A Comprehensive Illustration Of Business Accounting Ratio/Financial Analysis/Interpretation Of The Financial Statement

September 30th, 2009 Comments off
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Below is an example to illustrate the major accounting business ratio for the interpretation of the financial statement of a company. 

A Comprehensive Illustration of Major Ratios
 

Below major ratios have been computed to illustrate what we have learned from earlier articles on ratio analysis/interpretation of financial statement:-

 
 

 

Balance Sheet Of XYZ Ltd As At 31 st December 2008
Share Capital

$

$

$
100,000 Ordinary Share Capital @ $1 each, issued and fully paid

 

100,000

 
10% 50,000 Preference Shares @ $1 each and fully paid

 

50,000

 

150,000
Revenue Reserves

 

 

20,000
 

 

 

170,000
Loan Capital:

12% $1 Debenture

 

 

 

30,000
 

 

 

200,000
Represented by:

 

 

 
Fixed Assets

 

 

142,000
Current Asset

 

 

 
Stock

 

28,000

 
Debtors

 

36,000

 
Bank

 

24,000

 
 

 

88,000

 
Less Current Liabilities

 

 

 
Creditor

18,000

 

 
Taxation

12,000

30,000

58,000
Net Assets Employed

 

 

200,000
         

 

 

XYZ Ltd

Trading & Profit & Loss Account For The Year Ended  31 st December 2008
 

$

 

$
Opening Stock

20,000

 Sales: Cash

84,000
Purchases

480,000

            Credit

448,000
 

500,000

 

 
Less:          Closing Stock

 

28,000

 

 
Cost Of  Sales

472,000

 

 
Gross Profit

60,000

 

 
 

532,000

 

532,000
Administrative Expenses

28,000

Gross Profit b/d

60,000
Selling & Distribution Expense

9,000

 

 
Financial Expenses               ( include Debenture capital)

4,000

 

 
Net Profit

19,000

 

 
 

60,000

 

60,000
Taxation

12,000

Net profit b/d

19,000
Preference dividend(gross)

5,000

 

 
Balance c/d

2,000

 

 
 

19,000

 

19,000
         

 

Others:

 Let’s assume that the market price is $1.20 and ordinary dividend declared is 1%

 

Required:  Provide all major ratios

 

Suggested Solution:

 

EFFICIENCY RATIO:

(1)     Gross Profit Percentage:

=Gross Profit/Sales x 100

=60,000/532,000 x 100

= 11.28%

  

(2) Expense Ratio

            (a) Adminstrative expense ratio

                 =Administrative expense/Sales x100

                 = 28,000/532,000 x100

                 =5%

 

            (b)Selling & Distribution(S&D) expense ratio

                 = S&D/Sales x100

                 = 9,000/532,000 x100

                 = 1.69%

 

            © Financial Expenses expense ratio

                 =Financial Expenses/Sales x 100

                 =4,000/532,000 x100

                 = 0.75%

 (3)     Net Profit Percentage:

=Net Profit/Sales x 100

=22,000/532,000 x100

=4.25%

 

(4)      Return On Capital Employed (R.O.C.E)

      =Net profit before interest and tax/Capital Employed x100

      =22,600 x100/200,000

      =11.3%

 

 LIQUIDITY OR SOLVENCY RATO:

 (1)     Quick Asset Ratio

=Quick Assets ( Current Assets- Stock)/Current Liabilities

=60,000/30,000

=2:1

 (2)     Current Ratio

=Current Assets/Current Liabilities

=88,000/30,000

=2.93:1

 

      (3) Stock Turnover Ratio

=Cost of goods sold/Average Stock

=472,000/(20,000+28,000)/2

=19.67times per annum

        Or

           Average stock/Cost of goods sold x 365 days

           =24,000/472,000 x365 days

           =       18.6 days

           

  (3)     Debtors Turnover Ratio

=Debtors/Credit Sales x 365 days

=36,000/448,000 x 365 days

= 29.3 days

 

(4)     Creditors Turnover Ratio

= Creditors/Credit purchases x 365 days

=18,000/480,000 x 365 days

=  13.7  days

 

GEARING OR LEVERAGE RATIO:

 (1)     Capital Gearing

=Preference Shares + Long term loan capital/Shareholders fund +Long term loan capital                                                    x100

=50,000+30,000/200,000 x100

=40%

 

(2)     Interest Times Covered

=Net profit before interest and taxation/Interest payable

=22,600/3,600

=6.3 times

 

MARKET OR GROWTH RATIO:

 (1)     Earning per share (EPS)

=Net profit after tax and preference dividend/number of ordinary share issued

=2,000/100,000

=$0.02 per share

 

(2)     Price/Earnings Ratio(PE)

=Market price per share/Earnings per share

=1.2/0.02

=60 times

(3)     Earnings Yield

=Earning per share x Nominal value/market value

=0.02 x1/1.20 x100

=1.66%

 

(4)     Dividend Cover

=Net profit after tax and preference dividend/Ordinary dividend payable

=2,000/1,000

=2 times

 

(5)     Dividend Yield

=Dividend % x Nominal value per share/Market price per share

=1%x 1/1.20

=0.83%

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