RATIO ANALYSIS (12 MARKS) Royal Ltd Statement of comprehensive income for the years ended 30 June 2019 and 30 June 2020 2019 $000 25,000 17,500 7,500 2020 $000 37,000 18,000 19,000 Sales revenue Cost of goods sold Gross profit Operating expenses Depreciation expense Amortisation expense Wages expenses Interest expense Other income Gain on sale of equipment Net profit before income tax expense Income tax expense Net profit after income tax expense 3,500 1,800 1,900 1,600 4,000 1,890 2,000 2,000 4,200 4,000 2,900 812 2,088 13,110 3,933 9,177 Royal Ltd Statement of financial position as at 30 June 2019 and 30 June 2020 2019 $000 2020 $000 CURRENT ASSETS Cash Accounts receivable 3,500 5.500 4,000 6.000 2019 $000 2020 $000 3,500 5,500 9,250 18,250 4,000 6,000 13,000 23,000 35,250 15,860 10,500 1,470 28,420 36,000 19,661 11,000 2,923 24,416 CURRENT ASSETS Cash Accounts receivable Inventories Total current assets NON-CURRENT ASSETS Plant and equipment (at cost) Accumulated depreciation - plant and equipment Intangible assets (at cost) Accumulated amortisation - intangible assets Total non-current assets TOTAL ASSETS CURRENT LIABILITIES Accounts payable Wages payable Interest payable Income tax payable Total current liabilities NON-CURRENT LIABILITIES Loans payable TOTAL LIABILITIES NET ASSETS 46,670 47,416 875 95 96 24 1,090 1,000 97 98 2,374 3,569 27,000 34,000 28,090 37,569 18,580 9,847 35,250 15,860 10,500 1,470 28,420 36,000 19,661 11,000 2,923 24,416 NON-CURRENT ASSETS Plant and equipment (at cost) Accumulated depreciation - plant and equipment Intangible assets (at cost) Accumulated amortisation - intangible assets Total non-current assets TOTAL ASSETS CURRENT LIABILITIES Accounts payable Wages payable Interest payable Income tax payable Total current liabilities 46,670 47,416 875 95 96 24 1,090 1,000 97 98 2,374 3,569 NON-CURRENT LIABILITIES Loans payable 27,000 34,000 28,090 37,569 TOTAL LIABILITIES NET ASSETS 18,580 9,847 14,864 3,716 18,580 4,020 5,827 9,847 EQUITY Share capital Retained earnings TOTAL EQUITY REQUIRED: (a) Calculate the following ratios for 2019 and 2020 using the formulas below (4 marks): Return on assets = (Earnings before interest and tax / End of the year assets) x 100. . Current ratio = Current assets / Current liabilities. REQUIRED: (a) Calculate the following ratios for 2019 and 2020 using the formulas below (4 marks): Return on assets = (Earnings before interest and tax / End of the year assets) x 100. Current ratio = Current assets / Current liabilities. Debt to equity ratio = End of year liabilities / End of year equity. Days inventory = (End of year inventory / Sales revenue) x 365. IMPORTANT: - For return on assets, please express it in percentage form with two decimal places. e.g., 12.43%. - For current ratio or debt to equity ratio, please express it with two decimal places. e.g., 1.23. - For days inventory, please round it to the nearest whole number. e.g., 12. (b) Based on the results of the ratios calculations and the additional benchmarks below, analyse the profitability, liquidity, financial structure and asset efficiency of the company, making sure you: identify the most likely reasons for the changes in ratios (based on the changes in the individual items that make up the nominator and denominator for each ratio rather than just focusing on the overall changes in those) (4 marks); compare the ratios against the theoretical benchmarks (2 marks); compare the ratios against the competitor's ratios (2 marks). The theoretical benchmarks are as follows: Return on assets = 10.00%; Current ratio = 1.00; Debt to equity ratio = 1.00; Days inventory = 20 days. The ratios for the competitor, President Ltd, are as follows: 2019 2020 Return on assets 27% 9.46% Current ratio 12.56 5.09 Debt to equity ratio 3.53 6.19 Days inventory 332 407