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

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/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

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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