Question

Calculate and comment on the following ratios (where applicable round off answers to two decimal places):

4.1.1 Gross margin (3)

4.1.2 Current ratio (3)

4.1.3 Acid-test ratio (4)

4.1.4 Debtors collection period (3)

4.1.5 Inventory turnover (4)

4.1.6 Return on assets (3)

INFORMATION: Caht Enterprises Extract from the Statement of Comprehensive Income for the year ended 31 March 2019

	R
Sales (all credit)	610 000
Gross profit	390 000
Operating profit	170 000
Interest expense	17 000
Profit before tax	153 000
Net profit after tax	110 000

	R	R
Assets
Non –current assets		700 000
Current assets		340 000
Inventory	70 000
Debtors	150 000
Bank	120 000
		1 040 000
Equity and Liabilities
Owners’ equity		600 000
Non-current liabilities		300 000
Current liabilities		140 000
		1 040 000

Answer 1

1). Gross Margin = Gross profit / Sales
= 390,000 / 610,000
= 0.6393 or 63.93%

2). Current Ratio = Current Assets / Current Liabilities
= 340,000 / 140,000
= 2.43 times

3). Acid test ratio = Quick assets / Current liabilities
Quick assets = Debtors + Bank = 150,000 + 120,000 = 270,000

Acid test ratio = 270,000 / 140,000
= 1.93 times

4). Debtors collection period = (Debtors amount / Sales) * 365 days
= (150,000 / 610,000) * 365
= 89.75 days

5). Inventory turnover = Cost of goods sold / Inventory
= 220,000 / 70,000
= 3.14 times

Cost of goods sold = Sales - Gross profit
= 610,000 - 390,000
= 220,000

6). Return on assets = Net Income / Total assets
= 110,000 / 1,040,000
= 0.1058 or 10.58%