Question

Exercise 2: Read the comparative balance sheets and the income statements of the firm 'Imaginary Computers Limited'. Use the techniques of financial statements analysis as explained in the chapter to do the following: 1. Complete the missing values (titles, formulas and numerical values in the table below. Note that some ratios could not be calculated as relevant data are not available. 2. Comment on the financial strengths and weaknesses of the firm (trends of the ratios and its comparison with industry average) Imaginary Computers Ltd. 2002 2001 53 6.7 Share capital Reserves and surplus 75 2003 85 7.4 5.7 Papelord Long-term debt Notes payable - Short term Accounts payable Totalliinilities and Net fixed assets Cash at bank Receivables Inventory Total Assets 4.1 5.6 3.4 25.11 17.4 2.6 35 1.6 32 5.2 6.5 28.1 218 0.8 28 2.7 221 42 72 5.6 322.9 26.1 12 2.9 2.7 3229 Income statement for the year ending 31 December 15 000) 2001 2003 2002 34.9 26.2 574 24.5 53 3.7 LE 02 45.8 16 7.0 4.5 0.1 Net Sales Cost of goods sold Gross Profit Operating Expenses Operating profit Non-operating surplus/deficit ERIT Interest Profit before tax Tax Net Profit Dividends Retained earnings 0.4 50 2.0 10 0.6 0.6 0.6 22 20 11 19 Answer: Ratio Formula 2001 2002 2003 Comments Industry Average

Answer 1

	RATIO	FORMULA	2001	2002	2003	INDUSTRY AVERAGE	COMMENTS
LIQUIDITY RATIO	CURRENT RATIO	CURRENT ASSET/CURRENT LIABILITY	0.85	0.54	0.45	1.2	Current ratio is falling year by year which mens liquidity of the company is very poor .we can see it from industry average also.
	QUICK RATIO	QUICK ASSET/CURRENT LIABILITIES	0.68	0.31	0.24	0.6	Quick Ratio is also falling year by year .It means company also does not have adequate quick asset to repay it's current liablities.As we compare from Industry In 2001 it was ok but after that it become poor.
TURNOVER MANAGEMENT RATIO	INVENTORY TURNOVER RATIO	COST OF GOOD SOLD/ AVERAGE INVENTORY	18.6	12.9	16.9 OR 17	20.5	Inventory turnover Ratio is also poor of the company of all three year if we compare with the industry.
	DAYS SALES OUTSTANDING RATIO	RECEVIABLE/AVG. SALE PER DAY	43	29	18	45	A company DSO ratio is below as we compare it from industry which company credit policy is too rigorous
PROFITABILITY RATIO	GROSS PROFIT/SALES	GROSS PROFIT/NET SALES	0.18	0.25	0.20	0.45	A Company's gross profit is also not up to mark as we compare with industry. They are earning less gross from there competitors
	NET PROFIT RATIO	NET PROFIT/NET SALES	0.03	0.08	0.05	0.15	A Company's Net profit is also not upto the mark as we compare it from industry they are earning less net profit from there competitors.
LONG TERM SOLVENCY RATIO	DEBT TO EQUITY RATIO	DEBT/EQUITY	1.09	1.13	1.07	1.9	A company's Debt to Equity is less as we compare with a industry .It is good to have a less debt .
	FIXED CHARGE COVERAGE RATIO	EBIT/INT, PAYABLE ON LOAN	1.8	5.11	2.5	1	A company have higher fixed charge coverage ratio as we compare with industry which is good because higher the ratio higher the Margin of safety.