Question

After reviewing the following calculation, provide a brief analysis of each of the ratios. Also provide a brief evaluation regarding the company’s performance as it relates to the four categories listed above, plus the DuPont Equation. Finally, discuss how these ratios will help make appropriate financial decisions as they relate to the role as a financial manager, and also assist in achieving the firm’s financial management goals.

1. Profitability Ratios
   1. Gross Margin Percentage-

Gross Margin Percentage = Net Income/Sales

For 2018: Gross Profit is 58.26B, Sales 130.86B

Gross Margin Percentage = 58.26B/130.86B

= 0.44520861989

For 2017: Gross Profit 57.52B, Sales 126.03B

Gross Margin Percentage = 57.52B/126.03B

= 0.45639927001

2. EBIT Margin Percentage

EBIT Margin Percentage = EBIT/Sales

For 2018: EBIT Margin Percentage = 2.88B/130.86B

EBIT Margin Percentage =: 2.88B/130.86B

= 0.02200825309

For 2017: EBIT Margin Percentage = 23.45B/126.03B

EBIT Margin Percentage = 23.45B/126.03B

= 0.18606680949

2. Resource Management Ratios:
   1. Age of Inventory – Measure the Firm’s management of its inventory

Age of Inventory (Days’ of Inventory) = 365/Inventory Turnover

Inventory Turnover = COGS/Inventory

For 2018: COGS = 72.61B, Inventory = 1.34B

Age of Inventory = 365days/Inventory Turnover

Inventory Turnover = COGS/Inventory

= 54.1865671642

365/54.1865671642

= 6.73B

For 2017: COGS=68.51B, Inventory 1.03B

=68.51/1.03

=66.5145631068

365/66.5145631068

=5.48752007006

2. Age of Accounts Receivable

Age of Accounts Receivables = 365days / AR Turnover

AR Turnover = Sales / Receivables

For 2018: Sales=130.86B, Receivables=25.86B

130.86/25.86=

AR Turnover= 5.06032482599

365/ 5.06032482599

= 72.1297569921

For 2017: Sales=126.03B, Receivables=23.49B

126.03/23.49=

5.36526181354

365/ 5.36526181354

=68.0302308974

3. Age of Accounts Payable

Age of Accounts Payable = 365 / AP Turnover

AP Turnover = Purchases / Payables

For 2018: Cost of Goods Sold- 72.61B

For 2017: Cost of Goods Sold- 68.51B

Inventory Purchases = (Ending Inventory – Beginning Inventory) + Cost of Goods Sold

For 2017: (1.03B – 1.2B) + 68.51

=68.34B

68.34B/7.06B

AP Turnover= 9.67988668555

365/9.67988668555

Age of AP = 37.70705297

For 2018: (1.03B-1.34B) + 72.61B

=72.3B/7.23B

=10B

365/10

=36.5

3. Liquidity Ratio:
   1. Current Ratio
4. Leverage Ratios
   1. Debt-to-Assets Ratio
   2. Debt-to-Equity Ratio
   3. Interest Coverage

In addition, you have decided to evaluate the Return on Equity (ROE) of the company by calculating the DuPont Ratio, including the Profit Margin, Asset Turnover, and Financial Leverage Ratios.

Year 2017:

Return on Equity (DuPont Ratio) = Profit Margin x Total Asset Turnover x Financial Leverage

Profit Margin = Net Income / Net Sales

=30.1B/126.03B

= 0.238832024121241

Total Asset Turnover = Net Sales / Average Total Assets

Average total Assets= 2016 Total Assets + 2017 Total Assets / 2

(244.18B+257.14B) /2

=250.66

TAT= 126.03/250.66

TAT= 0.5027926274634964

Financial Leverage = Total Assets / Total Equity

257.14B/44.69B

= 5.75385992392034

Profit Margin x Total Asset Turnover x Financial Leverage

0.238832024121241 x 0.5027926274634964 x 5.75385992392034

Return on Equity (DuPont Ratio) =0.6909406515199963

Answer 1

		2017	2018
A	PROFITABILITY RATIOS	RATIO	RATIO	DIFFERENCE
1	GROSS PROFIT RATIO	0.4452086199	0.45639927	0.0111906501
2	EBIT RATIO	0.1860668095	0.0220082531	-0.1640585564
B	Resource Management Ratios:
1	AGE OF INVENTORY	5.4875200701	6.73	1.2424799299
2	AGE OF RECEIVABLES	68.0302308974	72.1297569921	4.0995260947
3	AGE OF ACCOUNTS PAYABLE	68.34	36.5	-31.84
C	DUE POINT
1	RETURN ON EQUITY	0.2388320241
2	TOTAL ASSETS TURNOVER	0.5027926275
3	FINANCIAL LEVARAGE	5.7538599239
A	THERE IS SLIGHT INCREASE IN THE GROSS PROFIT WHEN COMPARED TO 2017 RATIO
B	THERE IS NEGATIVE GROWTH IN EBIT RATION DUE TO INCREASE IN INDIRECT COST
C	AGEOF INVENTORY SHOWS THE MANAGEMENT IN EFFICIENCY USE OF RESOURCES
	PROPERLY IN TIMELY MANNER IN 2017 IT IS 5.48 BUT WHERE AS IN 2018 IT IS
	INCREASED TO 6.73
D	AGEOF ACCOUNTS RECEIVABLE SHOWS THE MANAGEMENT IN EFFICIENCY USE OF RESOURCES
	PROPERLY IN TIMELY MANNER IN 2017 IT IS 68.03231 BUT WHERE AS IN 2018 IT IS
	INCREASED TO 72.129 WHICH RESULT INTO BLOCKAGE OF CASH
BY ANALYSING ABOVE DATA WE CAN CONCLUDE THAT MANAGEMENT HAS TO PUT MORE EFFORTS
IN COST SAVINGS IN UNCESSARY AREA BECAUSE WHEN COMPARED TO PREVIOUS YEAR DATA
FOR SAME SALES COMPANY ABLE TO SECURE 18.60% EBIT HOW EVEY IN 2018 IT RESULTED IN TO
NEGATIVE DUE INCREASE IN INDIRECT COSTS.
AND BY ANALYSING CURRENT ASSETS STATUS WE CAN CONCLUDE THAT MANAGEMENT FAIL TO
CONTROLE THE RECEIVABLE CYCLE AND PAYABLE CYCLE AS THIS IS RESULT IN TO CASH CRUNCH
DUE TO WHICH MANAGEMENT WILL NOT ABLE TO MAKE DECISSIONS FREELY
INCREASE IN ACCOUNTS RECEIVABLE AND REDUCTION IN ACCOUNTS PAYABLE CYCLE WILL BE
EARLY CASH OUT FLOW AND LATE CASH INFLOW.
AND FINALLY MANAGEMENT ALSO FAIL TO USE INVENTORY EFFICIENTLY AS THE INVENTORY
CYCLE ALSO INCREASE SIGNIFICANTLY WHICH ONCE AGAIN RESULT IN TO BLOCKAGE OF FUNDS
IN 2017 RETUN ON EQUITY IS FAIR GIVING AND 23.88 RETURN ON EVERY 100$ INVESTED IIN FIXED ASSET IS
CONSIDER TO BE GOOD RETURN AND
WHEN COMPARED TO TOTAL ASSETS IT IS INCREASED TO 50 RUPEES WHICH SHOWS THE MORE OF THE
FUNDS STRUCKED IN THE CURRENT ASSETS SO MANAGEMENT SHOULD HAVE CONSIDERED GIVING MORE
INCETIVE TO EARLY PAYMENT BY THE DEBTORS. LIKE GIVING A DISCOUNT FOR EARLY PAYMENT