Question

LO3 restion Fwoc Problem Solving (S Marks) Sepma Corporation Comparative Balance Sheet As at June 30, 2016 and 2037 (Millions of Dollars) Assets Cash Accounts Receivable Inventory 2017 $630 2016 $ 20 72 48 100 120 Gross fixed assets Accumulated depreciation Net fixed assets 480 160 400 160 240 320 Total assets 432 548 Uiabilities and owners 'equilty 128 Accounts payable 80 Notes payable 36- 32. Long term debt Common stock Retained earnings Total liabilities and owners 'equity 100 132 140 132 84 432 116 S48 Where, Segma profit after tax and Sales for 2017 are $100 million and $250 million, respectively. On the other hand, Segma profit after tax and Sales for 2016 are $ 60 million and $200 million, respectively. Based on the aforementioned information, analyze the financial performance for Segma using the following financial ratios 1) Quick Ratio (Acid-Test) 2) Total Assets Turnover 3) Average collection period 4) Return on common equity (ROE) 5) Debt Ratio Note: Use the format provided in next page, don't forget to show your calculation for each ratio and to provide your evaluation on company performance based on your ratios. Ratio Quick Ratio (Acid-Test) Total Assets Turnover 2016 2017 Average collection period Return on common equity (ROE) Debt Ratio

Answer 1

Ratio	2016	2017
Quick ratio (acid test ratio)	0.793 times	4.2375 times
Total assets turnover	0.463 times	0.456 times
Average collection period	131.4 days	70.08 days
Return on common equity (ROE)	27.78%	40.32%
Debt ratio	0.50 times	0.547 times

*all amounts are in million dollars

1) Quick ratio = quick assets ÷ current liabilities

	2016	2017
Cash	$20	$630
Accounts receivable	$72	$48
Total quick assets	$92	$678
Accounts payable	$80	$128
Notes payable	$36	$32
Current liabilities	$116	$160
Quick ratio	0.793	4.2375

Quick ratio is used to analyse an entity's ability of how it can meet it's requirement to pay off the current liabilities without depending on the sale of its inventory. A higher ratio shows a stronger position of the entity.

In 2016, the ratio was 0.793 that means Segma can pay off 0.793 times of its current liabilities using its quick or say liquid assets. Whereas in 2017 there is surplus cash available with Segma due to which it has a stronger quick ratio of 4.2375 times.

2) Total assets turnover = Net sales ÷ Total assets

	2016	2017
Net sales	$200	$250
Total assets	$432	$548
Assets turnover ratio	0.463 times	0.456 times

Total assets turnover ratio represents an entity's efficiency to generate revenue using its assets. In 2016 the ratio was 0.463 times and in 2017 it has reduced to 0.456 times.

3) Average collection period = Accounts receivable ÷ (annual credit sales ÷ 365)

(Since no information is provided, it is assumed that all the sales are credit sales.)

	2016	2017
Accounts receivable	$72	$48
Credit sales per day	$0.548 (200÷365)	0.685 (250÷365)
Average collection period	131.4 days	70.08 days

In 2016, it took almost 132 days on an average for collection whereas in 2017, Segma had a faster collection i.e. within 71 days.

4) Return on common equity = (Net income ÷ Shareholders equity)× 100

	2016	2017
Net income	$60	$100
Shareholders equity (common equity + retained earnings)	$216	$248
ROE	27.78%	40.32%

ROE in 2016 and 2017 are 27.78% and 40.32% respectively. So, Segma is able enough to generate income from the equity available. However, there is a significant improvement in 2017 where there is an increase of 12.54%.

5) Debt ratio = Total liabilities ÷ total assets

	2016	2017
Accounts payable	$80	$128
Notes payable	$36	$32
Long term debt	$100	$140
Total liabilities	$216	$300
Total assets	$432	$548
Debt ratio	0.50 times	0.548 times

The ratio represents that how much debt the entity has taken to finance its assets. Lower debt ratio represents stronger financial position. Segma has funded almost 50% of its assets using debt as the ratio signifies.