Question

The following extract appeared in the financial statements of Sihle Limited:

Sihle Limited

Extract from the Statement of Comprehensive Income for the year ended 31 December 2019:

	R
Sales	4 140 000
Cost of sales	(3 490 000)
Opening inventory	710 000
Purchases	3 630 000
Gross profit	650 000
Operating expenses	(429 000)
Operating profit	221 000
Interest  expense	(35 000)
Profit before tax	186 000
Taxation	(52 800)
Profit after tax	133 200

Additional information:

• Dividends paid during the year amounted to R65 000.
• The market price per share on 31 December 2019 was R55.
• The company has ordinary share capital of 20 000 shares issued at R1 each.

Use the information provided above to calculate the following ratios for 2018:

5.1.1 Net profit margin                                                                                                                        (2)

5.1.2 Earnings retention ratio                                                                                                             (2)

5.1.3 Price earnings ratio                                                                                                                   (2)

5.1.4 Dividend per share                                                                                                                    (4)                                                                                                                                            

5.2       Comment on each of the following ratios of Sihle Limited:                                                    (10)

Ratio	Sihle Limited	Industry average
5.2.1  Acid test ratio	0.8:1	1.2:1
5.2.2   Current ratio	2.30:1	2.80:1
5.2.3   Debtors collection period	39.28 days	30 days
5.2.4   Inventory turnover	4.75 times	6.5 times
5.2.5   Return on equity	14.1%	19.2%

Answer 1

SOLOUTION TO Q 5.1.1

NET PROFIT MARGIN

= ( PROFIT AFTER TAX / SALES ) * 100

= ( 133200 / 4140000) * 100

= 3.22 %

SOLUTION TO Q 5.1.2.

EARNINGS RETAINTION RATIO

= ( PROFIT AFTER TAX - DIVIDEND PAID ) / PROFIT AFTER TAX

= ( 133200 - 65000) / 133200

= 0.51 OR 51 %

SOLUTION TO Q 5.1.3

PRICE EARNING RATIO = ( MARKET PRICE PER SHARE / EARNINGS PER SHARE)

= ( 55 / 6.66) = 8.26 TIMES

WORKINGS 1

EARNINGS PER SHARE

= ( NET PROFIT AFTER TAX / NUMBER OF ODINARY SHARE)

= ( 133200 / 20,000) = $ 6.66

SOLUTION TO Q 5.1.4

DIVIDEND PER SHARE

= ( DIVIDEND DECLARED DURING THE YEAR / NUMBER OF ODINARY SHARES)

= ( 65000 / 20,000)

= 3.25

SOLUTION TO Q5.2

PART 5.2.1

FROM THE ABOVE ACID TEST RATIO WE OBSERVED THAT SIHLE LTD IS LAGGING BEHIND FROM THE INDUSTRY AVERAGE . IT IMPILES THAT THE LOWER LIQUIDITY OF THE SHILE LTD AS PER THE INDUSRY AVERAGE. TO IMPROVE THE LIQUIDITY THE COMAPNY HAS TO INCRESE THEIR SAKES. BY INCRESING SALES THE COMPANY CAN IMPROVE THEIR CASH POSITION . IF THE CASH POISTION IS IMPROVED THE LIQUIDITY ALSO IMPROVED. IT SHOULD BE 1:1.

PART 5.2.2

THE CURRENT RATIO OF SIHLE LTD IS ABOVE THE STANDARD FROM I.E.2:1 BUT BELOW THE INDUSTRY AVERAGE. TO ACHIVE THE INDUSRTY AVERAGE COMPANY HAS INCRESE THEIR SALES BY WAY OF CASH OR CREDIT SUPPOSE THE INCRESES THEIR CREDIT SALES , AS A RESULT IT INCRESE THE DEBTORS , IF THE IT INCRESE THE CURRENT ASSTES WILL INCRESE IF CURRENT ASSTES WILL INCRESE THE CURRENT RATIO WILL INCRESE. I THINK THE CURRENT RATIO OF SIHLE LTD IS MODERATE .

PART 5.2.3

DEBTORS COLLECTION PERIODE OF SIHLE LTD IS VERY APPRCIATABLE . IT INDICATES THAT THE SIHLE LTD ' s DEBTORS MANAGEMNT SYSTEM IS VERY WELL PLANED. AS WE KNOW IF DEBTORS COLLECTION PERIDE IS HIGH ITS A GOOD INDICATOR FOR THE BECAUSE THE IS VERY MUCH ABLE TO CONVERT THEIR CREDIT IN CASH.

PART 5.2.4

INVENTOTRY TRUNOVER RATIO IMPLIES THAT HOW MANY TIME SOLD OR REPLACED THEIR INVENTORY IN SPECIFIED TIME PERIODE. IN OUR CASE IT IS 4.75 TIMES I.E. BELOW FROM INDUSTRY AVERAGE. SO SIHLE LTD HAS IMPROVE THEIR SALES BY GIVING CREDIT FACILITY OR ANY POLICY THAT ATTRACT THE CUSTOMER & HELPS TO INCRESE THIR INVENTORY RATIO.

PART 5.2.5

BASICALLY RETURN ON EQUITY MEASURES THE EXCESS RETURN OVER INVESTMENT( ODINARY SHARE CAPITAL). IN OUR CASE THE SIHLE LTD HAS LOW RETURN ON EQUITY AS COMPARED TO THE INDUSURTY AVERAGE. TO IMPROVE THE RETURN ON EQUITY THE SIHLE LTD HAS TO INCRESE THEIR SALES AND REDUCE THEIR INTEREST EXPENSE IF BOTH ARE FOLLOW BY THE SIHLE LTD THEY DEFINATELY ACHIVE THE INDUSRTY AVERAGE AND ALSO IMPROVE THEIR INTERNAL GROWTH OF THE BUSSINESS.