Question

10:34 Х Assignment 1.docx Question 3: Read the comparative balance sheet and the income statements of the firm 'Imaginary Computers Limited'. Use the techniques of financial statements analysis as explained in the chapter to do the following: Complete the missing values (titles, formulas and numerical values in the table below. Note that some ratios could not be calculated as relevant data are not available. 2 Comment on the financial strengths and weaknesses of the firm (trends of the ratios and its comparison with industry average) Imaginary Computers Ltd. Balance sheet as at 31 December ( 000) 2001 2002 2003 153 75 8.5 Reserves and surplus 6.7 5.7 74 Long-term debt 3.242 Notes payable - Short term 5. 65. 27.2 3.4 6.5 5.6 Total 25.1 28 1929 Net findes 174 218 26.1 26012 Receivables 2.52.829 16 2727 Total 251 21 329 Income statement for the year ending 31 December (5000 298 574 1452458 Gross Pro 31 7116 Operating Expenses 174270 Operating pro 154546 Nooperating surplus deficit 020104 EBIT 1946 interest 1009201 Profit before tar 315 3.0 IT Net Pro 1 SBGESBE 106 -

Answer 1

Below is the solution :

Kindly note that it seems that Debt-equity ratio provided appears wrong hence it has been corrected for year 2001 & 2002.

Equity = Share Capital + Reserves and Surplus

Debt = Long Term Debt

Current Assets = Cash at bank+ Receivables+ Inventory

Current Liabilities = Notes Payable - Short Term + Account Payable

Turnover = Sales

Fixed Charge before tax = Operating Expenses

	Ratio	Formula	2001	2002	2003	Industry Average	Comments
Liquidity Ratio	Current Ratio	Current Asset/Current Liabilities	0.85	0.54	0.53	1.2	The Low current ratio compared to industry indicates that company might have difficulty in meeting current obligations
	Inventory Turnover Ratio	Sales / Inventory	18.6	12.9	21.26	20.5	This ratio is showing trend of matching with industry except year 2002. The lower ratio indicates that there is excess inventory , however as observed year 2002 seems to be exceptional
Profitability Ratio	Gross Profit / Sales	Gross Profit / Sales	0.18	0.25	0.44	0.45	The gross profit to sales ration have significantly improved over the years and in year 2003 matches industry average which indicates good business performance improvement
	Debt Equity Ratio	Debt/Equity	2.93	4.12	3.79	1.9	The higher debt-equity ratio indicates that company is not adequately utilising borrowing. It also indicates that company have surplus funds which is not required in business. The healthy profit generation is one of the reason for this.
	Fixed Charge Ratio	(Earning before interest and tax + Fixed charge before tax) /( Fixed charge before tax +Interest)	1.17	1.73	1.33	0.5	The higher Fixed charge coverage ratio compared to industry indicates that company is quite healthy to cover its fixed expenses & interest. This facts also getting corroborated by higher debt-equity ratio & improving gross profit ratio