Question

I have different figures. I would like to see calculation workings for:

a) Investment Rotation, to arrive to 0.85.

b) Economic and Financial returns (ROA Return On Assets, ROE Return On Equity, ROI Return On Investments) and if these are the correct requirements for reviewing economic and financial returns.

Problem:

The person in charge of the finances of the company MGT, S.A. wants to know the company's situation concerning the industrial sector to which it belongs. For this, it has the following information regarding the industry:

1. General liquidity ratio is 1.55; the acid test is 1.20, and the ratio between the available and the current liabilities is 0.95.
2. The debt ratio stands at 1.25. The margin on sales is 21%. The investment rotation is 1.45 times.
3. Economic profitability is around 23%, and financial profitability is 29%

The data referred to the company (in thousands of €) are the following:

Assets		Liability and Net Equity
Non-current asset (net)	170	Equity	125
Stocks of finished products	45	Reservations	25
Clients	65	External Resources	105
Banks	70	Loans	65
		Supplier	30
Total Assets	350	Total Net Equity	350

In addition, it is known that:

• Sales are € 250,000 and its direct cost of € 105,000.
• Amortization of € 70,000.
• Long-term debt generates interest at 5%, short-term bank loans at 7%, and the departure of suppliers does not accrue any interest.
• The Corporation Tax is 25%.

Calculate the liquidity, acid test and debt ratios, and compare them with the sector data. It also calculates the economic and financial returns, and the margin on sales and investment rotation, even making a comparison between the company and sector.

4.1 Liquidity Current assets/current liabilities

	Sector	Company
General liquidity ratio	1.55	1.89
Acid test ratio	1.20	1.42
Cash to liquidity ratio	0.93	0.74
Debt ratio	1.25	1.75
Margin on Sales	21.00%	58.00%
Investment rotation	1.45	0.85
Economic Profitability	23.00%	16.68%
Financial Profitability	29.00%	19.56%

Answer 1

Investment Rotation is a figure given in the table. This is a percentage of profits reinvested in the business and not paid out to the shareholders in form of dividends.

Answering all parts of the question

1. Liquidity Ratios - Both Current Ratio and Acid Test Ratio of the Company is higher than the liquidity ratios of the Sector ( Current Ratio of 1.89 for Company vs. 1.55 for sector). Similarly the acid ratio is higher for the Company at 1.42 vs. 1.20 for the sector. This indicates that the company has a higher liquidity than the sector averages.

2. Debt ratio of the Company at 1.75 is higher than 1.45 of the Sector which means that the Company is leveraged more than a similar company in the sector.

3. Margin on sales is higher at 58% vs. 21% for the sector. However the financial profitability is lower than the sector due to high leverage and higher possible debt cost.