Question

The following are the financial statements of E Ltd for the years ended 31 March 20x2 and 20x3.

Balance sheets as at 31 December

20x3 20x2

$’000 $’000 $’000 $’000

Non current assets, at net book value 280 315

Current assets

Stock 290 240

Debtors 140 120

Bank 55 0

485 360 360

Total assets 765 675

Equity

Share capital 100 100

Reserves 315 85

415 185

Long term liabilities

8% Debentures (issued in 20x0) 240 240

Current liabilities

Creditors 110 100

Bank overdraft 0 150

110 250

110 250

Total equity and liabilities 765 675

Income statements for the years ended 31 March

20x3 20x2

$’000 $’000 $’000 $’000

Sales 1,700 1,500

Opening stock 240 200

Purchases 1,150 1,090

1,390 1,290

Less: Closing stock 290 240

Cost of sales 1,100 1,050

Gross profit 600 450

Less: Operating and finance costs 340 270

Net profit 260 180

Taxation 30 20

Net profit after taxation 230 160

REQUIRED:

(a) Calculate to one decimal place the following ratios for E Limited for both years 20x2 and 20x3. Show workings.

(i) Acid test ratio;

(ii) Current ratio;

(iii) Creditors’ repayment period (in days);

(iv) Debtors’ collection period (in days);

(v) Gearing ratio;

(vi) Gross profit to sales percentage;

(vii) Net profit (before interest and taxation) to sales percentage; and

(viii) Return on capital employed

(b) Comment on the performance of E Limited over the two year period using the ratios calculated in (a) in terms of:

(i) Liquidity

(ii) Long term solvency/risk

(iii) Profitability

Answer 1

Balance sheets as at 31 December
	20x3	20x2
	$’000	$’000	$’000	$’000
Non current assets, at net book value		280		315
Current assets
Stock	290		240
Debtors	140		120
Bank	55	485	0	360
Total assets		765		675
Equity
Share capital 100 100	100		100
Reserves 315 85	315	415	85	185
Long term liabilities
8% Debentures (issued in 20x0)		240		240
Current liabilities
Creditors	110		100
Bank overdraft	0	110	150	250
Total equity and liabilities		765		675
Income statements for the years ended 31 March
	20x3	20x2
	$’000	$’000	$’000	$’000
Sales		1700		1500
Opening stock	240		200
Purchases	1150		1090
Less: Closing stock	-290		-240
Cost of sales		1100		1050
Gross profit		600		450
Less: Operating and finance costs		340		270
Net profit		260		180
Taxation		30		20
Net profit after taxation		230		160

[a]

Ratio names	Formulas	20x3 (Ratios)	20x2 (Ratios)
(i) Acid test Ratio	(Current Asset-Stock)/ Current Liability	1.77	0.48
(ii) Current ratio;	Current Asset/ Current Liability	4.41	1.44
(iii) Creditors’ repayment period (in days);	Creditors/(Purchase/365)	34.91	33.49
(iv) Debtors’ collection period (in days);	Debtors/(sales/365)	30.06	29.20
(v) Gearing ratio;	Longterm debt/ Equity	0.58	1.30
(vi) Gross profit to sales percentage;	Gross profit/ Sales x 100	35.29	30.00
(vii) Net profit (before interest and taxation) to sales percentage; and	Net profit/ Sales x 100	15.29	12.00
(viii) Return on capital employed	Net profit/ equity x 100	62.65	97.30

[b] Comments:

(i) Liquidity :- for measuring liquidity acid test ratio and current ratios are best ratios. So as the ratio is more in 20x3 than 20x2, so in 20x3 liquidity position of E ltd. Is better than 20x3.

(ii)Longterm solvency/risk:- As the gearing ratio of the company is lower in 20x3 than 20x2 indicating better solvency position and lower risk zone in 20x3.

(iii) Profitability:- in terms of profitability 20X3 is better as both gross profit ratio and net profit ratio is better in 20X3 as compared to last year. But return on capital employed in 20x3 is lower indicating less return on capital employed.