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QUESTION 4 [30 Marks] Picant Ltd assembles computer equipment from bought in components and distributes them to various wholesalers and retailers. It has recently subscribed to an agency that produces average ratios across many businesses. Below are the ratios that have been provided by the agency for Picant's business sector based on a year end of 31 August 2017 Return on capital employed Net asset turnover Gross profit margin Net profit (before tax) margin Current ratio Quick ratio Inventory holding period Accounts receivable collection period Accounts payable payment period Debt to equity Dividend yield Dividend cover 22.10% 1.8 times 30% 12.5% 1.6:1 0.9:1 46 days 45 days 55 days 40% 6% 3 times Picant's financial statements for the year to 31 August 2017 are set out below: Statement of comprehensive income for the year ended 31 August 2017 $ 000 Sales 7,275 Cost of sales (5,610) Gross profit 1,665 Other operating expenses (645) Operating profit 1,020 Finance costs (102) Exceptional item (note (0) (360) Profit before taxation 558 Income tax (270) Profit for the period 288 Dividend paid (Interim $180,000;Final $ 90,000) (270) Profit transferred to retained earnings 18 Statement of financial position as at 31 August 2017 $ 000 $ 000 Fixed assets: Property, Plant & Equipment Current assets: Inventory Accounts receivables Bank Total assets 1,620 825 960 1.785 3,405 Equity: Ordinary shares (25 cents each) Retained earnings 450 555 1,005 Non-current liabilities 8% loan notes 900 Current liabilities Bank overdraft Trade accounts payable Taxation Total equity and liabilities 195 1,050 255 1,500 3,405 Notes: (1) The exceptional item in the SOCI relates to losses on the sale of a batch of computers that had become worthless (obsolete stock) due to improvements in microchip design; (ii) The market price of Picant's shares throughout the year averaged $ 6.00 each. (iii) The carrying value of the fixed assets represents only 15% of their original cost. Required: (a) Calculate the ratios for Picant equivalent to those provided by agency firm. [12 Marks] (b) Write a report analyzing the financial performance of Picant based on a comparison with the sector averages. [12 Marks) Explain the limitations of ratio analysis, [6 Marks] Page 9 of 9