Table 2: Financial ratios for the industry

Financial ratios for the industry Industry Average

Return on capital employed 18.50%

Net profit margin 15.00% Gross profit margin 35.23%

Volume of trade 1.5

Current ratio 1.90 Acid test ratio 1.27 Debtors collection period 30 days

Creditors payment period 49 days

Inventory turnover Gearing 0.327 Net dividend 0.05 Dividend cover 6 times Interest cover 15 times Earnings per share 0.20 PE ratio 6

With reference to table 2 and to the answers you calculated in question 1, write an evaluation in which you compare and contrast the financial performance of the two companies in the following areas:

1. a) Profitability
2. b) Management of working capital and liquidity
3. c) Investment potential

Question 3 (400 words)

Identify additional information (i.e. data not contained in tables 1 and 2) which would be useful in evaluating the performance of the two companies.

Question 4 ( 600 words)

As a financial accounting technique, ratio analysis has limitations in addition to its beneficial applications. Do you agree? Explain why.