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Week 8b:

Financial Statement
Analysis &
Performance
Exercises

The following ratios were given


for 2 similar businesses:

Inventory turnover
ratio
Current ratio
Gross profit margin
Net profit margin

Zaitun
Trading
6 times

Chantra
Trading
8 times

2 times
30%
15%

3 times
40%
10%

Which firm has a stronger


financial position?

Activity:
Chantra has a higher inventory
turnover ratio. Inventory is
sold/replaced more times than Zaitun.
Liquidity:
Chantra is more liquid than Zaitun.
Profitability:
Chantra has a higher gross profit
margin makes more profit per sale.
However, on a net profit basis (after
deducting all expenses), Zaitun has a
higher margin.

Orchid Palace
Income Statement for the year ended 31.12.2012
Sales
Less: Sales returns

2,500,600
(35,000)
2,465,600

Opening inventory
Add: Purchases

550,000
1,100,000

Add: Transportation inwards

100,000

Less: Purchases returns

(80,000)

Less: Closing inventory

(380,700)

Cost of goods sold

1,289,300

Gross profit

1,176,300

Orchid Palace
Income Statement for the year ended 31.12.2012
(Contd.)
Salesmen salaries

160,000

Distribution expenses

128,000

Electricity & water

20,000

Administrative expenses

97,000

Depreciation of equipment

25,000

Depreciation of land & buildings

50,000

Marketing expenses

85,000

Consultancy expenses

100,000

Salaries & wages expense

350,000
1,015,000

Interest expense

(10,000)

Net profit

151,300

All sales were on credit basis.

Orchid Palace
Balance Sheet as at 31.12.2012
Non-current
assets

Long-term
liabilities

Land & buildings

1,700,00
0

Less: Provision for


depreciation

(380,000
)

Equipment
Less: Provision for
depreciation

Bank loan
1,480,00
0

850,000
(250,000
)

1,000,000

Current
liabilities
500,000 Accounts payable

569,000

1,980,00
0
Current assets

Owners equity

Inventory

380,700

Accounts
receivable

360,000

Bank & cash

219,600

Total assets

Capital

1,371,300

2,940,3 Total liabilities

2,940,30

960,300

Calculate the following ratios for Orchid


Palace:
Current ratio
Quick ratio
Inventory turnover ratio
Number of days sales in receivables
Non-current assets turnover ratio
Total assets turnover ratio
Debt ratio
Times interest earned ratio
Debt to equity ratio
Gross profit margin
Net profit margin
Return on assets ratio

Liquidity ratios:
Current ratio
= Current assets/Current liabilities
= 960,300/569,000
= 1.69
Quick ratio
= (Current assets Inventory
Prepayments)/Current liabilities
= (960,300 380,700)/569,000
= 1.02
* Note that both CR & QR are > 1.
Generally, this means that the firm is

Activity ratios:
Inventory turnover ratio
= Cost of goods sold/Average inventory
= 1,289,300/(0.5 X [550,000 + 380,700])
= 1,289,300/465,350
= 2.77
Number of days sales in receivables
= Average accounts receivable/Average
daily sales
= 360,000/2,465,600 X 365 days
= 53.29 days
*Take accounts receivable @ 31.12.2012

Activity ratios (Contd.):


Non-current assets turnover ratio
= Net sales/Non-current assets (net)
= 2,465,600/1,980,000
= 1.25
Total assets turnover ratio
= Net sales/Average total assets
= 2,465,600/2,940,300
= 0.84
*Average total assets => use total
assets @ 31.12.2012

Gearing ratios:
Debt ratio
= Total liabilities/Total assets X 100
= (1,000,000 + 569,000)/2,940,300 X
100
= 53.36%
Times interest earned ratio
= Net profit/Interest expense
= 151,300/10,000
= 15.13 times
Debt to equity ratio
= Long term debt/Owners equity
= 1,000,000/1,371,300

Profitability ratios:
Gross profit margin
= Gross profit/net sales X 100
= 1,176,300/2,465,600 X 100
= 48%
Net profit margin
= Net profit/net sales X 100
= 151,300/2,465,600 X 100
= 6%
Return on assets ratio
= Net profit after tax/Total assets X 100
= 151,300/2,940,300 X 100
= 5%
* Since there is no tax, take net profit after tax
= net profit.