Question

Question 1

DMS Pte Ltd
Balance Sheet
As of 31 Dec 2018
Cash			$      150,000.00
Accounts Receivables			450,000.00
Inventories			300,000.00
Total Current Assets			$      900,000.00
Net Fixed Assets			1,500,000.00
Total Assets			$ 2,400,000.00
Accounts Payable			$      300,000.00
Long-term Debt			600,000.00
Total Liabilities			900,000.00
Common Stockholders' Equity		1,500,000.00
Total Liabilities and Equity		2,400,000.00

DMS Pte Ltd
Income Statement
As of 31 Dec 2018
Sales	$ 3,000,000.00
Less: Cost of Goods Sold	1,500,000.00
Gross Profit	$ 1,500,000.00
Less: Operating Expenses	600,000.00
Operating Profits	$      900,000.00
Less: Interest Expenses	90,000.00
Profit Before Taxes	$      810,000.00
Less: Taxes (20%)	$      162,000.00
Profit After Taxes	$      648,000.00

1. Given the industry average figures in the table below, compute the corresponding ratios of DMS Pte Ltd for 2018.

Ratios	Industry Average 2018	DMS Pte Ltd 2018
Current Ratio	2.20	3.00
Quick Ratio	1.50	2.00
Debt Ratio	50.0%	37.5%
Times Interest Earned	8.00	5.00
Gross Profit Margin	50.0%	50.0%
Operating Profit Margin	25.0%	30.0%
Net Profit Margin	12.0%	21.6%

2. Using the information and your answer in part (a), perform a cross-sectional analysis for DMS Pte Ltd in the following areas:
   1. Liquidity
   2. Financial Leverage
   3. Profitability

Answer 1

i]

The liquidity position indicated by current ratio (3.00) and quick ratio (2.00) is very good the short-term liabilities are more than sufficiently covered by short-term assets. The liquidity position is also much better than the industry average

ii]

Financial leverage is the use of debt in the capital structure. Higher debt means higher leverage. The debt ratio of 37.5% is much lower than the industry average of 50%. We can say that DMS Pte. Ltd. has lower leverage than the industry.

iii]

Profitability ratios are an indicator of profits earned for the level of sales or assets.

Gross profit margin of DMS is the same as industry average

Operating profit margin is somewhat higher than industry average

Net profit margin is substantially better than industry average