Question

se Study 1: Financial Ratios Scenario: Barry Edgar is the director of Maritime Boating Ltd. The company has traded for 30 years and has in the past achieved very good levels of growth and return on capital, but this is now changing. In recent time it has failed to introduce new product lines, relying on traditional products and little has been invested in Research or Product Development. You are a business consultant for a firm of Management Consultants. Maritime Boating is one of your clients. In recent times the business has experienced increased turnover but a downturn in overall performance. Barry Edgar has had a meeting with your Director and he has stated that he wants to introduce tighter management control within the company by introducing a system of responsibility accounting. You receive the following memo from your Director, Pauline Hoppe, regarding this case. Memorandum To: Business Consultant Date: 21st May 2011 From: Pauline Hoppe, Director Subject: Maritime Boating Ltd. - ormation You are aware that I met with Barry Edgar yesterday and that he is concerned with the latest results shown in the final accounts that have recently been prepared at year en The file attached contains a summary of the company's abbreviated profit statements and balance sheets for the past performance indicators for their business sector as a whole for the period under review years; together with additional information and I would like you to examine this information and meet with me on Friday morning to discuss the form and the three-year period. presentation of a detailed financial analysis of the company over Signed: P. Hoppe

Answer 1

FINANCIAL RATIO ANALYSIS

		Particulars		Year 2009		Year 2010		Year 2011
BALANCE SHEET RATIOS: Stability (Staying Power)
1	Current
		Current Assets	=	1.66	1.23	1.91	1.22	2.49	1.31
		Current Liabilities		1.35		1.56		1.9
2	Quick
		Cash + Accts. Rec.	=	1.17	0.87	1.36	0.87	1.89	0.99
		Current Liabilities		1.35		1.56		1.9
3	Debt-to-Worth
		Total Liabilities	=	3.56	7.12	3.77	4.14	4.11	3.26
		Net Worth		0.5		0.91		1.26
INCOME STATEMENT RATIOS: Profitability (Earning Power)
4	Gross Margin
		Gross Profit	=	0.73	0.15	0.87	0.16	0.78	0.12
		Sales		4.9		5.3		6.6
5	Net Margin
		Net Profit Before Tax		0.49	0.10	0.57	0.11	0.51	0.08
		Sales		4.9		5.3		6.6
ASSET MANAGEMENT RATIOS: Overall Efficiency Ratios
6	Sales-to-Assets
		Sales	=	4.9	1.21	5.3	1.13	6.6	1.23
		Total Assets		4.06		4.68		5.37
7	Return on Assets
		Net Profit Before Tax	=	0.73	0.18	0.87	0.19	0.78	0.15
		Total Assets		4.06		4.68		5.37
8	Return on Investment
		Net Profit Before Tax	=	0.49	0.98	0.57	0.63	0.51	0.40
		Net Worth		0.5		0.91		1.26
ASSET MANAGEMENT RATIOS: Working Capital Cycle Ratios
9	Inventory Turnover
		Cost of Goods Sold	=	4.17	8.51	4.43	8.05	5.82	9.70
		Inventory		0.49		0.55		0.6
10	Inventory Turn-Days
		360	=	360	42.30	360	44.70	360	37.11
		Inventory Turnover		8.5102		8.0545		9.7
11	Accounts Receivable Turnover
		Sales	=	4.9	4.30	5.3	4.02	6.6	3.59
		Accounts Receivable		1.14		1.32		1.84
12	Accounts Receivable Turn-Days
		360	=	360	83.76	360	89.66	360	100.36
		Accts. Rec. Turnover		4.2982		4.0152		3.587
13	Accounts Payable Turnover
		Cost of Goods Sold	=	4.17	3.09	4.43	2.84	5.82	3.06
		Accounts Payable		1.35		1.56		1.9
14	Average Payment Period
		360	=	360	116.55	360	126.77	360	117.52
		Accts. Pay. Turnover		3.0889		2.8397		3.0632

Financial Ananlysis of Income statements

Income Statement, (amounts in US$ Mn)
	YEAR 2009	YEAR 2010	Y-o-Y Change	YEAR 2011	Y-o-Y Change
Revenues	4.90	5.30	8.16%	6.60	24.53%
operating expenses	4.17	4.43	6.24%	5.82	31.38%
Gross Profit	0.73	0.87	19.18%	0.78	-10.34%
Tax Expense	0.24	0.30	25.00%	0.27	-10.00%
Profit after tax	0.49	0.57	16.33%	0.51	-10.53%
Dividend	0.12	0.16	33.33%	0.16	0.00%
Net retained Profit	0.37	0.41	10.81%	0.35	-14.63%

Financial Analysis of Balance sheet

Balance Sheet, (amounts in US$ Mn)
	YEAR 2009	YEAR 2010	Y-o-Y Change	YEAR 2011	Y-o-Y Change
Assets
Current Assets
Cash and Cash Equivalents	0.03	0.04	33.33%	0.05	25.00%
Debtors	1.14	1.32	15.79%	1.84	39.39%
Inventory- raw material	0.09	0.12	33.33%	0.15	25.00%
Inventory- Finished goods	0.40	0.43	7.50%	0.45	4.65%
Total Current Assets	1.66	1.91	15.06%	2.49	30.37%
Fixed Assets	2.40	2.77	15.42%	2.88	3.97%
Total Assets	4.06	4.68		5.37
Current Liabilities (A/c payable)	1.35	1.56	15.56%	1.90	21.79%
Long term Liabilities
Bank loan	2.21	2.21	0.00%	2.21	0.00%
Stockholders' Equity
Common Stock and retained Earning	0.50	0.91	82.00%	1.26	38.46%
Total Liabilities	4.06	4.68		5.37