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