Analysis

work

Tutorial 7 Class

Question 1 Liquidity and Solvency

XYZ Company is a medium sized retailer. For each of the ratios listed below,
explain briefly what the ratio means and comment on XYZ Companys
performance based on each individual ratio over the three year period.

Current ratio
Acid-test ratio

2012
3.8:1
1.6:1

2013
3.4:1
1.5:1

2014
2.8:1
1.1:1

Receivables turnover
Inventory turnover
Creditors turnover
Debt to total assets
Times Interest Earned
Cash debt coverage

8.7 times
24.3 times
20.3 times
0.42
5.8 times
120%

9.4 times
24.3 times
12.2 times
0.48
4.5 times
103%

10.1 times
28.1 times
8.1 times
0.65
3.2 times
78%

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Current ratio

Acid-test ratio

Receivables
turnover
Inventory
turnover
Creditors
turnover
Debt to
assets

total

Times interest
earned
Cash
coverage

debt

Question 2 Profitability Ratios (from the owners perspective)

The following information has been provided about ABC Company:
Net Profit After Tax
Owners Equity
Number of Shares Issued

2008
$ 300,000
$ 800,000
400,000 (issued at $ 2.00)

Dividends Paid
Share Price
Borrowings
Assets

$
$
$
$

Debt to total assets

0.47

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100,000
3.20
700,000
1,500,000

2009
$ 330,000
$ 1,200,000
600,000 (issued at
$ 2.00)
$ 100,000
$ 3.40
$ 300,000
$ 1,500,000
0.20

Payout ratio
Return on Equity

0.33
0.375

0.30
0.275

Comment on the profitability over the two year period.

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Question 3 Profitability Ratios (managements efficiency)

(a) Consider the following ratios for DEF Company and discuss the performance
over the three year period:

Return on Assets = Profit before I T / Avg .Total

Assets
Sales Turnover = Sales / Avg .Total Assets
Return on Sales = Profit before I T / Sales

2007
0.40

2008
0.52

2009
0.58

10
0.04

6.5
0.08

5.3
0.11

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(b) A sole trader business that offers a lawn mowing and gardening service has
the following
information for the year:
Revenue
$ 78,000
Net profit before interest and tax
$ 52,000
Average total assets
$ 26,000
Return on Assets
2.0

Sales Turnover
3.0

Return on Sales
0.67

Consider why these results are so much higher than the company analysed in
the previous exercise, and whether the returns are adequate.
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Monash College

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Question 4
The following table reports various ratios for the year 2013 for MYOB,
Computershare and Infomedia. All 3 companies operate in the same industry
(computer software and services.)
MYOB sells software and services to a variety of industries. Computershare
provides computer services to a diverse range of companies listed on the stock
market. Infomedia provides computer services to the automotive industry.

ROE
ROA
Profit margin
Asset turnover
Days inventory
Days receivables
Debt to equity ratio

MYOB
6.45%
5.1%
8.6%
59 times
47 days
45 days
56%

Computershare
7.31%
5.9%
14.6%
40 times
42 Days
53 days
64%

Infomedia
7.76%
6.9%
12.8%
54 times
113 days
86 days
67%

Required
(a) What do the ratios suggest about the companies respective
(1)
Profitability;
(2)
Short term position; and
(3)
Long-term financial structure?
(b) Explain any limitations to the analysis and state any additional information
which could assist in making a more reliable assessment.

Question 5

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You are interested in investing in Careforre Limited a retailer of fast moving

consumer goods including major grocery lines, personal care products, snack
foods, alcohol and magazines .You have gathered the following data:

Return on equity
Return on assets
Gross profit margin
ratio
Profit margin ratio
Asset Turnover ratio
Days Inventory
Days debtors
Current ratio
Quick ratio
Debt to equity
Interest coverage ratio

2013

2014

11.6%
??
40.2%

13.5%
??
41.3%

Industry Average
2014
12.9%
10.5%
40%

15.3%
0.56 times
130 days
53 days
1.6 times
0.8 times
103%
4.36 times

17.6%
0.66 times
132 days
50 days
1.7 times
0.9 times
104%
4.84 times

17.8%
0.59 times
135 days
45 days
1.9 times
1.2 times
75%
5.24 times

Required
(a) List which ratios focus on profitability. Comment on Careforre Limiteds
profitability.
(b) How is the asset turnover ratio calculated and what does this ratio tell us?
(c) Calculate the return on total assets for Careforre Limited for 2013 and
2014.
(d) Comment on Careforre Limiteds liquidity.
(e) In terms of the capital structure, comment on the debt to equity ratio and
the interest coverage ratio of Careforre Limited.

Question 6
Financial information relating to Alpha Omega Enterprises, a company engaged
in buying and selling consumer white goods like dishwashers, TVs and washing
machines, is provided below:
Alpha Omega Enterprises
ended 30 June:

Net Sales (all

Sales)
Expenses:
Cost of Goods Sold
Selling

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Income

2013 ($)
Credit 415,000

327,850
and 75,400

Statement

for

the

year

2014 ($)
500,000

370,500
72,800

administrative
Interest expense
Income tax expense

Net Profit
Alpha Omega Enterprises
30 June:

8,400
1,000
412,650

5,500
15,360
464,160

2,350

35,840

Statement of Financial Position as at

Assets
Current Assets
Cash
Accounts Receivable
Inventory
Total Current Assets
Total Non-Current Assets
Total Assets
Liabilities and Owners Equity
Current Liabilities
Accounts Payable
Income Taxes Payable
Total Current Liabilities
Non-Current Liabilities
Long term Loans
Total Liabilities
Owners Equity
Capital
Profits for the year
Total Owners Equity
Total Liabilities and Owners Equity

2013 ($)

2014 ($)

20,000
58,000
62,000
140,000
176,190
316,190

15,000
61,000
53,000
129,000
165,940
294,940

72,000
1,000
73,000

75,000
15,360
90,360

105,000
178,000

68,740
159,100

135,840
2,350
138,190
316,190

100,000
35,840
135,840
294,940

The following ratios have been calculated based on the above:

2013
2014

2013
2014

Current

Acid-test

1.43 : 1

0.84 : 1

Asset
Turnover

Return on Return on Debt

Assets
Equity
Total
Assets
12.4%
30.4%
54.0%

1.7 times

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Receivabl
es
Turnover
8.2 times

Inventory
Turnover

Profit
Margin

7.0 times

7.2%
to Times
Interest
Earned
10.3 times

Required
1) Calculate ratios for 2014.
2) Comment on the liquidity of Alpha Omega Enterprises over the two year
period using Current and Acid-test ratios and the Receivables and Inventory
Turnovers.
3) Comment on the profitability of Alpha Omega Enterprises over the two year
period referring to the Profit Margin, Return on Assets, Return on Owners
Equity and Asset Turnover ratios.
4) Comment on the solvency of Alpha Omega Enterprises over the two year
period considering the changes in the Debt to Assets and Times Interest
Earned ratios?
5) Assume you are a bank manager and Alpha Omega approaches you for a long
term loan of $40,000 to meet working capital needs. What will be your
response? Give reasons.

Question 7
Financial information relating to Outside Inn Company is provided below:
Outside Inn Company

Income Statements for the year ended 30 June:

2014 ($)
Net Sales (all on credit)
600,000
Expenses
Cost of Sales
415,000
Selling
and 123,800
administrative
Interest expense
7,800
Income tax expense
18,000
564,600
Net Profit
35,400
Outside Inn Company
Assets
Current Assets
Cash
Short-term investments
Accounts Receivable
Inventory
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2013 ($)
520,000
354,000
114,800
6,000
14,000
488,800
31,200

Balance Sheets as at 30 June:

2014 ($)

2013 ($)

21,000
18,000
92,000
84,000

18,000
15,000
74,000
70,000
8

Total Current Assets

Total Non-Current Assets
Total Assets
Liabilities and Owners Equity
Current Liabilities
Accounts Payable
Income Taxes Payable
Total Current Liabilities
Non-Current Liabilities
Payables
Total Liabilties
Owners Equity
Capital
Retained Earnings
Total Owners Equity
Total Liabilities and Owners Equity

215,000
423,000
638,000

177,000
383,000
560,000

122,000
23,000
145,000

110,000
20,000
130,000

120,000
265,000

80,000
210,000

150,000
223,000
373,000
638,000

150,000
200,000
350,000
560,000

The following ratios for 2013 have been calculated for you:

2013
2014

Current

Acid-test

1.4 : 1

0.82 : 1
?

Receivabl
es
Turnover
7.5 times
?

Inventory
Turnover
5.2 times
?

Required
1) Calculate the missing ratios above for the year 2014.
2) Comment on the liquidity of Outside Inn Company over the two year period
with reference to the ratios provided and those calculated in part (a).

Question 8
Normally Debt to Assets ratios and Interest coverage (earned) ratios are inverse
that is an increase in one ratio leads to a decrease in the other ratio and vice
versa. The Manager of YM Company noticed that the debt to asset ratio over the
past two years has decreased from 71% to 60% and during the same period the
interest coverage ratio has also decreased from 4.9 times to 3.1 times. He has
asked you as the Accountant to explain to him why this could happen.

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