QUESTION 2 (20 Marks) REQUIRED Use the information provided below to answer the following questions. (Answers to ratios must be expressed to two decimal places.) 2.1 Compare and comment on the profitability of both companies by using the following ratios: 2.1.1 Return on capital employed (4 marks) 2.1.2 Profit margin (Net profit margin) (4 marks) 2.2 Calculate the earnings retention ratio of both companies and explain how shareholders can benefit from a higher retention ratio. (6 marks) 2.3 Compare the two companies regarding the amount of debt that each company uses to finance its assets (as a percentage). (4 marks) 2.4 Suggest TWO (2) ways in which KLM Limited can improve its gross profit margin ratio, without increasing its selling prices. (2 marks) 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. Extract of Statement of Comprehensive Income for the year ended 31 December 2022 Sales Cost of sales Depreciation Other operating expenses Interest on loan Company tax KLM Limited R ZAP Limited R 6 800 000 2 000 000 4 600 000 864 000 280 000 40 000 260 000 50 000 180 000 60 000 414 400 276 080 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 R ZAP Limited R Non-current assets 1 960 000 1 240 000 Current assets Share capital Retained earnings Non-current liabilities (15%) Current liabilities Extract of Statement Changes in Equity for the year ended 31 December 2022 Dividends for the year 1715 000 2 000 000 410 000 1 000 000 240 000 1 020 000 80 000 460 000 415 000 110 000 KLM Limited ZAP Limited R518 000 R276 000