Explain the advantages and disadvantages of using ratio analysis to provide guidance to investors and other stakeholders on the financial conditions of a business. Explain the differences between risk and return, and how they affect each other in an investment decision. Use practical examples in your answer.
The following
BALANCE SHEET
|
|
2002 |
|
2003 |
|
|
Fixed Assets (NBV) |
|
$1,000,000 |
|
$1,800,000 |
|
Current Assets Stock |
$600,000 |
|
$1,600,000 |
|
|
Debtors |
$1,270,000 |
|
$1,800,000 |
|
|
Cash |
$140,000 |
$2,010,000 |
---------------- |
$3,400,000 |
|
Current Liabilities Bank Overdraft |
- |
|
$260,000 |
|
|
|
$120,000 |
|
$40,000 |
|
|
Trade Creditors |
$1,050,000 |
($1,170,000) |
$2,100,000 |
($2,400,000) |
|
Net Assets |
|
$1,840,000 |
|
$2,800,000 |
|
Capital and Reserves |
|
|
|
|
|
Ordinary Share capital Share premium |
$420,000 |
$500,000 |
$820,000 |
$600,000 |
|
Revaluation reserves |
- |
|
$300,000 |
|
|
|
$920,000 |
|
$1,080,000 |
|
|
|
|
$1,340,000 |
|
$2,200,000 |
|
Total Capital and Reserves |
|
$1,840,000 |
|
$2,800,000 |
INCOME STATEMENT
|
|
2002 |
2003 |
|
Sales revenue |
$8,400,000 |
$9,000,000 |
|
Cost of goods sold |
($6,300,000) |
($7,200,000) |
|
Gross Profit |
$2,100,000 |
$1,800,000 |
|
Operating Expenses |
($1,500,000) |
($1,600,000) |
|
Profit before taxation |
$600,000 |
$200,000 |
|
Taxation |
($120,000) |
($40,000) |
|
Profit for the year |
$480,000 |
$160,000 |
Required:
- Comment on the profitability and liquidity of the company revealed by the changes in the ratios over the two
- Calculate the following ratios and comment on the changes in the position of the company as revealed by the changes in the ratios over the two years:
Rate of stock turnover
Average days of credit granted to customers (Debtor days) Average days of credit allowed by suppliers (Creditors days)
- Explain the advantages and disadvantages of using ratio analysis to provide guidance to investors and other stakeholders on the financial conditions of a business.
- Explain the differences between risk and return, and how they affect each other in an investment decision. Use practical examples in your answer.
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