Uma Foodstuff Ltd. is a large chain of food stores. The financial statements for Uma Ltd. are given below. Income statement for the year ended 31 December 2021 2020 $m. $m. Revenue 145,000 160,000 Cost of sales 86,000 91,200 Gross profit 59,000 68,800 Selling and distribution expenses 17,500 17,600 Administrative expenses 7,500 6,400 Operating profit 34,000 44,800 Interest expense 2,000 400 Profit before taxation 32,000 44,400 Income tax expense 6,400 8,880 Net profit 25,600 35,520 Statement of financial position as at 31 December 2021 2020 $m. $m. ASSETS Non-current assets Land and buildings 40,000 68,600 Equipment 34,000 35,000 74,000 103,600 Current assets Inventories 20,000 12,000 Trade receivables 4,000 2,000 Cash 4,000 7,000 27,000 21,000 Total assets 102,000 124,600 EQUITY AND LIABILITIES Equity Share capital 54,000 75,600 Retained earnings 10,000 12,000 Total equity 64,000 87,600 Non-current liabilities Long-term borrowings 31,000 25,000 Current liabilities Trade payables 5,000 Short-term borrowings 7,000 7,000 7,000 12,000 Total equity and liabilities 102,000 124,600 Calculate and present the following ratios for the year 2021: a) Total assets turnover b) Average inventory turnover period c) Average settlement period for trade receivables
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
Uma Foodstuff Ltd. is a large chain of food stores. The financial statements for Uma Ltd. are given below.
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Income statement |
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for the year ended 31 December |
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2021 |
2020 |
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$m. |
$m. |
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Revenue |
145,000 |
160,000 |
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Cost of sales |
86,000 |
91,200 |
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Gross profit |
59,000 |
68,800 |
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Selling and distribution expenses |
17,500 |
17,600 |
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Administrative expenses |
7,500 |
6,400 |
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Operating profit |
34,000 |
44,800 |
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Interest expense |
2,000 |
400 |
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Profit before |
32,000 |
44,400 |
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Income tax expense |
6,400 |
8,880 |
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Net profit |
25,600 |
35,520 |
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as at 31 December |
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2021 |
2020 |
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$m. |
$m. |
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ASSETS |
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Non-current assets |
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Land and buildings |
40,000 |
68,600 |
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Equipment |
34,000 |
35,000 |
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|
74,000 |
103,600 |
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Current assets |
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Inventories |
20,000 |
12,000 |
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Trade receivables |
4,000 |
2,000 |
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Cash |
4,000 |
7,000 |
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|
27,000 |
21,000 |
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Total assets |
102,000 |
124,600 |
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|
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EQUITY AND LIABILITIES |
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Equity |
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Share capital |
54,000 |
75,600 |
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|
10,000 |
12,000 |
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Total equity |
64,000 |
87,600 |
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Non-current liabilities |
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Long-term borrowings |
31,000 |
25,000 |
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Current liabilities |
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Trade payables |
5,000 |
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Short-term borrowings |
7,000 |
7,000 |
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|
7,000 |
12,000 |
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Total equity and liabilities |
102,000 |
124,600 |
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- Calculate and present the following ratios for the year 2021:
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a) Total assets turnover |
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b) Average inventory turnover period |
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c) Average settlement period for trade receivables |
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d) Average settlement period for trade payables |
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e) Net profit margin |
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f) Gross profit margin |
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g) |
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h) |
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i) Current ratio |
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j) Quick ratio |
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k) Debt-to-equity ratio |
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l) Interest cover ratio |
- Using the ratios calculated in (1) and ratios below, compare the performance of Uma Ltd. between 2021 and 2020.
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2020 |
2019 |
Industry average |
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Total assets turnover (times) |
1.28 |
1.95 |
1.65 |
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Average inventory turnover period (days) |
32.20 |
30.50 |
38.00 |
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Average settlement period for trade receivables (days) |
6.15 |
6.05 |
6.50 |
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Average settlement period for trade payables (days) |
25.00 |
24.50 |
26.00 |
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Net profit margin |
21.90% |
23.00% |
18.00% |
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Gross profit margin |
43.00% |
43.20% |
41.00% |
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ROA |
28.50% |
29.40% |
27.00% |
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ROE |
40.50% |
51.40% |
50.00% |
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Current ratio (times) |
1.75 |
1.83 |
1.50 |
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Quick ratio (times) |
0.75 |
0.78 |
0.65 |
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Debt-to-equity ratio (times) |
0.42 |
0.48 |
0.55 |
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Interest cover ratio (times) |
112.00 |
115.00 |
50.00 |
- Evaluate the performance of Uma Ltd. over time using financial ratios with reference to relevant benchmarks above.
- Critically evaluate financial statements to assess organisational performance using a range of measures and benchmarks to make justified conclusions.
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