TUTORIAL QUESTIONS ON FINANCIAL RATIO ANALYSIS AN ALYSIS Question 1 The following data is for Misty Berhad. You are to use the data to compute the financial ratios and interpret the results. Balance Sheet as at 30 June 2009 RM Plant and equipment Long-term investments and other fixed assets Inventory Accounts receivable receivable Cash and short-term investments TOTAL ASSETS
26,881 20,606 20,606 56,372 14,657 14,657 190,389
Equity Long-term liabilities liabilities Current liabilities liabilities TOTAL LIABILITIES AND EQUITY
135,013 17,895 17,895 37,481 37,481 190,389 190,389
71,873 71,873
Income Statement for the year ended 30 June 2009 RM Sales (all credit) Costs of goods sold Selling and administrative administrative expenses Earnings before interest and tax Interest expense Earnings before tax Taxes Net income
Earnings per share Dividend per share Average inventory inventory
254,553 254,553 (149,806) (149,806) (69,706) (69,706) 35,041 35,041 (2,525) 32,516 32,516 (13,976) 18,540 18,540
RM4.13 RM1.80 RM56,530 RM56,530
Industry averages are as follows: follows: Current ratio Quick ratio Inventory turnover ratio Receivables turnover Average collection collection period Fixed assets turnover turnover Operating profit margin
2.50X Net profit margin 1.80X Return on assets 7X Return on equity 4.5X Debt to equity 80 days Debt ratio 2.50X Times interest earned earned 8.9%
4.5% 6.0% 9.5% 30% 18% 9.6X
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Question 2 Madeline Berhad has a gross profit margin of 25% and sales of RM8 million. Of its sales, 80% are on credit while the remainder is cash sales. Madeline¶s current assets equal RM500,000 RM500,000 and current liabilities liabilities amount to RM80,000. RM80,000. It also has RM36,000 in cash plus marketable securities. Required: a) If the firm¶s accounts receivable balance is RM250,000, determine its average collection period. b) If the firm reduces its average collection period period to 12 days, determine its new level of accounts receivable. receivable. c) Determine Madeline¶s Madeline¶s costs of goods sold.
Question 3 Jon Enterprise has current assets of RM11,400, inventories of RM4,000 and a current ratio of 2.6. What is Jon¶s acid -test ratio?
Question 4 Pacific Alliance Alli ance Berhad has an an average collection period of 74 days. What is the accounts receivable turnover turnover for Pacific Alliance? Alliance? Use a 360 -day year.
Question 5 Bulan Sdn Bhd has an accounts receivable turnover ratio of 3.4. What is Bulan¶s average collection period?
Question 6 Astrix Co. has a debt ratio of 42%, long -term liabilities liabilities of RM20,000 and total assets of RM70,000. RM70,000. What is Ast rix¶s level of current liabilities? liabilities?
Question 7 Shaun Berhad has an annual expense of RM30,000 and pays income tax equal to 28% of earnings earnings before tax. Its t imes-interest earned earned ratio is 4.2. What is Shaun¶s net income?
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Question 8 The following data is for Segar Berhad, a manufacturer of electrical appliances. As a financial manager of the company, you are required to: a) Use the data to compute the the relevant ratios. b) Use Du Pont system syste m to calculate the ROE of the firm. c) Identify and briefly explain areas of of the firm¶s firm¶ s strengths and and weaknesse weaknesses. s. d) Provide possible reasons for the weaknesses and recommend appropriate appropriate actions to be taken in order to improve ROE.
Segar Berhad Balance Sheet as at 30 June 2009 RM Non-current Assets Plant and equipment Other fixed assets Current Assets Inventory Cash TOTAL ASSETS
53,762 41,212 41,212
112,744 Accounts receivable receivable
143,746 143,746 29,314 380,778
Equity Long-term liabilities liabilities Current liabilities liabilities TOTAL LIABILITIES AND EQUITY
270,026 35,790 35,790 74,962 74,962 380,778 380,778
Segar Berhad Income Statement for the year ended 30 June 2009 RM Sales (all credit) Costs of goods sold Selling and administrative administrative expenses Earnings before interest and tax Interest expense Earnings before tax Taxes Net income
509,106 (299,612) (139,412) (139,412) 70,082 70,082 (5,050) 65,032 (27,952) 37,080
The company¶s ratios for the year ended 30 June 2008 are as follows: Current ratio Inventory turnover ratio Average collection collection period Fixed assets turnover turnover Total assets turnover turnover
2.50X Debt ratio 9.6X Times interest earned earned 80 days Net profit margin 4.10X Return on assets 2.36X Return on equity
22% 9.6X 7.9% 10.2% 13.8% 3
Question 9 As a junior financial manager, your first task in Delima Berhad is to assess the firm¶s efficiency, liquidity, profitability and leverage. The firm¶s financial statements are presented below: Delima Berhad Income Statement for the year ended 30 September 2009 RM(µ000) Sales (75% on credit) Costs of goods sold Gross profit Selling expenses Depreciation Interest on long-term long -term loan Taxes Net profit after tax Preference dividend Net profit attributable attributable to ordinary ordinary shareholders shareholders
90,000 90,000 (63,000) (63,000) 27,000 27,000 (16,000) (1,800) (1,700) (2,250) 5,250 (500) 4,750
Delima Berhad Balance Sheet as at 30 September 2009 RM(µ000) Non-current Assets Gross non-current assets Accumulated depreciation depreciation Current Assets Inventory Cash TOTAL ASSETS
38,400 38,400 (6,400)
30,200 Accounts receivable receivable
13,900 13,900 9,100 85,200
Shareholders¶ Equity Ordinary shares Retained Retained earnings earnings
34,000 5,200
Long-term Liabilities Preference shares Long-term debt
5,000 9,000
Current Liabilities Notes payable payable Acc ounts payable Accounts TOTAL LIABILITIES AND EQUITY
6,000 26,000 85,200 85,200
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The firm¶s financial ratios for the year ended 30 September 2008 are as follows: Current ratio Quick ratio Inventory turnover ratio Average collection collection period Total assets turnover turnover
2.00X Net profit margin 1.10X Return on assets 4.00X Debt ratio 45 days Times interest earned earned 3.00X
5% 5.2% 45% 9.00X
Required: a) Calculate the above ratios for Delima Berhad. Berhad. b) Using trend analysis, comment on the firm¶s firm¶ s strengths strengths and and weaknesses. c) Calculate the firm¶s firm¶ s ROE using Du Pont analysis. d) Discuss Disc uss two ways on how to improve the firm¶s ROE.
Question 10 The following data is taken from Glee Berhad¶s financial statements for 2008 and 2009. Financial year ended 31 December 2008 31 December 2009 RM RM RM RM Ordinary share capital (200,000 ordinary shares at RM1 each) Share premium Retained earning s b/f Retained earning s for the year
432,000 80,000
Dividend per share (RM) Market price per share at the end of the year (RM)
200,000
200,000
128,000
128,000
512,000 840,000
512,000 112,000
624,000 952,000
2008
2009
0.30 6.30
0.34 7.56
Required: a) Calculate for each year: i)
Earnings per share (EPS)
ii) Price-earnings Price-earnings ratio (P/E) iii) Dividend payout payout ratio b) Explain the uses of P/E ratio. What does a high P/E ratio indicate?
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Question 11 The balance sheet and income statement of Beethoven Sdn Bhd for 2009 are given below. Beethoven Sdn Bhd Balance Sheet as at 31 December 2009 RM Net non-current assets Current assets Inventory Cash TOTAL ASSETS
960,000
500,000 Accounts receivable receivable
436,000 436,000 280,000 2,176,000
Ordinary shareholders¶ equity
1,007,200
Long-term liabilities liabilities
336,000 336,000
Current liabilities Notes payables Accounts payable payable Other current liabilities liabilities TOTAL LIABILITIES AND EQUITY
364,000 340,000 340,000 128,800 128,800 2,176,000 2,176,000
Beethoven Sdn Bhd Income Statement for the year ended 31 December 2009 RM Sales Costs of goods sold Gross profit Less: Expenses Selling expenses General General and administrative administrative expenses Earnings before interest and tax Less: Interest expenses Earnings before taxes Less: Taxes @ 30% Net profit after tax
2,400,000 (1,787,200) (1,787,200) 612,800 612,800 (140,000) (172,800) (172,800) 300,000 300,000 (28,000) (28,000) 272,000 272,000 (81,600) 190,400 190,400
Additional information: Number of shares outstand ing Market price per share at the end of the year
100,000 shares RM3.50
The industry financial ratios for the financial year ending 31 December 2009 are as follows: Current ratio Quick ratio Inventory turnover ratio Average collection collection period Total assets turnover turnover
1.25 X Net profit margin 0.72 X Return on assets 2.90 X Return on equity 3 months months Debt ratio 1.05 X Price-earnings Price-earnings ratio
9.3 % 10 % 20 % 46 % 1.50 X
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Required: a) Compute the above above ratios for the financial year ending 31 31 December 2009. (Use Du Pont equation to compute ROE.) b) Comment on the the firm¶s asset management management ratios, leverage ratios ratios and profitability ratios. c) Based on Du Pont analysis, analysis , explain the reasons influencing the firm¶s ROE as in part (a). d) Give recommendations to improve the firm¶s ROE. e) Discuss Disc uss the benefits of of using Du Pont analysis. Question 12 Solaris Berhad has applied for a loan from a bank for its expansion program. In order to evaluate the company as a potential borrower, the bank would like to compare the company with the industry. The company has submitted the following financial statements to the bank. Solaris Berhad Balance Sheet as at 31 December 2009 RM(µ000) Net Non-current Assets Current Assets Inventory Cash TOTAL ASSETS
2,250
900 Accounts receivable
300 300 3,750
Shareholders¶ Equity Ordinary shares Retained earning s
1,200 300
Long-term Liabilities Long-term debt
1,650
Current Liabilities Notes payable Accounts payable Other current liabilities TOTAL LIABILITIES AND EQUITY
375 150 75 3,750
Solaris Berhad Income Statement for the year ended 31 December 2009 RM(µ000) Net sales Less: Costs of goods sold Operating expenses Depreciation Interest expenses Earnings before tax Tax Net profit after tax Less: Ordinary shares dividend Retained profits for the year
4,050 (2,000) (1,525) (225) (105) 195 (78) 117 (87) 30
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Required: a) Calculate the following following ratios . i. Current ratio ii. Quick ratio iii. Inventory turnover ratio iv. Average collection period v. Total assets turnover turnover vi. Gross profit margin vii. Net profit margin margin viii. Return on equity ix. Debt ratio b) Using the Du Pont Pont equatio equation, n, calculate calculate the return on equity equity of the company. company. c) You are given the following industry averages:
Net profit margin Total assets turnover Debt ratio Return on assets
i. ii.
5% 1.1 X 40 % 5.5 %
Calculate the ROE for the industry. Comment on Solaris Berhad¶s: a. Profitability b. Asset Management c. Debt Management
d) Based on Du Pont analysis, analysis , explain the factors affecting Solaris Solaris Berhad¶s ROE. e) Should the bank grant the loan to Solaris Berhad? Why?
Question 13 You are the finance manager of E.Z. Sdn Bhd. You would like to assess the efficiency ratios and the leverage position of the company and how these ratios affect the company¶s profitability. The financial statements of the company for the past two years are as follows:
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E.Z. Sdn Bhd Balance Sheet as at 31/12/08 RM(µ000) Net non-current assets
275,000
31/12/09 RM(µ000) 312,500
Current assets Inventory Accounts receivable receivable Cash TOTAL ASSETS
4,500 432,000 432,000
145,500 53,500 53,500 5,500 533,000 533,000
Ordinary shareholders¶ equity
211,500
238,500
Long-term liabilities
176,500
244,000
Current liabilities TOTAL LIABILITIES AND EQUITY
44,000 432,000 432,000
50,500 533,000 533,000
99,000
E.Z. Sdn Bhd Income Statement for the year ended 31/12/08 RM(µ000) Sales Costs of goods sold Gross profit Operating expenses Operating Operating profit Interest expenses Profit before taxes Taxes Net profit after tax
550,000 396,000 154,000 154,000 88,000 66,000 66,000 26,000 26,000 40,000 40,000 16,000 24,000 24,000
31/12/09 RM(µ000) 625,000 437,500 187,500 187,500 106,000 81,500 36,500 45,000 18,000 27,000
Industry averages: Current ratio Inventory turnover ratio Average collection collection period Total assets turnover turnover Times interest earned earned
3.10 X Net profit margin 5.00 X Return on assets 30 days Return on equity 1.50 X Debt ratio 3.00 X Debt-to-equity Debt-to-equity ratio
7% 10.5 % 19 % 45 % 82 %
Required: a) Compute the above above ratios for E.Z. Bhd for the year year 2008 and 2009. 2009. b) Comment on the the firm¶s asset management management ratios, leverage position and profitability. c) Based on Du Pont analysis, analysis , identify the factors that contribute to the firm¶s firm¶ s ROE. d) Give three suggestions on how to improve the firm¶s profitability.
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69,500
