Question

'Second-Hands Ltd is a company that sells secondhand motor vehides. The owners (shareholders) of the business are interested to know how the business has performed over the past two years and have you to report on the performance of the business, in particular on the liquidity of the business. You are provided with the following information: Average for the 2019 2020 industry Current ratio Current Assets/Current liabilities 3:1 2.5:1 2.3:1 + 1.5:1 0.8:1 1:1 Quick ratio (Cash assets + Receivables)/Current liabilities Receivables turnover Net credit sales income/ Average receivables balance Average days to sell 365 / Inventory turnover 7 times 7.5 times 7 times 30 days 60 days 40 days + REQUIRED: a. State which area of business activity (profitability, liquidity or financial stability) each of the following ratios helps us to analyse: (Write your answer in the space provided) Business activity measured Ratio Return on ordinary shareholders' equity Times interest earned Average collection period Asset turnover ratio Gross profit margin Expense ratio

Answer 1

Below are the Attachments in context to the answer for all the ratios given above with detailed explaination for "Second - Hand Ltd" . Please go through this all Snapshots of the answer for clear understanding herewith attached in serial order:

order:-
Ratio. Good / Bad Irenal (2 Discussion t V Ľ Bad 2) Quick Ratio (Cash Assets & Receivable Lemay labiokes -tem - Quick Ratio Represents measures Short. liquidity more conse rotatively then Coment. Ratio. It describes; " If all Sales yovesves el isappear, Could berines meet the coment obligations with the readily Convertible quick fuals on hand". - If We see in care f 'second-Hand itd) quick ratio trend is lower in comport 2020 in compared to figure of 2019 which represents that business ability to meets its short from liebring is going down. Also it is to be noted that Ratio should be sol or above that. Even if we compare it with Average we can find the situation in 2020. sendesting figure, degrading in

Ratio 3) Good / Bad Fromad Discussion V z 3) Receivables tomover Net Credit Sale Income Average rocorable balance goods on credit . Good - Raceivables turnover indicates the Company's financial & operatoril performance. Also, it represents the average Corteten period if the sold > A higher ratio is desirable, as 7 indicates that the company's collection of Accounts recevable is efficiant. Whereas, low Account receivable suggests that, Company's collection process is poor and the it a entren Credit for -> Now, or connection to 'Second-Hand Lid we can see that, the ratio times in 2020 Increasing in compared to 2019 i.e. Company is able to improve its Receivables tormover ratio and is able to Collect dues quicker in compared to 2014 which is a good Sign for Company. Also, in compared to industry Average frond, the company's ratio is better in 2020. I extending too is

Ratio Good Bed grond Discussion d ( Average days to sell Taventory sosnover 365) Bad the aceivable. - Average days to sell to promyls cavorage number of days between the date a credit she is made and the date the purchaser pays for that Sale. i.e. it reprogents the amount of time it takes for a business to receive payments owed by the dients in dermed of Accounts rece. » A lower average Collochton porroel B generally more favourable than a higher average Collection period . Hlow average collecting period indicates the organization Collects paymond faster - In confort to socond-Hand itd We can see that the Ararage day to sell in 2020 is higher than only which reproses to company is not able to collect . the due amount from its Customer as gast in 2000 as it was able to collect in 2019. Hence, this is definately not a good sign for the company. Also in Contoret to industry trends, 2020 figure is not that attraktive.