: 1 = 1,30: 1 operations.

Cash ratio: > Ability to cover its

current obligations out of
cash and cash
= 0,87: 1 = 0,31: 1 equivalent

> More suppliers and

credit grantors happy to
provide funding

>Stricter lending policies

> Sound debt collection

= 147 days = 180 days processes

> Suppliers more lenient

to the company (track
record)
= 107 days = 89 days
> Interest-free credit and
company taking
advantage

Inventory days: > Fashion out of stock

and not sold
= 140 days = 129 days > High value items move
slowly

Cash conversion cycle: = 147 + 140 - 107 > Better credit control
processes in place (NCR
= 180 days = 220 days intervention)
- > Better terms
negotiated with
suppliers

Inventory turnover (times): > Fashion out of stock

and not sold
= 2,61 times = 2,83 times > High value items move
slowly

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MAC3761/QB002

iv. Capital structure/solvency

Ratios 2016 2015 Possible reasons

Interest cover (TIE): > Increasing operating

costs and new store
costs
= 2,42 times = 2,75 times
>High interest rates
currently paid

> High debt for most part

of year

Net interest cover: > Increase in cash

reserves from profits
= 2,9 times = 2,78 times > Increase in interest
rates

Effective interest rate: > Good relations /

negotiations with banks
(low rates)
= 10,91% =11,28%
> Better company credit
status leading to
cheaper credit

IBD to EBITDA: > Repayment of loan

(2015: R10bn)
= 2,44: 1 =2,99: 1 > Increase in operating
profit from new stores

Debt-equity ratio: > Repayment of short-

term portion to reduce
gearing
= 83,84% = 86,32%

Debt-equity ratio (net): > Cash generated from

operations & interest
received increased
= 75,76% = 77,34%
> Repayment of short-
term portion to reduce
gearing

Debt ratio: > Repayment of short-

term portion to reduce
gearing
= 55% = 56,21%

Capital gearing ratio: > Repayment of short-

term portion to reduce
= 46,95% gearing
= 45,6%

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MAC3761/QB002

Current vs Target Capstruct: > Though short of target,

year to year seems to be
getting closer
= 45,6% : 54,4% = 40%:60% repayment of loans &
profitability

v. Financial / investor ratios

Ratios 2016 2015 Possible reasons

Earnings per share (EPS):

= R10,50 per share

Dividend per share (DPS):

= R6,50 per share

P/E multiple: > Tough market

conditions (competition)
and investors losing
= 13,33 =14,20 confidence

Earnings Yield: > Tough market

conditions (competition)
and investors losing
= 7,5% = 7,04% confidence

Dividend yield: > Decline in share price

while maintaining
dividend growth
= 4,6% = 3,8%

Dividend cover: > Dividends increased to

meet expectations
despite low profits
= 1,62 times = 2,0 times
> Dividend policy more
generous to attract
investors

Dividend pay-out ratio: > Dividends increased to

meet expectations
despite low profits
= 61,90% = 50,14%
> Dividend policy more
generous to attract
investors

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