# Financial Reporting And Analysis - Financial Reporting And Analysis Section 2

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 As at June 30 \$‘000s Cash 800 Accounts receivable 700 Inventory 2,500 Accounts payable 500 Taxes payable 300 Installment loan payable,due in two equal annual payments on Dec 31 800

• Option : C
• Explanation : Current ratio = Current assets / Current liabilities
The higher the current ratio, the more liquid the company. Thus, with a current ratio of 3.33 (4,000 ÷ 1,200), the company is more liquid than the industry, with a current ratio of 3.00.

 Operating profit margin 23.8% Net profit margin 14% Total asset turnover 0.9 Return on assets 12.6% Financial leverage 1.88 Debt to equity 0.88

• Option : A
• Explanation : ROE = ROA * Financial leverage = 12.6% x 1.88 = 23.7%.

 Company (£) Common Size IndustryData (% of sales) EBIT 100,000 22.0 Pretax profit 85,500 18.2 Net Income 74,200 13.5 Sales 350,000 100 Total assets 650,000 150 Total equity 400,000 65.5 ROE 18.6% 20.6%

• Option :
• Explanation : As shown below, the company’s financial leverage is lower that the industry’s leverage. The low ROE of the company is most likely because it has low financial leverage. Company Industry Tax burden ratio 74.2/85.5 = 0.87 13.5/18.2 = 0.74 Financial leverage 650/400 = 1.625 150/65.5 = 2.29 Interest burden ratio 85.5/100 = 0.855 18.2/22 = 0.83

 ROA 5.6% Total asset turnover 2.12 Financial leverage 1.89 Dividend payout ratio 52.3%

• Option : B
• Explanation : Sustainable growth rate = retention ratio (b) × ROE.
b = 1 - Dividend payout ratio = 1 - 0.523 = 0.477
ROE = ROA x Financial leverage = .056 x 1.89 = 0.10584
Sustainable growth rate = b x ROE = 0.477 x 0.10584 = 0.0505 = 5.05%.