INSTRUCTIONS: 1. Use the financial statements for financial reasons to find Zumb
ID: 2446129 • Letter: I
Question
INSTRUCTIONS:
1. Use the financial statements for financial reasons to find Zumba Productions.
It includes results in the spaces provided above. This sheet or on a separate sheet you have to show the calculations that led you to the result.
NOTE: If you do not include the calculations you will not receive the full credit even if the result is correct.
2. Prepare and interpret an analysis of the financial ratios showing the company.
3. Summarize your findings and make recommendations.
4. Use the Du Pont method explained in the material of this module for performance
on equity. What does this result?
Explanation / Answer
Sl. No.
Ratio
Formula
Working
Result
a
Current ratio
Current Assets/Current Liabilities
72,000/69,000
1.04
b
Quick Ratio
(Cash in hand + Cash at Bank + Receivables + Marketable Securities)/ Current Liabilities
26,500/69,000
0.38
c
Inventory Turnover
Cost of goods sold/Inventory
106,000/136,740
0.78
d
Average collection period
365/Receivables Turnover
365/6.4
57
e
Debt ratio
Total Liabilities/Total Assets
91,950/150,000
61.3%
f
Times interest earned ratio
Earnings before Interest and Tax/Interest Expense
17,000/6,100
2.79
g
Gross Profit Margin
Gross Profit/Net Sales
54,000/160,000
34%
h
Net profit margin
Net Profit after tax/Net Sales
6,540/160,000
4.09%
i
Return on total sales
Income from Operations/Net Sales
17,000/160,000
11%
j
Return on common equity
Net Income/Common Equity
6,540/31,500
21%
k
Market/Book ratio
Share price of Stock/Book value per share
Not available
Not available
L
Working capital
Current Assets - Current Liabilities
72,000-69,000
$Z3000
1
Current Assets = Cash+Marketable Securities+Accounts Receivable+Inventory
=
500+1000+25000+45500
72,000
2
Quick Assets = Cash + Accounts Receivable + Marketable Securities
=
500+1000+25000
26,500
3
Current Liabilities = Accounts Payable+Notes Payable+Accrued Salaries Payable
=
22000+40000+7000
69,000
4
Receivables Turnover = Sales/Accounts Receivables
=
160,000/25,000
6.4
5
Average Inventory = (Opening Inventory+Closing Inventory)/2
=
(208,400+65,080)/2
136,740
6
Total Liabilities = Current Liabilities + Long Term Debt + Short Term Debt
=
69,000+22,950
91,950
3. Summary of findings:-
Zumba’s Current Ratio and Quick Ratio are quite low as compared to market ratios. If we take ACP into account, it seems that company is losing money due to poor collections, ACP is 57 days almost 2 months as compared to industry average of 37 days. Looking at Working capital this becomes clear.
While if we look at Gross profit margin it is in tune with the industry, therefore, the company is losing maximum into collecting its debts. If we look at its Return on total sales which is a measure of operating efficiency, Zumba is faring better as compared to the industry standards.
Now coming to Financial Ratios, the interest coverage ratio is comparatively lower that industry which means that Zimba may face a bit difficulty in servicing interest, however it is
4. DuPont Equation
Return on equity = Profit Margin X Total Assets Turnover X Financial Leverage
= 160,000/150,000
= 1.067
Total Equity = Common Stock + Retained Earnings
= 31,500+26,550 = 58,050
Financial Leverage = 150,000/58,050
= 2.584
Return on Equity = 0.040875 X 1.067 X 2.584
= 11.27%
If we look at this ratio, Zimba seems to be fairly competitive from financial angle as well as from operating efficiency level. The Financial Leverage is more than 2.5, this means that it is able to generate more returns on its equity. Similarly the Net Profit ratio is also 4% which is relatively a reasonable measure and any increase in efficiency will resultantly increase the return on equity.
Sl. No.
Ratio
Formula
Working
Result
a
Current ratio
Current Assets/Current Liabilities
72,000/69,000
1.04
b
Quick Ratio
(Cash in hand + Cash at Bank + Receivables + Marketable Securities)/ Current Liabilities
26,500/69,000
0.38
c
Inventory Turnover
Cost of goods sold/Inventory
106,000/136,740
0.78
d
Average collection period
365/Receivables Turnover
365/6.4
57
e
Debt ratio
Total Liabilities/Total Assets
91,950/150,000
61.3%
f
Times interest earned ratio
Earnings before Interest and Tax/Interest Expense
17,000/6,100
2.79
g
Gross Profit Margin
Gross Profit/Net Sales
54,000/160,000
34%
h
Net profit margin
Net Profit after tax/Net Sales
6,540/160,000
4.09%
i
Return on total sales
Income from Operations/Net Sales
17,000/160,000
11%
j
Return on common equity
Net Income/Common Equity
6,540/31,500
21%
k
Market/Book ratio
Share price of Stock/Book value per share
Not available
Not available
L
Working capital
Current Assets - Current Liabilities
72,000-69,000
$Z3000
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