Question

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The following information is an extract from the financial statements of Extreme-Experiences Pty Ltd. 2020 2019...

The following information is an extract from the financial statements of Extreme-Experiences Pty Ltd.

2020

2019

Current Assets

409,500

292,500

Non-current Assets

2,275,000

1,768,000

Current Liabilities

221,000

169,000

Non-current Liabilities

764,400

670,800

Total Revenue

728,000

624,000

Total Expenses

500,500

455,000

a)    Calculate the following ratios for both 2019 and 2020.

2020

2019

Profit Margin

(Correct your answer to 0.01%)

Current Ratio

(Correct your answer to 0.1)

Debt to Total Assets Ratio

(Correct your answer to 0.01%)

b)    Comment on the Liquidity of Extreme-Experiences using the answers in part a).

c) Which ratio measures Solvency? Provide suggestions on how to improve the Solvency of Extreme-Experiences.

Solutions

Expert Solution

Part 1

a).Net profit margin = Net profit /Total revenue i.e Net profit = Total revenue - Total expenses

2020

Net profit = 728000-500500= 227500

Net profit Margin = 227500/728000=0.3125

2019

Net profit = 624000-455000=169000

Net profit margin = 169000/624000= 0.27

b).

Current ratio = Current assets / Current Liabilities

2020

Current ratio = 409500/221000= 1.85

2019

Current ratio = 292500-169000= 1.73

c).Debt to Total assets ratio =

Total debt /Total assets  

Total assets= current assets + non current assets

Total debt = current liabilities + non current liabilities

2020

Total debt = 221000+ 764400= 985400

Total assets = 409500+ 2275000= 2684500

Debt to total asset ratio = 985400/2684500

= 0.3671

2019

Total debt = 169000+670800=839800

Total assets = 1768000+292500=2060500

Debt to total assets ratio =

839800/2060500= 0.4078

Part 2.

Current ratio is a indicator of firms liquidity. High current ratio is considered to be good as company is more likely to pay creditors back as in both years 2020 and 2019 current ratio is more than 1 and also current ration increases in 2020. But large current ratio is not always good sign for investors .If the company's current ratio is too high it may indicate that the company is not effectively using its current assets . However quick ratio is actual measure of liquidity.

Part 3.

Debt to Total assets ratio is the measure of solvency ratio . As 0.5 debt to total asset ratio is considered to be healthy but in both years 2020 and 2019 is less than 0.5 however it decreases in 2020 from 0.4078 to 0.3671.

Solvency ratio can be improved by following

Increase owners equity.

Look for bulk discounts

Revaluate operating expenses

Avoid new debt

Issue stock

ekkarill92 answered 1 year ago
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