Question

Noel Chappell has started the car repair business for five years. He is interested to know the performance of his business. The statement of financial position is shown below:

Noel Chappell Statement of Financial Position As at 30 June
	2018	2019
Assets	($)	($)
Cash	6,000	3,000
Accounts receivable	14,000	17,000
Inventory	13,000	19,000
Non-current assets (net)	27,000	20,000
Total assets	60,000	59,000
Liabilities and shareholders' equity
Accounts payable	20,000	22,000
Long term borrowings	16,000	13,000
Capital	24,000	24,000
Total liabilities and shareholders' equity	60,000	59,000

Additional information:

Total assets as at 1 July 2017 were $25,000.

Total revenues/sales in 2019 were $180,000 and in 2018 were $140,000.

Profit after tax for 2019 is $36000 and in 2018 is $28000.

Required

(i)    Calculate the following ratios for 2018 and 2019:

1.     current ratio

2.     quick ratio

3.     debt ratio

4.     asset turnover ratio

5.    profit margin

The industry average of the liquidity ratio for similar businesses is also provided:

current ratio	1.3:1
quick ratio	0.8:1
debt ratio	50%
asset turnover ratio	4.0:1

(ii) Comment on the liquidity and financial stability performance of the business.

Answer 1

(i) Ratios

1. Current ratio

Current Ratio = Current Assets / Current Liabilities

Current Assets and current Liabilities:

Particulars	2018	2019
Cash	$6,000	$3,000
Accounts Receivable	$14,000	$17,000
Inventory	$13,000	$19,000
Total Current Assets	$33,000	$39,000
Accounts Payable	$20,000	$22,000
Total Current Liabilities	$20,000	$22,000

Current Ratio

Current ratio	2018	2019
Current ratio	$33,000 / $20,000 = 1.65 : 1	$39,000 / $22,000 = 1.77 : 1

2. Quick ratio

Quick ratio = Quick Assets / Current Liabilities

Particulars	2018	2019
Cash	$6,000	$3,000
Accounts Receivable	$14,000	$17,000
Total Quick Assets	$20,000	$20,000
Accounts Payable	$20,000	$22,000
Total Current Liabilities	$20,000	$22,000

Quick Ratio

Quick ratio	2018	2019
Quick ratio	$20,000 / $20,000 = 1 : 1	$20,000 / $22,000 = 0.91 : 1

3. Debt ratio

Debt ratio = Total Liabilities / Total Assets * 100

Debt ratio

Debt ratio	2018	2019
Debt ratio	($20,000 + $16,000) / $60,000 * 100 = 60.00%	($22,000 + $13,000) / $59,000 * 100 = 59.32%

4. Asset turnover ratio

Asset turnover ratio = Credit Sales / Average total assets

Asset Turnover ratio

Asset Turnover ratio	2018	2019
Average total assets	($25,000 + $60,000) / 2 = $42,500	($60,000 + $59,000) / 2 = $59,500
Asset turnover ratio	$140,000 / $42,500 = 3.29 : 1	$180,000 / $59,500 = 3.03 : 1

5. Profit Margin

Profit Margin = Profit after tax / Sales * 100

Profit Margin

Profit Margin	2018	2019
Profit Margin	$28,000 / $140,000 * 100 = 20%	$36,000 / $180,000 * 100 = 20%

(ii) Noel Chappell has stable Liquidity and Debt Position as compared to Previous year. It's Net Profit Margin is same as last year. By comparing to the industry average of the ratios, Noel Chappell has better liquidity ratios (Current ratio & Quick ratio). But, Industry of the similar company has better debt ratio and asset turnover ratio than Noel Chappell ratio.

All the best...