Financial ratio Qn

QUESTION TEN: MFI test 2013/14 J Electronics assembles computer equipment from bought in components and distributes them to various wholesalers and retailers. The Finance Manager of the company has computed several ratios for the financial year ending 31" December 2012, which are as shown below together with the average ratios in the industry: J Electronics Industry average Return on capital employed 34.6% 22.1% Total assets turnover 3.8 times 1.8 times Gross profit margin 22.9% 30% Net profit (before tax) margin 7.7% 12.5% Current ratio 1.19:1 1.6:1 Quick ratio 0.64:1 0.9:1 Inventory holding period 54 days 46 days Accounts receivable collection period 48 days 45 days Accounts payable payment period 68 days 35 days Debt to equity 90% 40% Dividend yield 2.5% 6% (a) The Finance Manager has requested you to write a report analysing the financial performance and financial position of J Electronics based on a comparison with the industry averages (15 marks) (b) Ratio analysis can reveal most of the information about the company when it is used effectively. However, an analyst must be aware of the strengths and weaknesses of this method of evaluating the financial performance and financial position of an entity. Explain the strengths and weaknesses of this method (10 marks)