Question
The CEO intends to seek further funding for the project, by presenting the companys financial performance and standing to potential investors. Presented below are the
The CEO intends to seek further funding for the project, by presenting the companys financial performance and standing to potential investors. Presented below are the summarized accounts for TempoZoom.
TempoZoom
Income statement for the year ended 31 June 2021
| $000 |
Revenue | 40 500 |
Cost of sales | (15 000) |
Gross Profit | 25 500 |
Selling, Distribution and Administrative expenses | (10 500) |
Profit from operations | 15 000 |
Finance cost | (3 750) |
Profit before tax | 11 250 |
Tax expense | (2 500) |
Net profit for the period | 8 750 |
Statement of Financial Position as at 31 June 2021
| $000 | $000 |
Assets |
|
|
Non-Current Assets |
|
|
Other financial assets | 1 400 |
|
Property, plant and equipment | 9 100 |
|
Total non-current assets |
| 10 500 |
Current Assets |
|
|
Cash and cash equivalents | 2 400 |
|
Trade and other receivables | 1 100 |
|
Inventories | 1 200 |
|
Total current assets |
| 4 700 |
Total Assets |
| 15 200 |
|
|
|
Current Liabilities |
|
|
Trade and other payables | 2 300 |
|
Total current liabilities |
| 2 300 |
Non-current liabilities |
|
|
Long term borrowings | 3 800 |
|
Total non-current liabilities |
| 3 800 |
Total liabilities |
| 6 100 |
Equity |
|
|
Share capital | 350 |
|
Retained earnings | 8 750 |
|
Total equity |
| 9 100 |
Total liabilities and equity |
| 15 200 |
a. In addition to the financial statements presented above, key financial ratios indicating the profitability, efficiency and liquidity of the company for the past year has been compiled, together with their respective industry averages for benchmarking.
Calculate the ratio values (to one decimal place) for TempoZoom for the year ended 31 June 2021 as follows:
Ratios | Historical Data | Industry Average | |
| 2020 | 2021 | 2021 |
Operating Profit Margin (%) | 29.5 |
| 36.3 |
Return on Capital Employed (%) | 148.1 |
| 120.4 |
Quick/Acid Test ratio (%) | 1.3 |
| 1.4 |
Times Interest Earned (times) | 3.5 |
| 3.8 |
Debt ratio (%) | 0.3 |
| 0.3 |
(5 marks)
b. Interpret the following ratios for TempoZoom for the year ended 31 June 2021 to the CEO.
- Operating Profit Margin
- Return on Capital Employed
- Quick/Acid test ratio
- Times interest earned
- Debt ratio
(15 marks)
c. Critically discuss FIVE limitations of financial ratio analysis to the CEO. (5 marks)
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