Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2005 and 2006 are as follows:

Income statements for the year ended 30 June 2005 2006

£000 £000 £000 £000 Revenue 1,180 1,200 Cost of sales (680) (750)

Gross profit 500 450 Operating expenses (200) (208)

Depreciation (66) (75)

Interest (–) (8)

(266) (291)

Profit before tax 234 159 Tax (80) (48)

Profit after tax 154 111 Dividend – paid (70) (72)

Retained profit for year 84 39 Balance sheets as at 30 June 2005 2006 £000 £000 £000 £000 Non-current assets 702 687 Current assets Inventories 148 236 Receivables 102 156 Cash 3 4 253 396 Current liabilities Trade payables (60) (76)
Other payables and accruals (18) (16)
Tax (40) (24)
Bank overdraft (81) (122)
(199) (238)
Net current assets 54 158 Non-current liabilities Bank loan – (50)
756 795 Equity Ordinary share capital of £1 (fully paid) 500 500 Retained profits 256 295 756 795 Required:

(a) Calculate the following financial ratios for both 2005 and 2006 (using year-end figures for balance sheet items):
(i) return on capital employed;
(ii) net profit margin;
(iii) gross profit margin;
(iv) current ratio;
(v) acid test ratio;
(vi) settlement period for receivables;
(vii) settlement period for payables; and (viii) inventories turnover period.

(b) Comment on the performance of Threads Limited from the viewpoint of a business considering supplying a substantial amount of goods to Threads Limited on usual trade credit terms.