INFORMATION

Extracts for the year ended 31 December 2022 of the Statement of Comprehensive Income and Statement of Financial Position are given below for two companies viz. KLM Limited and ZAP Limited

Statement of Comprehensive Income

	KLM Limited	ZAP Limited
Sales	6 800 000	2 000 000
Cost of sales	4 600 000	864 000
Depreciation	280 000	40 000
Other operating expenses	260 000	50 000
Interest on loan	180 000	60 000
Company tax	414 000	276 050

Note: All the income and expenses of both companies are included in the figures above.

Extract of Statement of Financial Position as at 31 December 2022

	KLM Limited	ZAP Limited
Non-current assets	1 960 000	1 240 000
Current assets	1 715 000	410 000
Share capital	2 000 000	1 000 000
Retained earnings	240 000	80 000
Non-current liabilities (15%)	1 020 000	460 000
Current liabilities	415 000	110 000

Extract of Statement Changes in Equity for the year ended 31 December 2022

	KLM Limited	ZAP Limited
Dividends for the year	R518 000	276 000

Use the information provided above to answer the following questions. (Answers to ratios must be expressed to two decimal places.) Compare and comment on the profitability of both companies by using the following ratios:

1. Return on capital employed
2. Profit margin (Net profit margin)
3. Calculate the earnings retention ratio of both companies and explain how shareholders can benefit from a higher retention ratio.
4. Compare the two companies regarding the amount of debt that each company uses to finance its assets (as a percentage).
5. Suggest TWO (2) ways in which KLM Limited can improve its gross profit margin ratio, without increasing its selling prices.