TUTORIAL QUESTIONS ON FINANCIAL RATIO ANALYSIS

Question 1

The following data is for Misty Berhad. You are to use the data to compute the financial ratios
and interpret the results.

Balance Sheet as at 30 June 2009

RM

Plant and equipment 26,881

Long-term investments and other fixed assets 20,606
Inventory 56,372
Accounts receivable 71,873
Cash and short-term investments 14,657
TOTAL ASSETS 190,389

Equity 135,013
Long-term liabilities 17,895
Current liabilities 37,481
TOTAL LIABILITIES AND EQUITY 190,389

Income Statement for the year ended 30 June 2009

RM

Sales (all credit) 254,553

Costs of goods sold (149,806)
Selling and administrative expenses (69,706)
Earnings before interest and tax 35,041
Interest expense (2,525)
Earnings before tax 32,516
Taxes (13,976)
Net income 18,540

Earnings per share RM4.13

Dividend per share RM1.80
Average inventory RM56,530

Industry averages are as follows:

Current ratio 2.50X Net profit margin 4.5%

Quick ratio 1.80X Return on assets 6.0%
Inventory turnover ratio 7X Return on equity 9.5%
Receivables turnover 4.5X Debt to equity 30%
Average collection period 80 days Debt ratio 18%
Fixed assets turnover 2.50X Times interest earned 9.6X
Operating profit margin 8.9%

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Question 2

Madeline Berhad has a gross profit margin of 25% and sales of RM8 million. Of its sales,
80% are on credit while the remainder is cash sales. Madeline’s current assets equal
RM500,000 and current liabilities amount to RM80,000. It also has RM36,000 in cash plus
marketable securities.

Required:

a) If the firm’s accounts receivable balance is RM250,000, determine its average collection
period.
b) If the firm reduces its average collection period to 12 days, determine its new level of
accounts receivable.
c) Determine Madeline’s costs of goods sold.

Question 3

Jon Enterprise has current assets of RM11,400, inventories of RM4,000 and a current ratio
of 2.6. What is Jon’s acid-test ratio?

Question 4

Pacific Alliance Berhad has an average collection period of 74 days. What is the accounts
receivable turnover for Pacific Alliance? Use a 360-day year.

Question 5

Bulan Sdn Bhd has an accounts receivable turnover ratio of 3.4. What is Bulan’s average
collection period?

Question 6

Astrix Co. has a debt ratio of 42%, long-term liabilities of RM20,000 and total assets of
RM70,000. What is Astrix’s level of current liabilities?

Question 7

Shaun Berhad has an annual expense of RM30,000 and pays income tax equal to 28% of
earnings before tax. Its times-interest earned ratio is 4.2. What is Shaun’s net income?

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Question 8

The following data is for Segar Berhad, a manufacturer of electrical appliances. As a financial
manager of the company, you are required to:

a) Use the data to compute the relevant ratios.

b) Use Du Pont system to calculate the ROE of the firm.
c) Identify and briefly explain areas of the firm’s strengths and weaknesses.
d) Provide possible reasons for the weaknesses and recommend appropriate actions to be
taken in order to improve ROE.

Segar Berhad
Balance Sheet as at 30 June 2009
RM

Non-current Assets
Plant and equipment 53,762
Other fixed assets 41,212

Current Assets
Inventory 112,744
Accounts receivable 143,746
Cash 29,314
TOTAL ASSETS 380,778

Equity 270,026
Long-term liabilities 35,790
Current liabilities 74,962
TOTAL LIABILITIES AND EQUITY 380,778

Segar Berhad
Income Statement for the year ended 30 June 2009
RM

Sales (all credit) 509,106

Costs of goods sold (299,612)
Selling and administrative expenses (139,412)
Earnings before interest and tax 70,082
Interest expense (5,050)
Earnings before tax 65,032
Taxes (27,952)
Net income 37,080

The company’s ratios for the year ended 30 June 2008 are as follows:

Current ratio 2.50X Debt ratio 22%

Inventory turnover ratio 9.6X Times interest earned 9.6X
Average collection period 80 days Net profit margin 7.9%
Fixed assets turnover 4.10X Return on assets 10.2%
Total assets turnover 2.36X Return on equity 13.8%

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Question 9

As a junior financial manager, your first task in Delima Berhad is to assess the firm’s
efficiency, liquidity, profitability and leverage. The firm’s financial statements are presented
below:

Delima Berhad
Income Statement for the year ended 30 September 2009
RM(‘000)

Sales (75% on credit) 90,000

Costs of goods sold (63,000)
Gross profit 27,000
Selling expenses (16,000)
Depreciation (1,800)
Interest on long-term loan (1,700)
Taxes (2,250)
Net profit after tax 5,250
Preference dividend (500)
Net profit attributable to ordinary shareholders 4,750

Delima Berhad
Balance Sheet as at 30 September 2009
RM(‘000)

Non-current Assets
Gross non-current assets 38,400
Accumulated depreciation (6,400)

Current Assets
Inventory 30,200
Accounts receivable 13,900
Cash 9,100
TOTAL ASSETS 85,200

Shareholders’ Equity
Ordinary shares 34,000
Retained earnings 5,200

Long-term Liabilities
Preference shares 5,000
Long-term debt 9,000

Current Liabilities
Notes payable 6,000
Accounts payable 26,000
TOTAL LIABILITIES AND EQUITY 85,200

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The firm’s financial ratios for the year ended 30 September 2008 are as follows:

Current ratio 2.00X Net profit margin 5%

Quick ratio 1.10X Return on assets 5.2%
Inventory turnover ratio 4.00X Debt ratio 45%
Average collection period 45 days Times interest earned 9.00X
Total assets turnover 3.00X

Required:

a) Calculate the above ratios for Delima Berhad.

b) Using trend analysis, comment on the firm’s strengths and weaknesses.
c) Calculate the firm’s ROE using Du Pont analysis.
d) Discuss two ways on how to improve the firm’s ROE.

Question 10

The following data is taken from Glee Berhad’s financial statements for 2008 and 2009.

Financial year ended

31 December 2008 31 December 2009
RM RM RM RM

Ordinary share capital 200,000 200,000

(200,000 ordinary shares at RM1 each)
Share premium 128,000 128,000
Retained earnings b/f 432,000 512,000
Retained earnings for the year 80,000 512,000 112,000 624,000
840,000 952,000

2008 2009

Dividend per share (RM) 0.30 0.34

Market price per share at the end of the year (RM) 6.30 7.56

Required:

a) Calculate for each year:

i) Earnings per share (EPS)
ii) Price-earnings ratio (P/E)
iii) Dividend payout ratio

b) Explain the uses of P/E ratio. What does a high P/E ratio indicate?

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Question 11

The balance sheet and income statement of Beethoven Sdn Bhd for 2009 are given below.

Beethoven Sdn Bhd

Balance Sheet as at 31 December 2009
RM

Net non-current assets 960,000

Current assets
Inventory 500,000
Accounts receivable 436,000
Cash 280,000
TOTAL ASSETS 2,176,000

Ordinary shareholders’ equity 1,007,200

Long-term liabilities 336,000

Current liabilities
Notes payables 364,000
Accounts payable 340,000
Other current liabilities 128,800
TOTAL LIABILITIES AND EQUITY 2,176,000

Beethoven Sdn Bhd

Income Statement for the year ended 31 December 2009
RM

Sales 2,400,000
Costs of goods sold (1,787,200)
Gross profit 612,800
Less: Expenses
Selling expenses (140,000)
General and administrative expenses (172,800)
Earnings before interest and tax 300,000
Less: Interest expenses (28,000)
Earnings before taxes 272,000
Less: Taxes @ 30% (81,600)
Net profit after tax 190,400

Additional information:

Number of shares outstanding 100,000 shares

Market price per share at the end of the year RM3.50

The industry financial ratios for the financial year ending 31 December 2009 are as follows:

Current ratio 1.25 X Net profit margin 9.3 %

Quick ratio 0.72 X Return on assets 10 %
Inventory turnover ratio 2.90 X Return on equity 20 %
Average collection period 3 months Debt ratio 46 %
Total assets turnover 1.05 X Price-earnings ratio 1.50 X

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Required:

a) Compute the above ratios for the financial year ending 31 December 2009. (Use Du Pont
equation to compute ROE.)
b) Comment on the firm’s asset management ratios, leverage ratios and profitability ratios.
c) Based on Du Pont analysis, explain the reasons influencing the firm’s ROE as in part (a).
d) Give recommendations to improve the firm’s ROE.
e) Discuss the benefits of using Du Pont analysis.

Question 12

Solaris Berhad has applied for a loan from a bank for its expansion program. In order to
evaluate the company as a potential borrower, the bank would like to compare the company
with the industry. The company has submitted the following financial statements to the bank.

Solaris Berhad
Balance Sheet as at 31 December 2009
RM(‘000)

Net Non-current Assets 2,250

Current Assets
Inventory 900
Accounts receivable 300
Cash 300
TOTAL ASSETS 3,750

Shareholders’ Equity
Ordinary shares 1,200
Retained earnings 300

Long-term Liabilities
Long-term debt 1,650

Current Liabilities
Notes payable 375
Accounts payable 150
Other current liabilities 75
TOTAL LIABILITIES AND EQUITY 3,750

Solaris Berhad
Income Statement for the year ended 31 December 2009
RM(‘000)

Net sales 4,050

Less:
Costs of goods sold (2,000)
Operating expenses (1,525)
Depreciation (225)
Interest expenses (105)

Earnings before tax 195

Tax (78)
Net profit after tax 117
Less: Ordinary shares dividend (87)
Retained profits for the year 30

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Required:

a) Calculate the following ratios.

i. Current ratio
ii. Quick ratio
iii. Inventory turnover ratio
iv. Average collection period
v. Total assets turnover
vi. Gross profit margin
vii. Net profit margin
viii. Return on equity
ix. Debt ratio

b) Using the Du Pont equation, calculate the return on equity of the company.

c) You are given the following industry averages:

Net profit margin 5%

Total assets turnover 1.1 X
Debt ratio 40 %
Return on assets 5.5 %

i. Calculate the ROE for the industry.

ii. Comment on Solaris Berhad’s:
a. Profitability
b. Asset Management
c. Debt Management

d) Based on Du Pont analysis, explain the factors affecting Solaris Berhad’s ROE.

e) Should the bank grant the loan to Solaris Berhad? Why?

Question 13

You are the finance manager of E.Z. Sdn Bhd. You would like to assess the efficiency ratios
and the leverage position of the company and how these ratios affect the company’s
profitability. The financial statements of the company for the past two years are as follows:

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 E.Z. Sdn Bhd
Balance Sheet as at
31/12/08 31/12/09
RM(‘000) RM(‘000)

Net non-current assets 275,000 312,500

Current assets
Inventory 99,000 145,500
Accounts receivable 53,500 69,500
Cash 4,500 5,500
TOTAL ASSETS 432,000 533,000

Ordinary shareholders’ equity 211,500 238,500

Long-term liabilities 176,500 244,000

Current liabilities 44,000 50,500

TOTAL LIABILITIES AND EQUITY 432,000 533,000

E.Z. Sdn Bhd

Income Statement for the year ended
31/12/08 31/12/09
RM(‘000) RM(‘000)

Sales 550,000 625,000

Costs of goods sold 396,000 437,500
Gross profit 154,000 187,500
Operating expenses 88,000 106,000
Operating profit 66,000 81,500
Interest expenses 26,000 36,500
Profit before taxes 40,000 45,000
Taxes 16,000 18,000
Net profit after tax 24,000 27,000

Industry averages:

Current ratio 3.10 X Net profit margin 7%

Inventory turnover ratio 5.00 X Return on assets 10.5 %
Average collection period 30 days Return on equity 19 %
Total assets turnover 1.50 X Debt ratio 45 %
Times interest earned 3.00 X Debt-to-equity ratio 82 %

Required:

a) Compute the above ratios for E.Z. Bhd for the year 2008 and 2009.
b) Comment on the firm’s asset management ratios, leverage position and profitability.
c) Based on Du Pont analysis, identify the factors that contribute to the firm’s ROE.
d) Give three suggestions on how to improve the firm’s profitability.