Explain the advantages and disadvantages of using ratio analysis to provide guidance to investors and other stakeholders on the financial conditions of a business. Explain the differences between risk and return, and how they affect each other in an investment decision. Use practical examples in your answer.
The following balance sheet and Income statement relate to XYZ Plc:
BALANCE SHEET
|
|
2002 |
|
2003 |
|
|
Fixed Assets (NBV) |
|
$1,000,000 |
|
$1,800,000 |
|
Current Assets Stock |
$600,000 |
|
$1,600,000 |
|
|
Debtors |
$1,270,000 |
|
$1,800,000 |
|
|
Cash |
$140,000 |
$2,010,000 |
---------------- |
$3,400,000 |
|
Current Liabilities Bank Overdraft |
- |
|
$260,000 |
|
|
|
$120,000 |
|
$40,000 |
|
|
Trade Creditors |
$1,050,000 |
($1,170,000) |
$2,100,000 |
($2,400,000) |
|
Net Assets |
|
$1,840,000 |
|
$2,800,000 |
|
Capital and Reserves |
|
|
|
|
|
Ordinary Share capital Share premium |
$420,000 |
$500,000 |
$820,000 |
$600,000 |
|
Revaluation reserves |
- |
|
$300,000 |
|
|
|
$920,000 |
|
$1,080,000 |
|
|
|
|
$1,340,000 |
|
$2,200,000 |
|
Total Capital and Reserves |
|
$1,840,000 |
|
$2,800,000 |
INCOME STATEMENT
|
|
2002 |
2003 |
|
Sales revenue |
$8,400,000 |
$9,000,000 |
|
Cost of goods sold |
($6,300,000) |
($7,200,000) |
|
Gross Profit |
$2,100,000 |
$1,800,000 |
|
Operating Expenses |
($1,500,000) |
($1,600,000) |
|
Profit before taxation |
$600,000 |
$200,000 |
|
Taxation |
($120,000) |
($40,000) |
|
Profit for the year |
$480,000 |
$160,000 |
Required:
- Comment on the profitability and liquidity of the company revealed by the changes in the ratios over the two
- Calculate the following ratios and comment on the changes in the position of the company as revealed by the changes in the ratios over the two years:
Rate of stock turnover
Average days of credit granted to customers (Debtor days) Average days of credit allowed by suppliers (Creditors days)
- Explain the advantages and disadvantages of using ratio analysis to provide guidance to investors and other stakeholders on the financial conditions of a business.
- Explain the differences between risk and return, and how they affect each other in an investment decision. Use practical examples in your answer.
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