TUTORIAL QUESTIONS ON FINANCIAL RATIO ANALYSIS

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 2009RM

Plant and equipment 26,881Long-term investments and other fixed assets 20,606Inventory 56,372Accounts receivable 71,873Cash and short-term investments 14,657TOTAL ASSETS 190,389

Equity 135,013Long-term liabilities 17,895Current liabilities 37,481TOTAL LIABILITIES AND EQUITY 190,389

Income Statement for the year ended 30 June 2009RM

Sales (all credit) 254,553Costs of goods sold (149,806)Selling and administrative expenses (69,706)Earnings before interest and tax 35,041Interest expense (2,525)Earnings before tax 32,516Taxes (13,976)Net income 18,540

Earnings per share RM4.13Dividend per share RM1.80Average inventory RM56,530

Industry averages are as follows:

Current ratio 2.50X Net profit margin 4.5%Quick ratio 1.80X Return on assets 6.0%Inventory turnover ratio 7X Return on equity 9.5%Receivables turnover 4.5X Debt to equity 30%Average collection period 80 days Debt ratio 18%Fixed assets turnover 2.50X Times interest earned 9.6XOperating profit margin 8.9%

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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 and current liabilities amount to 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 to 12 days, determine its new level of accounts receivable.

c) Determine 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 Berhad has an average collection period of 74 days. What is the accounts receivable turnover for Pacific 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 of RM20,000 and total assets of RM70,000. What is Astrix’s level of current liabilities?

Question 7

Shaun Berhad has an annual expense of RM30,000 and pays income tax equal to 28% of earnings before tax. Its times-interest 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 relevant ratios.

b) Use Du Pont system to calculate the ROE of the firm.

c) Identify and briefly explain areas of the firm’s strengths and weaknesses.

d) Provide possible reasons for the weaknesses and recommend appropriate actions to be

taken in order to improve ROE.

Segar BerhadBalance Sheet as at 30 June 2009

RM

Non-current AssetsPlant and equipment 53,762Other fixed assets 41,212

Current AssetsInventory 112,744Accounts receivable 143,746Cash 29,314TOTAL ASSETS 380,778

Equity 270,026Long-term liabilities 35,790Current liabilities 74,962TOTAL LIABILITIES AND EQUITY 380,778

Segar BerhadIncome Statement for the year ended 30 June 2009

RM

Sales (all credit) 509,106Costs of goods sold (299,612)Selling and administrative expenses (139,412)Earnings before interest and tax 70,082Interest expense (5,050)Earnings before tax 65,032Taxes (27,952)Net income 37,080

The company’s ratios for the year ended 30 June 2008 are as follows:

Current ratio 2.50X Debt ratio 22%Inventory turnover ratio 9.6X Times interest earned 9.6XAverage collection period 80 days Net profit margin 7.9%Fixed assets turnover 4.10X Return on assets 10.2%Total assets turnover 2.36X Return on equity 13.8%

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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 BerhadIncome Statement for the year ended 30 September 2009

RM(‘000)

Sales (75% on credit) 90,000Costs of goods sold (63,000)Gross profit 27,000Selling expenses (16,000)Depreciation (1,800)Interest on long-term loan (1,700)Taxes (2,250)Net profit after tax 5,250Preference dividend (500)Net profit attributable to ordinary shareholders 4,750

Delima BerhadBalance Sheet as at 30 September 2009

RM(‘000)

Non-current AssetsGross non-current assets 38,400Accumulated depreciation (6,400)

Current AssetsInventory 30,200Accounts receivable 13,900Cash 9,100TOTAL ASSETS 85,200

Shareholders’ EquityOrdinary shares 34,000Retained earnings 5,200

Long-term LiabilitiesPreference shares 5,000Long-term debt 9,000

Current LiabilitiesNotes payable 6,000Accounts payable 26,000TOTAL LIABILITIES AND EQUITY 85,200

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The firm’s financial ratios for the year ended 30 September 2008 are as follows:

Current ratio 2.00X Net profit margin 5%Quick ratio 1.10X Return on assets 5.2%Inventory turnover ratio 4.00X Debt ratio 45%Average collection period 45 days Times interest earned 9.00XTotal assets turnover 3.00X

Required:

a) Calculate the above ratios for Delima Berhad.

b) Using trend analysis, comment on the firm’s strengths and weaknesses.

c) Calculate the firm’s ROE using Du Pont analysis.

d) Discuss 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 ended31 December 2008 31 December 2009

RM RM RM RM

Ordinary share capital(200,000 ordinary shares at RM1 each)

200,000 200,000

Share premium 128,000 128,000Retained earnings b/f 432,000 512,000Retained earnings for the year 80,000 512,000 112,000 624,000

840,000 952,000

2008 2009

Dividend per share (RM) 0.30 0.34Market price per share at the end of the year (RM) 6.30 7.56

Required:

a) Calculate for each year:

i) Earnings per share (EPS)

ii) Price-earnings ratio (P/E)

iii) Dividend 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 BhdBalance Sheet as at 31 December 2009

RM

Net non-current assets 960,000

Current assetsInventory 500,000Accounts receivable 436,000Cash 280,000TOTAL ASSETS 2,176,000

Ordinary shareholders’ equity 1,007,200

Long-term liabilities 336,000

Current liabilitiesNotes payables 364,000Accounts payable 340,000Other current liabilities 128,800TOTAL LIABILITIES AND EQUITY 2,176,000

Beethoven Sdn BhdIncome Statement for the year ended 31 December 2009

RM

Sales 2,400,000Costs of goods sold (1,787,200)Gross profit 612,800Less: ExpensesSelling expenses (140,000)General and administrative expenses (172,800)Earnings before interest and tax 300,000Less: Interest expenses (28,000)Earnings before taxes 272,000Less: Taxes @ 30% (81,600)Net profit after tax 190,400

Additional information:

Number of shares outstanding 100,000 sharesMarket price per share at the end of the year RM3.50

The industry financial ratios for the financial year ending 31 December 2009 are as follows:

Current ratio 1.25 X Net profit margin 9.3 %Quick ratio 0.72 X Return on assets 10 %Inventory turnover ratio 2.90 X Return on equity 20 %Average collection period 3 months Debt ratio 46 %Total assets turnover 1.05 X Price-earnings ratio 1.50 X

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Required:

a) Compute the above ratios for the financial year ending 31 December 2009. (Use Du Pont equation to compute ROE.)

b) Comment on the firm’s asset management ratios, leverage ratios and profitability ratios.c) Based on Du Pont analysis, explain the reasons influencing the firm’s ROE as in part (a).d) Give recommendations to improve the firm’s ROE.e) Discuss the benefits 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 BerhadBalance Sheet as at 31 December 2009

RM(‘000)

Net Non-current Assets 2,250

Current AssetsInventory 900Accounts receivable 300Cash 300TOTAL ASSETS 3,750

Shareholders’ EquityOrdinary shares 1,200Retained earnings 300

Long-term LiabilitiesLong-term debt 1,650

Current LiabilitiesNotes payable 375Accounts payable 150Other current liabilities 75TOTAL LIABILITIES AND EQUITY 3,750

Solaris Berhad

Income Statement for the year ended 31 December 2009RM(‘000)

Net sales 4,050Less:

Costs of goods sold (2,000)Operating expenses (1,525)Depreciation (225)Interest expenses (105)

Earnings before tax 195Tax (78)Net profit after tax 117Less: Ordinary shares dividend (87)Retained profits for the year 30

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Required:

a) Calculate the following ratios.i. Current ratioii. Quick ratioiii. Inventory turnover ratioiv. Average collection periodv. Total assets turnovervi. Gross profit marginvii. Net profit marginviii. Return on equityix. Debt ratio

b) Using the Du Pont equation, calculate the return on equity of the company.

c) You are given the following industry averages:

Net profit margin 5 %Total assets turnover 1.1 XDebt ratio 40 %Return on assets 5.5 %

i. Calculate the ROE for the industry.ii. Comment on Solaris Berhad’s:

a. Profitabilityb. Asset Managementc. Debt Management

d) Based on Du Pont analysis, explain the factors affecting 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 BhdBalance Sheet as at

31/12/08 31/12/09RM(‘000) RM(‘000)

Net non-current assets 275,000 312,500

Current assetsInventory 99,000 145,500Accounts receivable 53,500 69,500Cash 4,500 5,500TOTAL ASSETS 432,000 533,000

Ordinary shareholders’ equity 211,500 238,500

Long-term liabilities 176,500 244,000

Current liabilities 44,000 50,500TOTAL LIABILITIES AND EQUITY 432,000 533,000

E.Z. Sdn BhdIncome Statement for the year ended

31/12/08 31/12/09RM(‘000) RM(‘000)

Sales 550,000 625,000Costs of goods sold 396,000 437,500Gross profit 154,000 187,500Operating expenses 88,000 106,000Operating profit 66,000 81,500Interest expenses 26,000 36,500Profit before taxes 40,000 45,000Taxes 16,000 18,000Net profit after tax 24,000 27,000

Industry averages:

Current ratio 3.10 X Net profit margin 7 %Inventory turnover ratio 5.00 X Return on assets 10.5 %Average collection period 30 days Return on equity 19 %Total assets turnover 1.50 X Debt ratio 45 %Times interest earned 3.00 X Debt-to-equity ratio 82 %

Required:

a) Compute the above ratios for E.Z. Bhd for the year 2008 and 2009.

b) Comment on the firm’s asset management ratios, leverage position and profitability.

c) Based on Du Pont analysis, identify the factors that contribute to the firm’s ROE.

d) Give three suggestions on how to improve the firm’s profitability.

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