Question

QUESTION 1                                                                                                                               

From the following information of two sole trader enterprises conducting similar businesses, prepare:

1. Ratio calculations in the table below for comparison of profitability, asset efficiency, liquidity and capital structure.
2. Vertical analysis of the Balance Sheets for both enterprises.

Round all calculations to 2 decimal places.

	Balance Sheet data (end-of-year)
	Hi Enterprises $	Lo Enterprises $
Current assets	24 000	32 000
Motor vehicles (net)	19 000	27 000
Total assets	43 000	59 000
Current liabilities	14 000	17 000
Non-current liabilities	17 600	21 400
Total liabilities	31 600	38 400
Net assets	11 400	20 600
Total equity	11 400	20 600

	Income Statement data
	Hi Enterprises $	Lo Enterprises $
Net sales	60 000	94 000
Cost of sales	(45 000)	(73 000)
Gross profit	15 000	21 000
Selling and administrative expenses	(7 300)	(8 800)
Wages expense	(6 400)	(7 200)
Net Profit	1 300	5 000

	Beginning -of-year balances
	Hi Enterprises	Lo Enterprises
Total assets	39 000	54 000
Total equity	10 800	18 600

1. Ratio calculations in the table below for comparison of profitability, asset efficiency, liquidity and capital structure.

Round all calculations to 2 decimal places                 

Ratio	Hi Enterprises	Lo Enterprises
ROE
ROA
Gross Profit Margin
Profit Margin
Asset turnover
Current Ratio
Debt Ratio

Analysis of the following items:  

Profitability:

Asset efficiency:

Liquidity:

Capital Structure:

B   Vertical Analysis of the Balance Sheets                                        

	Balance Sheet data (end-of-year)		Balance Sheet data (end-of-year)
	Hi Enterprises ($)	%	Lo Enterprises ($)	%
Current assets
Motor vehicles (net)
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Total equity

Answer 1

Question No. 1

Answer to A : a) ROE Computation for Hi Enterprises and Lo Enterprises

ROE is Return on Equity = Net Profit / Total Equity

Now , ROE for Hi Enterprises = 1300 / 11400 = 0.11 or 11%

ROE for Lo Enterprises = 5000/ 20600 = 0.24 or 24%

b) ROA Computation for Hi Enterprises and Lo Enterprises

ROA is Return on Assets = Net Profit / Total Assets

Now, ROA for Hi Enterprises = 1300 / 43000 = 0.03 or 3%

ROA for Lo Enterprises = 5000/ 59000 = 0.08 or 8%

c) Gross Profit Margin Computation for Hi Enterprises and Lo Enterprises

Gross Profit Margin = Gross Profit / Net sales

Now ,Gross Profit margin for Hi Enterprises = 15000/60000 = 0.25

Gross Profit margin for Lo Enterprises = 21000 /94000 = 0.22

d) Profit Margin Computation for Hi Enterprises and Lo Enterprises

Profit Margin = Net Profit / Net sales

Now , Profit Margin for Hi Enterprises = 1300 / 60000 = 0.02

Profit Margin for Lo Enterprises = 5000 / 94000 = 0.05

e) Asset Turnover Computation for Hi Enterprises and Lo Enterprises

Asset Turnover = Net Sales / Total Assets

Asset Turnover for Hi Enterprises = 60000/43000 = 1.40

Asset Turnover for Lo Enterprises = 94000 / 59000 = 1.59

f) Current Ratio for Computation for Hi Enterprises and Lo Enterprises

Current Ratio = Current Assets / Current Liabilities

Current Ratio for Hi Enterprises = 24000/14000 = 1.71

Current Ratio for Lo Enterprises = 32000/ 17000 = 1.88   

g) Debt Ratio for Computation for Hi Enterprises and Lo Enterprises

Debt Ratio = Total Liabilities / Total Assets

Debt Ratio for Hi Enterprises = 31600 / 43000 = 0.73

Debt Ratio for Lo Enterprises = 38400 / 59000 = 0.65

2nd Part ANALYSIS of the terms mentioned

a) Profitability = A good GP Margin shows company can able to good profit on sales. GP margin is better for Hi Enterprise than Lo Enterprise. In the same way Profit margin shows the way that positive return is good for better prospect of the business and thus Lo Enterprise is better than Hi Enterprise in respect of Profit Margin.ROE is better for Lo Enterprise than Hi Enterprises

b) Asset Efficiency = Asset Efficiency shows that company can able to earn good earnings from utilisation of assets.Asset Turnover and Return on Assets are both favourable for Lo Enterprise than Hi Enterprise. So Lo Enterprises can better utilise the assets than Hi Enterprises.

c) Liquidity - A good liquidity shows that company has enough cash to pay the debts , buying of stocks when it is required , debtors pay off their debts in due time etc etc. Here Current Ratio is more than 1 for the both Hi Enterprises and Lo Enterprises , so Current ratio is nice for the both the companies.showing better liquidity.

d) Capital Structure - Capital Structure shows the mixture of debt and equity. So high debt ratio represents that company borrowing money from outside more than owned capital .Here Debt Ratio is more for Hi Enterprise than Lo Enterprise and thus Hi Enterprise paying more interest on borrowed funds than Lo Enterprise

B Vertical Analysis of Balance Sheet in percentages

For total assets all comnputed on the basis of 43000 in Hi enterprises and for Lo Enterprises on the basis of 59000 and expresed in percentages.

	Hi Enterprises $	Percent	Lo Enterprises $
Current assets	24 000	55.81	32 000	54.24
Motor vehicles (net)	19 000	44.18	27 000	45.76
Total assets	43 000	100%	59 000	100%
Current liabilities	14 000	32.56	17 000	28.81
Non-current liabilities	17 600	40.93	21 400	36.27
Total liabilities	31 600	73.48	38 400	65.08
Net assets	11 400	26.52	20 600	34.92
Total equity	11 400	26.52	20 600	34.92