Required [1 Calculate the following ratios for September and October 20 fn lnune
ID: 2566143 • Letter: R
Question
Required [1 Calculate the following ratios for September and October 20 fn lnune Splen Gale carrens ebe Current Apgets / Current Liabilities etunon13- Net Profit Atef Tax 1 Equity Deyb J24A..* Total Liabilities / Total Assets EKT CerEBIT / Interest Expense 13Ha Net Profit After Tax/Sales 12] Using the above ratios, comment on The Riverview Restaurant's Prohability, Liquidity and Siabiny Provide a possible reason for the changes in each ratio. Explain how each ratio could be improved. [3] Name two ratios which measure efficiency, For each ratio, explain how it is used to measure efficiency How does the efficiency of a business operation impact on its profitability? [5+ 10 +5-20 marks ] , 290 173
Explanation / Answer
1. Calculate the following ratios:
Sept. 14
Oct. 14
Current ratio
= Current Assets / Current Liabilities
= 15,000 / 10,000
= 25,000 / 18,000
1.5
1.39
Return on equity
= Net profit after tax / Equity
= 28,000/165,000
=21,000/157000
17.0%
13.4%
Debt Ratio
= Liabilities / Assets
= 250,000 / 415,000
= 318,000 / 475,000
0.60
0.67
Interest Cover ratio
= EBIT / Interest expense
= 52,000 / 12,000
= 45,000 / 15,000
4.33
3.00
Profit Margin ratio
= Net profit after tax / Sales
= 28,000 / 180,000
=21000/240000
15.6%
8.8%
2. Using the above ratios, comment of the ratios:
Current ratio
The current ratio has decreased in oct. from 1.5 to 1.39. The decrease indicates the need to improve solvency ratio. Although the current assets has increased by 67% from 15,000 to 25,000 but the current liabilities has increased by 80% from 10,000 to 18,000. Hence the current ratio has decreased.
Return on equity
The Return on equity ratio has decreased in oct. from 17% to 13.4%. The decrease indicates the need to improve profitabilty ratio. The profit after tax has decreased by 25% from 28,000 to 21,000, whereas the equity has decreased by only 5%. Hence the Return on equity has decreased.
Debt Ratio
The Debt ratio has increased in oct. from 60% to 67%. The increase indicates the increase of dependence on borrowed funds. Although the liabilities assets has increased by 27% from 250,000 to 318,000 but the total assets has increased by only 14% from 415,000 to 475,000. Hence the Debt ratio has decreased.
Interest Cover ratio
The interest cover ratio has decreased in oct. from 4.33 times to 3 times. The decrease indicates the decrease of confidence of investors. The EBIT has decreased by 13.5% from 52,000 to 45,000 but interest expense has increased by 25% from 12,000 to 15,000. Hence the interest cover ratio has decreased.
Profit Margin ratio
The Profit margin ratio has decreased in oct. from 15.6% to 8.8%. The decrease indicates the decrease in operation efficiency of the business. The reason of this decrease is due to increase in operating expense. The PAT has decreased by 25% from 28,000 to 21,000 although the sales has increased by 33% from 180,000 to 240,000. The gross profit has also increase by 33%, which indicates that there is no change in cost of goods sold. Hence the profit margin is decreased due to increase in operating expenses.
3. Name the two ratios which measure efficiency.
The measure of efficiency is measued by:
Both the above raios are computed from Profit after tax, which are measured with sales and equity figures. The investors, stockholders and other related persons always look to these ratios and take the decisions.
1. Calculate the following ratios:
Sept. 14
Oct. 14
Current ratio
= Current Assets / Current Liabilities
= 15,000 / 10,000
= 25,000 / 18,000
1.5
1.39
Return on equity
= Net profit after tax / Equity
= 28,000/165,000
=21,000/157000
17.0%
13.4%
Debt Ratio
= Liabilities / Assets
= 250,000 / 415,000
= 318,000 / 475,000
0.60
0.67
Interest Cover ratio
= EBIT / Interest expense
= 52,000 / 12,000
= 45,000 / 15,000
4.33
3.00
Profit Margin ratio
= Net profit after tax / Sales
= 28,000 / 180,000
=21000/240000
15.6%
8.8%
2. Using the above ratios, comment of the ratios:
Current ratio
The current ratio has decreased in oct. from 1.5 to 1.39. The decrease indicates the need to improve solvency ratio. Although the current assets has increased by 67% from 15,000 to 25,000 but the current liabilities has increased by 80% from 10,000 to 18,000. Hence the current ratio has decreased.
Return on equity
The Return on equity ratio has decreased in oct. from 17% to 13.4%. The decrease indicates the need to improve profitabilty ratio. The profit after tax has decreased by 25% from 28,000 to 21,000, whereas the equity has decreased by only 5%. Hence the Return on equity has decreased.
Debt Ratio
The Debt ratio has increased in oct. from 60% to 67%. The increase indicates the increase of dependence on borrowed funds. Although the liabilities assets has increased by 27% from 250,000 to 318,000 but the total assets has increased by only 14% from 415,000 to 475,000. Hence the Debt ratio has decreased.
Interest Cover ratio
The interest cover ratio has decreased in oct. from 4.33 times to 3 times. The decrease indicates the decrease of confidence of investors. The EBIT has decreased by 13.5% from 52,000 to 45,000 but interest expense has increased by 25% from 12,000 to 15,000. Hence the interest cover ratio has decreased.
Profit Margin ratio
The Profit margin ratio has decreased in oct. from 15.6% to 8.8%. The decrease indicates the decrease in operation efficiency of the business. The reason of this decrease is due to increase in operating expense. The PAT has decreased by 25% from 28,000 to 21,000 although the sales has increased by 33% from 180,000 to 240,000. The gross profit has also increase by 33%, which indicates that there is no change in cost of goods sold. Hence the profit margin is decreased due to increase in operating expenses.
3. Name the two ratios which measure efficiency.
The measure of efficiency is measued by:
- Profit Margin ratio
- Return on equity
Both the above raios are computed from Profit after tax, which are measured with sales and equity figures. The investors, stockholders and other related persons always look to these ratios and take the decisions.
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