finance ratios ??
Ala.ga
presentation_5_updated_-_copy_new.pptxQuestion for understanding ratios
Using the following information, Calculate the firm’s debtor’s turnover and briefly explain the ratio you have calculated.
Year 1 Year 2
Sales – Cash 20,000 30,000
Sales - Credit 300,000 400,000
Debtors 50,000 30,000
Solution:
Explanation: Collection from Credit customers have exceed the usual 30 days term in year 1. The situation improves for the better in year 2 where collections give within the 30 days term.
University of Libya BETC
Prepared by: Muhammad akhtar
| Debtor’s Turnover | Year 1 | Year 2 |
| Debtors / Credit sales x 365 | 50000/300000 x 365 =60.83 =61 days | 30000 /400000 x 365 = 27.375 Days |
Question for understanding ratios
Using the Following information, calculate the firm’s Stock Turnover And briefly explain the ratios you have calculated.
Year 3 Year 4
Opening Stock 15,000 25,000
Closing Stock 25,000 80,000
Purchases 460,000 700,000
Solution:
University of Libya BETC
Prepared by: Muhammad akhtar
| Stock Turnover | Year 3 | year 4 |
| Cost of Goods sold Average Stock Explanation: The rapidity of Proof that the firm is selling | 450000 /20000 = 22.5 times Sales is higher in year 3 as The goods slower in year 4. | 645000/ 52500 = 12.3 times compared to year 4. This |
Question for understanding ratios
Using the following information, calculate the following ratios.
Gross profit margin
Net Profit margin.
Return on Shareholder’s fund
Year 1 year 2
$ $
Sales 150,000 250,000
Opening Stock 20,000 ?
Purchases 80,000 130,000
Closing Stock 30,000 50,000
Operating Expenses 40,000 80,000
Shareholder’Fund 300,000 300,000
University of Libya BETC
Prepared by: Muhammad akhtar
Question for understanding ratios
Using the following information, calculate the following ratios.
Gross profit margin = Gross profit / net Sales x 100
= 80000/15000x100
= 53.33%
Sales 150000
Less: Cost of good sold
Opening Stock 20000
Add: Purchases +80000
100000
Less: Closing Stock -(30000)
70000
Gross profit 80000
Less operating Expenses - ( 40000)
Net profit 40000
University of Libya BETC
Prepared by: Muhammad akhtar
Question for understanding ratios
Using the following information, calculate the following ratios.
B. Net profit Margin= Net profit before Tax / Net sales x 100
= 40000/ 150000 x 100
= 26.66 %
University of Libya BETC
Prepared by: Muhammad akhtar
Question for understanding ratios
Using the following information, calculate the following ratios.
Return on Shareholder’s Fund = Net Profit / Capital Employed x 100
= 40000/300000 x 100
Return on Shareholder’s Fund = 13.33 %
University of Libya BETC
Prepared by: Muhammad akhtar
Horizontal analysis & Vertical analysis
Horizontal
Analysis and Vertical Analysis are also popular forms. Horizontal analysis is used to evaluate the trend
in the accounts over the years, while vertical analysis, also called a Common Size Financial Statement
discloses the internal structure of the firm. It indicates the existing relationship between sales and each
income statement account. It shows the mix of assets that produce income and the mix of the sources of
capital, whether by current or long-term debt or by equity funding.
University of Libya BETC
Prepared by: Muhammad akhtar
The Balance sheets of Lauder corporation :
31/12/2005 31/12/2004
$ $
Fixed Assets 625,000 520,000
Current Assets 816000 756,000
Less: Current Liabilities 275600 540,400 242,400 513.600
1,192,400 1,033,600
Less: Long term Liabilities 390,000 397,600
802,400 636,000
Financed By:
Ordinary Share Capital 220,320 216,000
Retained Profit 582,080 420,000
802,400 636,000
Required:
a). Compute the amount and percentage changes in 2005 using Horizontal analysis, Assume 2004 is the base year.
b).Compute the percentage change in the individual asset, liability and shareholders equity items using the vertical analysis.
University of Libya BETC
Prepared by: Muhammad akhtar
The Balance sheets of Lauder corporation :
a)Horizontal Analysis
University of Libya BETC
Prepared by: Muhammad akhtar
| 2005 | 2004 | Amount | Percentage | |
| Fixed Assets Current Asset Total Assets Current Liabilities Long term liabilities Total Liabilities Shareholders Fund Ordinary Share Capital Retained profit | 652,000 816,000 1,468,000 275,600 390,000 665,600 220,320 582,080 802,400 | 520,000 756,000 1,276,000 242,400 397600 640,000 216,000 420, 000 636,000 | 132,000 60,000 192,000 33,200 (7,600) 25,600 4 ,320 162,080 166,400 | 25.38% 7.94 % 15.05% 13.70% -1.91 % 4.00% 2.00% 38.59% 26.16% |
Horizontal Analysis
C.The horizontal analysis shows a number of significant changes for the company from 2004 to 2005:
Fixed assets increase by 132,000 representing 25.38%
Current Liabilities increased by 33,200 representing 13.70%
The Retained profit increased by 162,080 representing 38.59%
These changes suggest that the company expanded its assets financed primarily by retained profit rather than long-term debts.
University of Libya BETC
Prepared by: Muhammad akhtar
The Balance sheets of Lauder corporation :
b) Vertical Analysis.
University of Libya BETC
Prepared by: Muhammad akhtar
| 2005 Amount Percentage | 2004 Amount Percentage | |
| Fixed Assets Current assets Total Assets Current Liabilities Long term Liabilities Total Liabilities Shareholders Fund: Ordinary Share Capital Retained Profit Total liabilities & shareholders fund | 652,000 44.41% 816,000 55.59% 1,468,000 100.00% 275,600 18.77% 390,000 26.57% 665,600 220,320 15.01% 582,080 39.65% 802,400 1,468,000 100.00 | 520,000 40.75% 756,000 59.25% 1,276,000 100.00% 242,400 19.00% 397600 31.16% 640,000 216,000 16.93% 420,000 32.92% 636,000 1,276,000 100.00% |
Vertical Analysis
Vertical Analysis shows the relative size of each category in the balance sheet.
Current assets decreased from 59.25% to 55.59% even though the absolute dollar amount has increased.
Fixed assets increased from 40.75% to 44.41 %
Retained profit has increased from 32.92% to 39.65% of total liabilities and shareholders fund. These results reinforce the earlier observations that the company finances its growth through retained profit rather than through long term debts.
University of Libya BETC
Prepared by: Muhammad akhtar
Home work Questions
You as on of the staff in the finance department, you manager ask you to prepare a formal report to the management on the performance of Kohinoor KDM after analysis the results over the previous years and also with the industry average.
The manager has given you the following information.
The latest industry financial ratio’s average is :
Gross profit margin 38%
Net profit margin 4.5%
Return on capital employed (equity and debentures) 17.85
Current ratio 1.95 : 1
Quick ratio 1.25: 1
Total Asset Turnover 3.85 times
Debtors collection period 50 days
Creditors collection period 45 days
Stock turnover 18.5 days
Gearing 30 %
University of Libya BETC
Prepared by: Muhammad akhtar
Home work Questions
The following information was extracted from the published accounts of Kohinoor kdm.
Income Statement for the year ended 31 December
2010 2011
$ $
Turnover 482,625 554,400
Cost of Sales 337,838 418,770
Gross profit 144,787 135,630
Operating Expenses
Depreciations 13,860 17,820
Audit fees 495 594
Debenture interest 2,970 3,960
Selling and Administrative expenses 111,623 90,239
Net Profit 15,839 23,017
University of Libya BETC
Prepared by: Muhammad akhtar
Home work Questions
Balance Sheet as at 31 December
2010 2011
$ $ $ $ $ $
Property, Plant and Equipment 70,785 91,575
Current Assets
Inventory 24,255 31,680
Debtors 53,640 60,885
Cash 5,760 3,960
83,655 96,525
Less: Current Liabilities
Bank overdraft 3,960 5,445
Creditors 34,155 37,125
Taxation payable 990 1,485
Others payables 2,723 3218
41,828 47,273
Working Capital 41,827 49,252
112,612 140.827
Financed By:
Capital And Reserves
Share Capital 39,600 39,600
Reserves 43,312 61,627
82,912 101,227
Non-Current Liabilities
10% debenture 29,700 39,600
112,612 140,827
University of Libya BETC
Home work Questions
The Relevant financial ratios for the Kohinoor kdm for the years ended 31 December 2010 and 2011. All Foumulas and Calculations must be shown clearly.
b. And also interpretation of ratios.
University of Libya BETC
Prepared by: Muhammad akhtar
