Question

QUESTION 3 From following financial statements, calculate following ratios and analyse the current year and previous year performance a) Current ratio. b) Days sales outstanding (DSO). (Sales 2017 RM500m & Sales 2018 RM600m) c) Inventory turnover ratio d) Total debt to assets e) Return on assets (ROA) (Net income 2017 RM42m &Net income 2018 RM58m)

Answer 1

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			Year 2015	Year 2016
a. Current Ratio:	Current assets		$       106	$       143
	Current Liabilities		$         65	$         64
Current Ratio	Current assets/Current Liabilities		1.63	2.23	Times
Current ratio has improved in Year 2016 compared to Year 2015. Low ratio indicates cash problems.
Though high ratio is also indiative of too much of working capital, however comparative to 2015, 2016 is good.
To have better idea, we should also check industry norms.
b. Days Sales Outstanding	Accounts Receivable		$         31	$         36
	Sales		$       500	$       600
Days Sales Outstanding	Accounts Receivable/(Sales/365)		22.63	21.90	Days
Days sales outstanding has improved in Year 2016. Earlier days sales outstnading was almost 23 days
which now has reduced to 22 days
c. Inventory Turnover Ratio	Inventory		$         51	$         84
	Sales		$       500	$       600
Inventory Turnover Ratio	Sales/Inventories		9.80	7.14
This ratio shows how effectively inventory is being managed. Higher ratio is sign of ineffective management.
Hence, there is improvement in Turn ratio in 2016
d. Total debt to Assets	Total Debt		$       225	$       235
	Total Assets		$       392	$       438
Total Debt to Assets	Total Debt/Total Assets		0.57	0.54
There is improvement in the ratio since increase in debt is lesser than increase in assets.
e. Return on Assets	Net Income		$         42	$         58
	Total Assets		$       392	$       438
Return on Assets	Net Income/Total Assets		10.71%	13.24%
Return on assets has imprved in Year 2016 meaning deplyoment of assets is generating more income in 2016
f. Return on Equity	Net Income		$         42	$         58
	Total Equity		$       167	$       203
Return on Equity	Net Income/Total Equity		25.15%	28.57%
Return on Equity has imprved in Year 2016 meaning there is more income being generated against capital invested.