# 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

= 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

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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