Question

SAMSUNG 0 8 FG H KL Enter 5 >7 shift The Finance Director of Amben Ltd is concerned about rising short-term interest rates and the poor liquidity of the company. After calculating appropriate ratios (10), prepare a report that comments on the recent performance and financial health of Amben Ltd Income statements for the year ended 31 December 2016 2015 $000 $000 $000 $1000 Turnover 5,300 Cost of sales 4,330 4,000 Gross profit 1,370 1,300 Administration cost 735 620 Operating profit 635 680 nterest 220 190 Profit before taxation 415 490 Taxation 125 147 290 Profit after taxation 343 90 Preference dividends 90 140 230 140 230 Ordinary dividends 60 113 Retained profits

Answer 1

Ratio no.	Ratio Name	Formula		Ratio value for 2016
1	Current ratio	Current assets/current liabilities	1415/810	1.75
2	Quick ratio	(Current assets-inventory)/current liabilities	(1415-900)/810	0.64
3	Cash ratio	Cash balance/current liabilities	55/810	0.07
4	Debt-equity ratio	Total dedt/Total equity	2910/3910	0.74
5	Debt-asset ratio	Total debt/Total assets	2910/6820	0.43
6	Interest coverage ratio	Operating profit/Interest	635/220	2.89
7	Gross profit margin ratio	Gross profit/Net sales	1370/5700	24.04%
8	Net profit margin ratio	Net profit/Net sales	290/5700	5.09%
9	RoA	Net profit/average total assets	290/(6820+6280)/2	1.11%
10	RoE	Net profit - preference dividends/average equity	(290-90)/(3910+3850)/2	1.29%

From the above ratios we can see that there is not much reason for the Finance Director of Amben to worry and be concerned. The company’s liquidity can be gauged by its liquidity ratios of current ratio, quick ratio and cash ratio. For 2016 the company’s current ratio stood at 1.75. This ratio measures the ability of a company to meet its current liabilities – current assets get converted into cash in the operating cycle of Amben and provide the funds to pay current liabilities. A current ratio of 1.75 is good and the firm can be said to have good liquidity. In 2015 the current ratio was 1400/1330 = 1.05 and hence we can see that Amben has also been able to improve its liquidity on a year-on-year basis.

The company’s leverage ratio is also reasonable as can be seen from its debt-asset ratio. We can see that for 2016 this stood at 0.43 and it means that 43% of all assets are financed by debt and the rest 57% is financed by equity. Even if short term interest rates are increasing the company should not be too bothered as its use of debt is not very high.

The company’s interest coverage ratio is 2.89. This means that the company can easily meet its interest burden even if its profitability remains stagnant and interest rate rises by few basis points.

The profitability ratios of the company also looks reasonable and seems to indicate that there is no cause and significant reason to worry about the company’s financial health.