Question

QUESTION FOUR

Margaret Kale Ltd has provided you with the latest two Statements of Cash Flow for the business and some additional information from previous and the current Balance Sheets and Income Statements.

Margaret Kale Ltd
Statement of Cash Flow for the ended 30TH MAY
	2018 $	$	2019 $	$
Cash flow from Operating Activities:
Receipts from the customers	366,500		401,500
Payments to the suppliers	(139,000)	227,500	(163,413)	238,088
Expenses paid:
Rent	(11,092)		(15,727)
Advertising	(9,630)		(8,213)
Insurance	(5,888)		(2,648)
Salaries	(28,890)		(16,625)
Income tax	(45,000)	(100,500)	(39,375)	(82,588)
Net cash flow from Operating Activities		127,000		155,500
Cash flow from Investing Activities:
Sale of non-current assets	9,000		7,875
Purchase of non-current assets	(16,875)		(11,250)
Net cash flow from Investing Activities		(7,875)		(3,375)
Cash flow from Financing Activities:
Ordinary shares dividend paid	(3,375)		(3,375)
Repayment of long term borrowings	(73,375)		(52,875)
Net cash flow from Financing Activities		(76,750)		(56,250)
Net increase in cash		42,375		95,875
Cash at the beginning of the year		(5,625)		36,750
Cash at the end of the year		36,750		132,625

QUESTION FOUR CONTINUED

Additional Information:

Item	2017	2018	2019
Total Assets	401,250	418,500	495,000
Total Non-Current Liabilities		200,813	166,438
Net Profit		150,000	131,250

Required:

1. Calculate the following ratios for each of the two years, round off to two decimal points.                                                                                    (7 x 1 = 7 Marks)

1. Cash flow adequacy ratio (Industry average: 1: 1.90)                     

2. Repayment of long-term borrowings ratio (Industry average: 1: 0.80)  

3. Reinvestment ratio (Industry average: 1: 0.08)                                            

4. Dividend Payment ratio (Industry average: 1: 0.04)                                 

5. Cash flow Return on Assets (Industry average 40%)                      

6. Debt Coverage (Industry average 150%)                              

7. Operations Index (Industry average 90%)                

Comment on the significance of each ratio and its impact on the business in terms of cash flow adequacy, return on assets, debt coverage and operations index over the two years, in comparison with the industry average.                                                                                                                                                                      

Answer 1

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Margaret Kale Ltd	Amount $
Cash flow adequacy ratio	2018	2019
Purchase of non-current assets	16,875.00	11,250.00
Repayment of long term borrowings	73,375.00	52,875.00
Ordinary shares dividend paid	3,375.00	3,375.00
Total	93,625.00	67,500.00	A
Net cash flow from Operating Activities	127,000.00	155,500.00	B
Cash flow adequacy ratio	1.36	2.30	C=A/B
(Industry average: 1: 1.90)
Cash flow adequacy ratio is used to determine the corporate has sufficient funds to pay its long term borrowings, fixed assets expansion and dividend liabilities.
In the present case Margaret Kale has ratio of 1:1.36 in 2018 and 1:2.30 in 2019 which is way better than industry average of 1:1.90.
Repayment of long-term borrowings ratio
Repayment of long-term borrowings ratio is calculated by dividing Long Term Debt with Total assets of the company.
Long Term Debt are the liabilities which are due after 1 year. Non-Current Liabilities are Long Term Debt.
	2018	2019
Total Non-Current Liabilities	200,813.00	166,438.00
Total Assets	418,500.00	495,000.00
Repayment of long-term borrowings ratio	0.48	0.34
(Industry average: 1: 0.80)
Repayment of long-term borrowings ratio is a solvency ratio. It calculates the company's leverage by comparing total long term debt with total assets.
In the present case Margaret Kale has ratio of 1:0.48 in 2018 and 1:0.34 in 2019 which is way better than industry average of 1:0.80.
Reinvestment ratio
Reinvestment ratio is used to estimate the amount of cash flow the management reinvests in the business. Its calculated as-
(increase in fixed assets+ increase in working capital)/ (Net Income + Non cash expenses- Non cash sales- Dividends)
No data is given for working capital. So I am assuming that there is no change in Working Capital.
	2018	2019
Increase in fixed assets	16,875.00	11,250.00
Increase in working capital	-	-
Total	18,893.00	13,269.00
Net Income	150,000.00	131,250.00
Non cash expenses	-	-
Non cash sales	-	-
Dividends	3,375.00	3,375.00
Total	146,625.00	127,875.00
Reinvestment ratio	0.13	0.10
(Industry average: 1: 0.08)
In the present case Margaret Kale has ratio of 1:0.13 in 2018 and 1:0.10 in 2019 which is way better than industry average of 1:0.08.
Dividend Payment ratio
Dividend Payment ratio is the total dividend paid to the shareholders relative to the net income of the company.
	2018	2019
Dividends	3,375.00	3,375.00
Net Income	150,000.00	131,250.00
Dividend Payment ratio	0.02	0.03
(Industry average: 1: 0.04)
In the present case Margaret Kale has ratio of 1:0.02 in 2018 and 1:0.03 in 2019 which is less than industry average of 1:0.04.
Cash flow Return on Assets
Cash flow Return on Assets means the percentage of revenue which is generated from the capital (i.e. Total Assets) of the company. It is the ratio between operating cash flow and total assets of the company.
	2018	2019
Net cash flow from Operating Activities	127,000.00	155,500.00
Total Assets	418,500.00	495,000.00
Cash flow Return on Assets	30.35%	31.41%
(Industry average 40%)
In the present case Margaret Kale has ratio of 30.35% in 2018 and 31.41% in 2019 which is less than industry average of 40%.
Debt Coverage
Debt Coverage is the ratio of total debt obligation to net operating income of the company.
Calculation of net operating income	2018	2019
Net Profit	150,000.00	131,250.00
Add:
Income tax	45,000.00	39,375.00
Interest Expense	-	-
Net operating income	195,000.00	170,625.00
Total debt obligation i.e. Non Current Liabilities	200,813.00	166,438.00
Debt Coverage ratio	97.11%	102.52%
(Industry average 150%)
In the present case Margaret Kale has ratio of 97.11% in 2018 and 102.52% in 2019 which is less than industry average of 150%.
Operations Index
Operations Index is the ratio of Net cash flow from Operating Activities of any year with a base year.
In our case let Base year be 2018.
	2018	2019
Net cash flow from Operating Activities	127,000.00	155,500.00
Operations Index	100.00%	122.44%
(Industry average 90%)
In the present case Margaret Kale has ratio of 122.44 in 2019 which is better than industry average of 90%.