Question

Total Tools operates a hardware business. The following Income Sustement and related information are available for the financial year ended December 31, 2018 TOEAL TOOLS IMALANCE SHEET 8000 3000) Predam 100 Accounts payi Anda Tolonentes Long-term de onde To Cara ck $10 por Pada Pewned angs Total d u Total b ad guy 11 TOTAL TOOLS PERFORMANCE Toale ta Tool operating expenses Faris before (EBIT) Interest bends Toolitus Fare s (EBIT) Taxes (A ) Net ne TOTAL TOOLS Other information Dudendo con look Earnings and in the firm (0) Share outstanding Market price per share 1 Industry Norm Current Acades Average collection period Accounts recebe umove 7 Operating comelum on investme Gross pro margin Operating profit margin Metro Tom over 9 Times interesteamed eum on guy 175 En persone Required: 1. Calculate each ratio for Total Tools comparative to those listed in the industry norm. (16 marks) 2. Using the ratios calculated above, comment on the performance of Total Tools with respect to its i. Liquidity (10 marks) ii. Profitability (10 marks)

Question 2

Using the ratios calculated, comment on the performance of total tools with reapect to

i.liquidity

ii.profitability

Answer 1

1.
1, Current ratio = Current assets/Current liabilities
Current assets = $ 50,190
Current liabilities = $ 25,523
Current ratio = 50190/25523
=	1.97
2. Acid test ratio = (Current Assets - Inventory)/Current liabilities
Current assets = $ 50,190
Inventorry = $ 27,530
Current liabilities = $ 25,523
Acid test ratio = (50190-27530)/25523
=	0.89
3.Average collection period/Account Receivable Turnover ratio
Accounts receivable turnover = Net credit sales/Average Accounts receivable
Net credit sales = $ 112,760
Accounts receivable = $ 18,320
Accounts receivable turnover = 112760/18320
=	6.16
Average collection period = 365/6.16
=	59.30
4.Accounts receivable turnover = Net credit sales/Average Accounts receivable
Net credit sales = $ 112,760
Accounts receivable = $ 18,320
Accounts receivable turnover = 112760/18320
=	6.16
5.Inventory turnover = Cost of Goods Sold/Average Inventory
Cost of Goods Sold =$ 85,300
Inventorry = $ 27,530
Inventory turnover = 85300/27530
=	3.10
6.Operating income return on investment = Operating income/Investment
Operating income = $ 11,520
Investment = $ 34,367
Operating income return on investment = 11520/34367
=	0.34
7.Gross profit margin = Gross Profit/Net sales
Gross profit = $ 27,460
Net Sales = $ 112,760
Gross profit margin = 27460/112760
=	0.24
8.Operating profit margin = Operating profit/Net Sales
Operating income = $ 11,520
Net Sales = $ 112,760
Operating profit margin = 11520/112760
=	0.10
9.Net profit margin = Net profit/Net Sales
Net Profit = $ 8,360
Net Sales = $ 112,760
Net profit margin = 8360/112760
=	0.07
10.Total assets turnover = Net sales/Average total assets
Net Sales = $ 112,760
Total assets = $ 81,890
Total assets turnover = 112760/81890
=	1.38
11.Fixed assets turnover = Net sales/Average fixed assets
Net Sales = $ 112,760
Fixed assets = $ 31,700
Fixed assets turnover = 112760/31700
=	3.56
12.Debt ratio = Total liabilities/Total assets
Total liabilities = $ 47,523
Total assets = $ 81,890
Debt ratio = 47523/81890
=	0.58
13. Times interest earned = Earnings before interest & taxed/Interest exp
Earnings before interest and tax = $ 11,520
Interest expense = $ 3,160
Times interest earned = 11520/3160
=	3.65
14.Return on equity = Net income/Shareholders' equity
Net income = $ 5,016
Shareholders' equity = $ 34,367
Return on equity = 5016/34367
=	0.15
15.Price earning ratio = Share price/ Earning per share
Earning per share = $ 3.86
Share price = $ 20
Price earning ratio = 20/3.86
=	5.18
16.Earnings per share = Net income/ Common shares outstanding
Earnings per share = 5016/1300
=	3.86
2)
(i) Liquidity ratio represents the company's ability to pay it's short term
liabilities.The liquidity ratio of Total Tools is within the industry norms
though it’s a bit lower than the industry average.Total Tools has adequate
liquid assets to cover its short term obligations.
(ii) The profitabity ratios of GP margin,Operating Profits,NP margins are
within the industry norms and averages.However the Return on equity,EPS
& PE ratio show that the return on investments is lower than the industry