Question

Question 4 (Marks: 27) South African companies measure their results by certain ratios. The following mining companies returned the following ratios and margins: Extract A Anglos Jarmony Afro Minerals Return on Assets 9% 6% 10% Profit Margin 2.6% 3.3% 8% Asset Turnover 3.4 times 1.9 times 1.3 times

Answer 1

Q4.1)

4.1.1) Meaning and explanation of ratios:

a) Return on Assets (ROA): It is a financial ratio which denotes the return a investor would receive on investment in assets of the company. The result of ROA reveals following:

Anglos: An investor is earning 9% on the investment in the company.

Jarmony: An investor is earning a lower of 6% on the investment in the company.

Afro Minerals: An investor is earning a higher 10% on the investment in the company.

b) Profit Margin or Net Profit Ratio (NPR): It is a profitability ratio which is commonly calculated to gauge the quantum of margin or money a company is on its business activities. The result of ROA reveals following:

Anglos: The company is making 2.6 net profit or money on every 100 sales made.

Jarmony: The company is making a slight high 3.3 net profit or money on every 100 sales made.

Afro Minerals: The company is making a higher 8 net profit or money on every 100 sales made.

c) Assets Turnover Ratio (ATR): It is the ratio of total sales or turnover to the average assets the company is maintaining. It denotes the number of times the Assets are being rotated by the company. Higher the ratio, more the usage of the assets. The result of ROA reveals following:

Anglos: The company has rotated 3.4 times its assets during the year or assets are used 3.4 times to create revenue or turnover.

Jarmony: The company has rotated less 1.9 times its assets during the year or assets are used only 1.9 times to create revenue or turnover.

Afro Minerals: The company has rotated more less only 1.3 times its assets during the year or assets are used more less only 1.3 times to create revenue or turnover.

4.1.2) Afro Minerals has been performing better than the rest of the mining companies because it is providing higher profitability as denoted by higher return on assets of 10% and the higher profit margins of 8%. The company is performing better even-though the Asset Turnover ratio is lower at 1.3 times. It shows that using less assets the company is able to generate higher returns.

4.1.3) The perspectives which are included in the balance score card are:

i) The usage of the assets by the company during its operation and to create the revenues or sales.

ii) The capability of the company to generate the money or net profit from the operation.

iii) The return the investor can expect from their investment in the respective company.

iv) The better use of the assets by the respective company.

Q4.2)

4.2.1) calculation of ratios and explanations:

Ratio	Formula	Calculation	Explanation
a) Net Profit Margin	Net profit/Net Sales	120000/500000 = 24%	The company is making money or net profit of 24 on every sales of 100
b) Return on Investment (ROI)	Net Profit / Capital invested in assets	120000/250000 = 48%	The investor of the company are getting return of 48% on investing in assets of the company.
c) Residual Income (RI)	Net Profit – (Capital invested * RRR)	120000 – (250000*12%) = 120000 – 30000 = 90000	The company is generating 90000 in excess of minimum required return of 12% on capital invested.
d) Expense ratio	Expenses / Net Sales	380000/500000 = 76%	The company has to spend 76 of every Sales of 100 to make net income of 24.
e) Asset turnover ratio	Net Sales / Average Assets	500000/215000 = 2.33 times	The company is able to rotate the assets 2.33 times during the year to create the Sales.