Question
Element Sdn Bhd (Element) is a company which manufactures and sells plastic furniture. The directors have pursued a policy of rapid expansion since April 2019.
Element Sdn Bhd (Element) is a company which manufactures and sells plastic furniture. The directors have pursued a policy of rapid expansion since April 2019. A number of new products have been developed and market share has increased. Elements accounting department is finalising its accounting statements for the year ended 31 March 2021. These statements will be presented to the forthcoming meeting of the board of directors where the financial results for the year will be assessed. When reviewing the accounts, the directors will study four target ratios identified in loan covenants given to Elements bankers.
The target ratios set out in the contractual arrangements between Element and the bank are as follows:
Quick ratio | 1.1:1 |
Current ratio | 1.5:1 |
Interest cover | 9.5 times |
Debt to equity ratio | 0.5:1 |
The draft accounts are as follows:
ELEMENT SDN BHD
Statement of Financial Position as at 31 December
2020 | 2021 | |
RM'000 | RM'000 | |
Non-Current Assets: | ||
Property, Plant & equipment | 230,000 | 180,000 |
Total Non-Current Assets | 230,000 | 180,000 |
Current Assets: | ||
Inventories | 19,500 | 15,200 |
Account Receivables | 14,200 | 14,700 |
Cash & Cash equivalents | 8,240 | 12,400 |
Total Current Assets | 41,940 | 42,300 |
TOTAL ASSETS | 271,940 | 222,300 |
Equity & Liabilities | ||
Equity: | ||
Share Capital | 80,000 | 50,000 |
Share Premium | 10,000 | 5,000 |
Retained earnings | 65,290 | 63,500 |
Total Equity | 155,290 | 118,500 |
Non-Current Liabilities: | ||
Long Term Loan | 100,000 | 90,000 |
Total Non-Current Liabilities | 100,000 | 90,000 |
Current Liabilities: | ||
Account Payables | 15,900 | 13,300 |
Current Tax Payables | 750 | 500 |
Total Current Liabilities | 16,650 | 13,800 |
TOTAL EQUITY & LIABILITIES | 271,940 | 222,300 |
Other Relevant Information: | ||
Sales Revenue | 86,400 | 81,100 |
Cost of Goods Sold | 68,990 | 67,074 |
Administrative Expenses | 2,460 | 2,146 |
Distribution Costs | 4,750 | 4,080 |
Interest Expenses | 5,300 | 4,600 |
Income Tax | 710 | 400 |
Profit after Tax | 4,190 | 2,800 |
- Compute the following ratios for both years in relation to Element Sdn Bhd:
- Quick Ratio.
- Current Ratio.
- Times Interest Earned.
- Debt to Equity.
- Profit Margin.
- marks)
b. Prepare a detailed report to the Director of Element Sdn Bhd on the company's position and performance in terms of liquidity, profitability and solvency. Use the ratios calculated at (a) above as the basis for your commentary.
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