Conglong Limited is a manufacturing company. Conglong’s accountant has just calculated the ratios for the latest financial year and obtained industry averages for these ratios. However, the accountant is unable to provide any insight into what Conglong Limited’s ratios reveal when compared with the industry averages. The company’s ratios and the ratios for industry averages are detailed below. Ratio Conglong Limited Industry averages RoCE 15% 36% Sales to total capital employed (Asset turnover) 1.5 times 3 times Operating profit margin 10% 12% Gross profit 40% 30% Current ratio 1 time 2 times Quick Acid ratio 0.6 times 1.6 times Inventory days 60 days 15 days Trade receivables days 60 days 30 days Trade payables days 20 days 30 days Interest cover 3 times 5 times Required: Identify and explain the nature of five (5) challenges associated with the use of ratio analysis.
Conglong Limited is a manufacturing company. Conglong’s accountant has just calculated the ratios for the latest financial year and obtained industry averages for these ratios. However, the accountant is unable to provide any insight into what Conglong Limited’s ratios reveal when compared with the industry averages. The company’s ratios and the ratios for industry averages are detailed below. Ratio Conglong Limited Industry averages RoCE 15% 36% Sales to total capital employed (Asset turnover) 1.5 times 3 times Operating profit margin 10% 12% Gross profit 40% 30% Current ratio 1 time 2 times Quick Acid ratio 0.6 times 1.6 times Inventory days 60 days 15 days Trade receivables days 60 days 30 days Trade payables days 20 days 30 days Interest cover 3 times 5 times Required: Identify and explain the nature of five (5) challenges associated with the use of ratio analysis.
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter15: Financial Statement Analysis
Section: Chapter Questions
Problem 57P: Grammatico Company has just completed its third year of operations. The income statement is as...
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Question
Conglong Limited is a manufacturing company. Conglong’s accountant has just calculated the ratios for the latest financial year and obtained industry averages for these ratios. However, the accountant is unable to provide any insight into what Conglong Limited’s ratios reveal when compared with the industry averages.
The company’s ratios and the ratios for industry averages are detailed below.
|
Ratio |
Conglong Limited |
Industry averages |
|
RoCE |
15% |
36% |
|
Sales to total capital employed (Asset turnover) |
1.5 times |
3 times |
|
Operating profit margin |
10% |
12% |
|
Gross profit |
40% |
30% |
|
|
1 time |
2 times |
|
Quick Acid ratio |
0.6 times |
1.6 times |
|
Inventory days |
60 days |
15 days |
|
Trade receivables days |
60 days |
30 days |
|
Trade payables days |
20 days |
30 days |
|
Interest cover |
3 times |
5 times |
Required:
- Identify and explain the nature of five (5) challenges associated with the use of ratio analysis.
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