Question

Business A and business B are both retailers, but seem to take a different approach to this trade according to the information available, which consists of a table of ratios: Required: 1) Discuss what this information indicates about the differences in each business’s approach. 2) If one of them prides itself on personal service and the other on competitive prices, which do you think is which, and why? 3) Based on the given information, which business tends to require more external financing and what types of external financing you would recommend. Ratio Business A Business B Return on capital employed 20% 17% Return on owners' equity 30% 18% Average settlement period for accounts receivable 63 days 21 days Average settlement period for accounts payable 50 days 45 days Gross profit percentage 40% 15% Profit percentage 10% 10% Inventory turnover period 52 days 25 days

Answer 1

1]

Business A has a much higher ROCE and ROE. This indicates that Business A focuses more on profitability and efficient use of capital.

Business A has a much higher inventory turnover ratio. This indicates that Business A moves its inventory faster, and the average holding time of inventory is lower.

2]

Business A offers a much higher time of credit to its customers, as indicated by its "Average settlement period for accounts receivable". Business A prides itself on customer service.

Business B has a much lower gross profit margin. Gross profit = sales - cost of goods sold. The gross margins of Business A are much lower. Business B offers competitive prices

3]

Although "Average settlement period for accounts payable" is almost same for both, "Average settlement period for accounts receivable" is much higher for Business A.

Business A has considerably higher working capital locked up in Accounts Receivable. Business A requires external working capital financing to improve its liquidity