Conglong Limited is a manufacturing company. Conglong’s accountant has just calculated the ratios for the latest financial year and obtained industry averages for these ratios. However, the accountant is unable to provide any insight into what Conglong Limited’s ratios reveal when compared with the industry averages. The company’s ratios and the ratios for industry averages are detailed below. RatioConglong LimitedIndustry averagesRoCE15%36%Sales to total capital employed (Asset turnover)1.5 times3 timesOperating profit margin10%12%Gross profit40%30%Current ratio1 time2 timesQuick Acid ratio0.6 times1.6 timesInventory days60 days15 daysTrade receivables days60 days30 daysTrade payables days20 days30 daysInterest cover3 times5 times Required:Identify and explain the nature of five (5) challenges associated with the use of ratio analysis.

Ratio Analysis The purpose of calculating the Ratio analysis is to make the best rated…

Answered: Conglong Limited is a manufacturing…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Conglong Limited is a manufacturing company. Conglong’s accountant has just calculated the ratios for the latest financial year and obtained industry averages for these ratios. However, the accountant is unable to provide any insight into what Conglong Limited’s ratios reveal when compared with the industry averages.

The company’s ratios and the ratios for industry averages are detailed below.

Ratio	Conglong Limited	Industry averages
RoCE	15%	36%
Sales to total capital employed (Asset turnover)	1.5 times	3 times
Operating profit margin	10%	12%
Gross profit	40%	30%
Current ratio	1 time	2 times
Quick Acid ratio	0.6 times	1.6 times
Inventory days	60 days	15 days
Trade receivables days	60 days	30 days
Trade payables days	20 days	30 days
Interest cover	3 times	5 times

Required:

Identify and explain the nature of five (5) challenges associated with the use of ratio analysis.

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