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    Balance Sheet Accounting Ratios for a car-manufacturing company

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    "A" Plc is a car-manufacturing company. The profit and loss account and balance sheet for the year ended 31st March 2007 are shown below with comparative figures for 2006.

    "A" Plc
    Profit and Loss Account
    For the year ended 31st March 2007

    2007 2006
    ?000s ?000s ?000s ?000s
    Turnover 950 620
    Cost of sales 250 190
    Gross Profit 700 430
    Distribution costs 90 65
    Administrative expenses 80 50
    170 115
    Operating profit 530 315
    Interest payable 140 150
    Profit before taxation 390 165
    Taxation 170 120
    Profit after taxation 220 45
    Dividends (proposed) 50 25
    Retained profit 170 20

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    Solution Preview


    Kindly see the attached file for calculations

    The following ratios will help in knowing the profitability and about the Return on its investments:

    Profitability ratios try to measure how profitable the firm is. Note that their success in this endeavor depends on how accurately the financial statements reflect reality. They include the profit margin on sales, basic earning power, return on total assets (ROA) and return on common equity (ROE).
    ? Profit Margin on Sales = Net Income available to Common Shareholders / Sales
    ? Gross Margin on Sales = Gross Operating margin / Sales

    ? Return on Equity = Net Income available to Common Shareholders / Common Equity
    The profitability ratios, indicates a company's financial health and how effectively the firm is being managed to earn a satisfactory profit and return on investment.

    Debt Management ratios measure the utilization of financial leverage by the firm and, indirectly, the level of risk the firm faces. They include the debt ratio, time-interest- earned ratio
    ? Debt Ratio = Total Liabilities / Total Assets
    ? Times-Interest-Earned Ratio = EBIT / Interest Charges

    a) Using accounting ratios, critically evaluate the overall performance of "A" plc for the years ended 31st March 2007 and 2006.
    A's profitability has increased to 20.56%in 2007 from 5.42% in 2006. Other profit ratios have also increased. Hence its performance has improved
    (For details refer excel file)
    The debt management ratios, measures the company's ability to meet its obligations as they become due. ConAgra has higher interest coverage at 3.79 times, lower leverage ratio at .46 which indicates high safety. As a lender you will s prefer to see a low debt ratio because there is a greater cushion for creditor losses if the firm goes bankrupt. Its debt equity ratio is low. This is positive for the company.
    Improved current ...

    Solution Summary

    A balance sheet accounting ratios for a car-manufacturing company is discussed. The profit and loss account is for the year end is determined.