FIN621 Solution 12 May 2010

[Guru]

Part 1 (Liquidity Ratios

1. Acid Test Ratio/Quick ratio

Acid Test Ratio/Quick ratio = Quick Assets/Current Liabilities
Acid Test Ratio/Quick ratio = (Current Assets-Inventory-Prepaid expenses)/Current Liabilities
= (36279168000-1155042000-512383000-267422000)/33455815000
=1.0265

2. Sales to working Capital

Sales to working Capital = Net Sales/Working Capital
Sales to working Capital = Net Sales/ (Current Assets-Current Liabilities)
= 76642399000/ (36279168000-33455815000)
= 76642399000/ (2823353000)
=27.14


3. How working capital does help the financial analyst?


Part 2 (Solvency Ratio

1. Debt-to-Equity Ratio

Debt-to-Equity Ratio = Total Debt /Total Equity
= (Current Liabilities + Long Term Liabilities)/ Total Equity
= (33455815+27931963)/10315060
= 5.466
Description: Debt is 5.466 of the equity of the firm which is strong value as the firm is 5.466 times meet the liabilities or Debts , the financial investors like this ratio high so company can get different loans or borrowing due to this positive ratio.

2. Time Interest Earned Ratio

Time Interest Earned Ratio =operating Income before Interest /Annual Interest Cost
= (2979911000)/2370674000
= 1.2567
Description: Debt is 5.466 of the equity of the firm which is strong value as the firm is 5.466 times meet the liabilities or Debts , the financial investors like this ratio high so company can get different loans or borrowing due to this positive ratio.


3. Fixed Charge Coverage Ratio

Fixed Charge Coverage Ratio =operating Income before Interest /Annual Interest Cost
= (2979911000)/2370674000
= 1.2567


4. Define difference between both ratios (Time Interest Earned & Fixed Charge Coverage)? To be very precise mention why do we calculate both?




Part 3 (Profitability ratios

1. Gross Profit Margin
= Gross profit/Net sales * 100
=7404163000/76642399000*100
= 9.660661849 %

2. Operating Profit Margin Return on sales
= Operating profit before IT / Net sales *100
= 2979911000/76642399000*100
= 3.888071145 %
3. Pretax Margin
= Operating profit before Tax / Net sales *100
= 2381627000/76642399000*100
= 3.107 %

4. Net Profit Margin
= Net profit / Net sales *100
= 991067000/76642399000*100
= 1.2 %

5. Return on Equity (ROE)

= Net profit / Total Equity *100
= 991067000/10315060*100
= 9.607 %
6. Return on Assets (ROA

= Net profit / Total Assets *100
= 991067000/71702838000*100
= 1.382 %


7. DuPont Return on Assets
=Operating profit margin ratio *Assets turnover ratio
= 3.889% * (Net sales / fixed assets)
= 3.89% * 2.17%
=8.43913%

8. What is the need for calculating DuPont Return on Assets when we already have Return on Assets ratio calculated?



Part 4(Activity Ratios

1. Inventory Turnover
2. Accounts Receivable Turnover
3. Accounts payable turnover
4. Average collection period
5. Average payment period

[Guru]

Another Solution

1. Acid Test Ratio/Quick ratio = Current Assets – ( Inventory + Prepayments) / Current
Liabilities
= 36,279,168 – (1,667,425 + 267,422)/ 33,455,815
Acid test Ratio = 1.0345


2. Sales to working Capital = Net Sales / Working Capital

Net sales = 76,642,399
Working capital = current assets – current liabilities = 36,279,168 – 33,455,812 = 2,823,356
= 76,642,399 / 2,823,356
Sales to working Capital = 27.145 / 100 = 0.2714 %



PART 2
Solvency Ratio
1. Debt-to-Equity Ratio = Total Liabilities / Shareholder Equity

= 61,387,778 / 10,315,060
Debt-to-Equity Ratio = 5.951


2. Time Interest Earned Ratio = EBIT / interest Expense

= 4,752,301 / 2,370,674
Time Interest Earned Ratio = 2


1. Fixed Charge Coverage Ratio = EBIT + Lease payments / Interest Exp + Lease
Payment
= 4,752,301 + 1,392,776 / 1,392776 + 2,370,674
Fixed Charge Coverage Ratio = 1.63





PART 3

Profitability Ratios

1. Gross Profit Margin = Gross profit / Net Sales * 100


= 7,404,163 / 76,642,399 * 100
Gross Profit Margin= 9.66 %



2. Operating Profit Margin = Operating profit / Net sales * 100


= 2,979,911 / 76,642,399 * 100


Operating Profit Margin = 3.9 %


3. Pretax Margin = Net earnings + Income Tax / Net Sales

Net Earnings = 991,067
Income Tax = 1,390,560
Net Sales = 76,642,399

= 991,067 + 1,390,560 / 76,642,399

Pretax Margin = 0.031 * 100 = 3.1%



4. Net Profit Margin = Net Pr ofit After Tax / Revenue * 100%



= 991,067 / 76,642,399 * 100
Net Profit Margin = 1.29 %






5. Return on Equity (ROE) = NP after Tax / Shareholder Equity * 100


= 991,067 / 10,315,060 * 100
Return on Equity (ROE) = 9.6




6. Return on Assets (ROA) = Net Income / Total Assets * 100


= 991, 067 / 71,702,838 * 100
ROA = 1.382


PART 4

Activity Ratios


1. Inventory Turnover = Cost of Goods Sold / Avg. Inventory

CGS = 69,238,236
Avg. Inventory = Open stock + Closing Stock / 2

= 1,391,068 + 1,667,425 / 2
Avg. Inventory = 1,529,247

= 69,238,236 / 1,529,247

Inventory Turnover = 45.24


2. Accounts Receivable Turnover = Net Sales / Avg. Account receivable



= 76,642,399 / 18,053,051

Accounts Receivable Turnover = 4.245 Times




3. Accounts payable turnover = CGS / Avg. Account payable



= 69,238,236 / 27,809,479
Accounts payable turnover = 2.489 times




4. Average collection period = (Trade Debtors × No. of Working Days) / Net Credit Sales

Accounts Receivable = 20,045,028
No. of Working Days = 360
Net Credit Sales = 76,642,399

= 20,045,028 * 360 / 76,642,399
= 94 days