Part 1
The following information relates to Securitie Ltd.
|
2019 |
2020 |
|
|
Current ratio |
1.3:1 |
1.1:1 |
|
Acid test ratio |
0.7:1 |
0.5:1 |
|
Receivables turnover period |
45 days |
30 days |
|
Inventory turnover period |
92 days |
122 days |
|
Profit margin |
7% |
10% |
The industry averages for current ratio and acid test ratio are 1.5:1 and 0.9:1 respectively.
Required
(a)State whether each of the following ratios/turnover period has improved or worsened during the period 2019 – 2020:
I.Acid test ratio
II.Inventory turnover period
III.Profit margin
(b)Interpret the liquidity ratios and critically evaluate the company’s liquidity.
(c)For each ratio/turnover period that you identified to have worsened in Part (a), provide two possible reasons for why it has worsened.
(d)Discuss the possible reasons that explain the change in profit margin from 2019 to 2020.
Part 2
Securitie Ltd’s common size statements of financial performance for 2017 and 2018 are presented below. All amounts are expressed as percentage of revenue.
|
2017 |
2018 |
|
|
Revenue (all sales) |
100.0 |
100.0 |
|
Cost of sales |
73.6 |
65.0 |
|
Gross profit |
26.4 |
35.0 |
|
Expenses (including tax) |
17.6 |
19.8 |
|
Profit |
8.8 |
15.2 |
Required
(a)Critically evaluate the company’s profitability. Hint: you are expected to discuss all items as well as their relationships where appropriate.
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