Question

You are a consultant for Glory Ltd, a quoted company operating in the manufacturing sector. Following are a Statement of Profit or Loss and Statement of Financial Position with comparatives for the year ended 31st December 2018.

Statement of Profit or Loss for th e year ended 31st December, 2018
  
2018

2017
  
GHS

GHS
Sales revenue

3,095,576

1,909,051
Cost of sales

2,402,609

1,441,950
Gross profit

692,967

467,101
Interest receivable

744

2,782
Administration expenses

333,466

222,872
Operating profit

360,245

247,011
Interest

18,115

21,909
Profit before taxation

342,130

225,102
Income tax expense

74,200

31,272
Profit for the year

267,930

193,830




3

Statement of Financial Position as at 31 December 2018 Assets
2018

2017
  
GHS

GHS
Non-current assets Property, plant and equipment 802,180

656,071
Current assets Inventory

64,422

86,550
Trade receivables

905,679

807,712
Prepayment and accrued income 97,022

45,729
Cash at bank and in hand 1,327

68,363
  
1,068,450

1,008,354
Total assets

1,870,630

1,664,425
Equity and liabilities Equity
Ordinary shares
258,178

258,178
Income surplus

651,721

410,591
  
909,899

668,769
Non-current liabilities 10% loan stock
100,000

100,000
Current liabilities Trade payables

627,018

545,340
Accruals and deferred income 81,279

280,464
Corporate taxes

108,000

37,200
Other taxes

44,434

32,652
  
860,731

895,656
Total equity and liabilities

1,870,630

1,664,425


Required: a. Calculate the following ratios: i. Profitability ratios - Return on Capital Employed, Return on Equity, Gross profit margin and Net profit margin ii. Long term solvency and stability - Debt/Asset ratio, Gearing ratio and Interest cover iii. Short-term solvency and liquidity – Current ratio and Acid test ratio iv. Efficiency (turnover ratios) – Account receivable collection period, Account payable payment period, Inventory turnover (times)

b. Prepare a report addressed to  the Chief Executive Officer, assessing the relative performance and financial position of Glory Ltd for the year ended 31st December, 2018

Answer 1

a. Calculation of Ratios -

Profitability ratios
Return on Capital Employed	=	Earnings before interest and tax	X 100	=	360,245	=	35.67%
Capital Employed	1,009,899
Return on Equity	=	Net Income	X 100	=	267,930	=	29.45%
Shareholder's Equity	909,899
Gross profit margin	=	Gross Profit	X 100	=	692,967	=	22.39%
Net Sales	3,095,576
Net profit margin	=	Net Profit	X 100	=	267,930	=	8.66%
Net Sales	3,095,576
ii. Long term solvency and stability
Debt/Asset ratio	=	Total Debt		=	960,731	=	0.51
Total Assets		1,870,630
Gearing ratio	=	Total Debt		=	960,731	=	1.06
Total Equity		909,899
Interest cover	=	Earnings before interest and tax		=	360,245	=	19.89
Interest Expenses		18,115
iii. Short-term solvency and liquidity
Current ratio	=	Current assets		=	1,068,450	=	1.24
Current Liabilities		860,731
Acid test ratio	=	Current assets - Inventory		=	1,004,028	=	1.17
Current Liabilities		860,731
iv. Efficiency (turnover ratios)
Account receivable collection period	=	Average accounts receivable	X 365	=	856,696	=	101.01	Days
Net Credit Sales	3,095,576
Account payable payment period	=	Average accounts Payables	X 365	=	586,179	=	89.05	Days
Cost of sales	2,402,609
Inventory turnover (times)	=	Inventory	X 365	=	75,486	=	11.47	Days
Cost of sales	2,402,609

b.  Report addressed to the Chief Executive Officer, assessing the relative performance and financial position of Glory Ltd for the year ended 31st December, 2018 -

i. Profitability ratios - Profitability ratio indicates company has 36% of operating profit against capital employed by the company. Return on equity indicates 29% of the income earned by the company on equity invested. Gross profitability of the company is 22%. Also the company earned 9% of profit from its sales activity.

ii. Long term solvency and stability - The total debt of the company is .51 to its total assets means .51 portion of the assets are invested by the debt. debt portion of the company is 1.06 as compare to the equity portion means company has borrowed from the equity and financial institution in the same proportion. Company has great interest cover in 2018 i.e. 20%.

iii. Short-term solvency and liquidity - Current ratio of the company in 2018 is 1.24 which indicates company has 1.24 assets to pay off its current liabilities. From which Highly liquid portion is 1.17.

iv. Efficiency (turnover ratios) - Companys debtors pays thier dues in 101 days to the company which is month than 3 months. Company need to tak it down to 90 days. Company pays its creditors in 90 days which shows good indication of reputation of the company. Company's inventory turnover times is 11 days which indicates good postion that company's inventory is movings so fast.

Overall financial position and profitability indicates company is in a good condition in 2018.