(Interpretation of Ratios) Ratunga Inc. manufactures and sells office furniture to business customers. It is listed on a stock exchange. A ratio analysis of its statement of comprehensive income and statement of financial position over the last four years has identified the following trends:
|
2012 |
2011 |
2010 |
2009 |
|
|
Sales growth |
10.0% |
8.5% |
8.0% |
7.0% |
|
Return on investment (ROI) |
5.0% |
4.8% |
4.5% |
4.1% |
|
Return on capital employed (ROCE) |
4.0% |
4.5% |
5.0% |
5.3% |
|
Operating profit/sales |
6.0% |
6.3% |
6.5% |
6.7% |
|
Gross profit/sales |
28.0% |
27.0% |
26.5% |
25.0% |
|
Working capital |
104.0% |
108.0% |
111.0% |
112.0% |
|
Acid test (quick ratio) |
68.0% |
72.0% |
73.0% |
77.0% |
|
Degree of operating leverage |
65.0% |
62.0% |
60.0% |
56.0% |
|
Interest cover |
1.7 |
1.9 |
2.1 |
2.3 |
|
Asset turnover |
108.0% |
105.0% |
99.0% |
94.0% |
|
Days” sales outstanding |
61.0 |
58.0 |
55.0 |
57.0 |
|
Inventory turnover |
15.0 |
13.0 |
13.0 |
12.0 |
|
Days” purchases outstanding |
72.0 |
68.0 |
64.0 |
61.0 |
|
Dividend per share |
10c |
10c |
10c |
10c |
|
Dividend payout ratio |
65.0% |
60.0% |
58.0% |
58.0% |
|
Dividend yield |
4.0% |
3.8% |
3.5% |
3.2% |
|
Price/earnings ratio |
9.6 |
8.5 |
8.2 |
7.7 |
- Explain how ratio analysis can be used to interpret business performance, with an emphasis on the different types of ratios that can be used.
- Use the above ratios to explain the strengths and weaknesses of the financial performance of Ratunga Inc. over the last four years.
Below is some information from the financial records of Cleereen Co.:
|
Accounts payable |
$ 18,000 |
|
Accounts receivable |
20,000 |
|
Bank overdraft |
5,500 |
|
Inventory |
45,000 |
|
Property, plant, and equipment |
150,000 |
|
Sales |
236,500 |