22.4 Given the following financial statements, historical ratios, and industry averages calculate the Zeta Company’s financial ratios for the most recent year. Analyse its overall financial situation from both a time series and a cross-sectional viewpoint. Your analysis should cover the firm’s liquidity, solvency and profitability.

Profit and loss account for the year ended 31 December 20X3 Net sales

£

£

Cash 300,000 Credit 9,700,000 Total 10,000,000 Less: Cost of goods sold*

7,500,000 Gross profit Less: Operating expenses 2,500,000 Selling expense 300,000 General and administration 700,000 Depreciation 200,000 1,200,000 Operating profit 1,300,000 Less: Interest expense 200,000 Profit before taxes 1,100,000 Less: Taxes (50%)

550,000 Profit after taxes 550,000 Less: Preference dividends 50,000 Earnings available for ordinary shareholders 500,000 Less: Ordinary share dividends 200,000 To retained earnings Credit purchases = £6,200,000.

Balance sheet as at 31 December 20X3 £ £
Fixed assets, at cost 12,000,000 Less: Accumulated depreciation 3,000,000 Other assets Current assets Stock 950,000 Debtors 800,000 Investments 50,000 Cash 200,000 2,000,000 Less: Current liabilities Trade creditors 900,000 Other creditors and accruals 100,000 Short-term loans 200,000 1,200,000 5% Preference shares Ordinary shares of 75p Share premium account Retained earnings Long-term debt £
9,000,000 1,000,000 800,000 £10,800,000 1,000,000 3,000,000 2,800,000 1,000,000 7,800,000 3,000,000 £10,800,000 Zeta Co. Ltd Historical data Industry average 20X1 20X2 20X3 Current ratio 1.40 1.55 1.85 Net working capital £760,000 £720,000 £1,600,000 Quick ratio 1.00 0.92 1.05 Average age of debtors 45.0 days 36.4 days 35.0 days Stock turnover 9.52 9.21 8.60 Creditors’ payment period 58.53 days 60.75 days 45.75 days Debt/equity ratio 0.25 0.27 0.39 Gross profit ratio 0.30 0.27 0.25 Operating profit to sales 0.12 0.12 0.10 Net profit to sales 0.056 0.056 0.048 Total asset turnover 0.74 0.80 0.74 Return on capital employed*
0.11 0.12 0.10 Earnings per share 70p 90p 60p Dividends per share 21p 30p 20p Book value per share 140p 150p 175p Times interest covered 8.2 7.3 8.0 * Profit before tax attributable to ordinary shareholders ordinary shareholders’ equity.