Question

The following is the summarized financial information of Number Holding Limited for the year ended 31 December, 2017 (with comparative figures):

Statement of profit or loss for the year ended 31 December

	2017							2016
	$							$
Sales revenue	29,026							29,887
Cost of goods sold	(22,176)							(25,116)
Gross margin	6,850							4,771
Operating expenses	(1,176)							(1,395)
Operating profits	5,674							3,376
Finance cost	(830)							(1,278)
Profits before tax	4,844							2,098
Profits tax	(748)							(494)
Profits after tax	4,096							1,604
Statement of financial position as at 31 December
	2017							2016
Non-current assets	$							$
Property, plant and equipment	48,628							43,360
Investment properties	6,516							7,560
Intangible assets	1,251							755
Current assets		56,395							51,675
Inventory	3,758							6,196
Trade receivables	3,502							3,080
Others receivables	1,905							2,535
Cash	2,912							4,031
Total assets		12,077							15,842
	68,472							67,517
Current liabilities
Trade payables	3,511							7,731
Other payables	2,493							3,710
Tax payables	194							288
Short-term bank loans	3,003							5,102
		9,201							16,831
Non-current liabilities
Borrowings	31,879							27,397
Owners’ equity
Ordinary shares	10,200							9,202
Other reserves	1,621							1,613
Retained profits	15,571							12,474
	27,392							23,289
Total liabilities and equity	68,472							67,517

Other information:

1 Balances as of 31 December 2015:

	$
Accounts receivables	6,000
Inventory	4,800
Total assets	42,930
Owners’ equity	20,350

Assume all sales and purchases are on credit terms.

Industry norms:

Current ratio	1.5
Quick ratio	1
Net profit margin	15%
Return on assets	10%
Return on shareholders’ equity	14%

Required

Calculate the following financial ratios for 2017 and 2016 (round up to two decimal places):

1. Current ratio

2. Quick ratio

3. Accounts receivable turnover (use average accounts receivable)

4. Inventory turnover (use average inventory)

5. Net profit margin

6. Return on assets (use average total assets)

7. Return on shareholders’ equity (use average shareholders’equity)

Based on the information and your calculations in (a) above, comment on the company’s liquidity and profitability.

Answer 1

Metric	2017	2016	Industry	Comment
Current Ratio	1.31	0.94	1	The Current Ratio has increased significantly and is above industry average thereby suggesting that the company's liquidity is good
Quick Ratio	1.10	0.57	1	The Quick Ratio has increased significantly and is above industry average thereby suggesting that the company's liquidity is good
Net Profit Margin	14.11%	5.30%	15%	Though the Net Profit margin increased dramatically, it is below the industrial average and there is scope for improvement of profitability of the firm
Accounts Receivable Turoner	8.82 times	6.58 times	--	No Comments
Inventory Turnover	4.46 times	4.57 times	--	No Comments
Return on Assets	6%	2.9%	10%	Though there is significant increase in the metric, the Return on Assets is far below the industrial average suggesting there is scope for more efficient use of assets of the company
Return on Shareholders' Equity	16%	7.35%	14%	There is increase in ROSE and it is higher than the industrial average suggesting that the company is adding better value to the shareholders when compared to the industry as a whole.