QUESTION FOUR

(a) Outline four limitations of the use of ratios as a basis of financial analysis. (4 marks)

(b) The following information represents the financial position and financial results of MIRANI Limited for the year ended 31 December 2002.

MIRANI Limited Trading, profit and loss account for the year ended 31 December 2002
	Sh.000	Sh.000
Sales Cash - Credit Less: cost of sales Opening stock Purchases Less: closing stock Gross profit Less expenses: Depreciation Directors emoluments General expenses Interest on loan Net profit before tax Corporation tax at 30% Net profit after tax Preference dividend Ordinary dividend Retained profit for the year	210,000 660,000 870,000 (150,000) 13,100 15,000 20,900 4,000 4,800 10,000	300,000 600,000 900,000 720,000 180,000 (53,000) 127,000 (38,100) 88,900 14,800 74,100

MIRANI Limited Balance Sheet as at 31 December 2002
	Sh.000	Sh.000	Sh.000
Fixed Assets Current Assets: Stocks Debtors Cash Current Liabilities: Trade creditors Corporation tax payable Proposed dividend	150,000 35,900 20,000 60,000 63,500 14,800	205,900 138,300	213,900 67,600 281,500
Financed by: Ordinary share capital (Sh.10 par value) 8% preference share capital Revenue reserves 10% bank loan		100,000 60,000 81,500 40,000	______ 281,500

Additional information:

1. The companys ordinary shares are selling at Sh.20 in the stock market.

2. The company has a constant dividend pay out of 10%.

Required:

Determine the following financial ratios:

Acid test ratio. (2 marks)

Operating profit ratio (2 marks)

Return on total capital employed (2 marks)

Price earnings ratio. (2 marks)

Interest coverage ratio (2 marks)

Total assets turnover (2 marks)

(c) Determine the working capital cycle for the company. (4 marks)