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NuWell Trading Ltd. - Financial Ratios

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NuWell Trading Ltd.

a) Calculate 1. Current ratio 2. Inventory turnover 3. Interest Cover Ratio 4. Return on Ordinary shareholders' equity 5. Earnings per ordinary share 6. Price/earning ratio

b) Based on the ratios computed, comment on NuWell's financial position and the attractiveness of its ordinary shares to investors.

c) Your friend Mr. Tan, an investor, does not believe in ratio analysis because he thinks that it is not foolproof. What could be the limitations of ratio analysis? Explain.

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Solution Summary

This solution is comprised of a detailed explanation and calculation to find the financial ratios and NuWell's financial situation.

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NuWell Trading Ltd.

1. Current ratio

For the year 2006 current ratio = current assets/current liabilities
= 296,800/164,800
= 1.80

For the year 2005 current ratio = current assets/current liabilities
= 305,600/178,400
= 1.71

2. Inventory turnover.

For the year 2006 Inventory turnover. = Sales
Average Inventories

= 369,600
[(117,600 + 129,600)/2]

= 2.99

For the year 2005 Inventory turnover. = Sales
Average Inventories

= 341,600
[(129,600 + 165,600)/2]

= 2.31

3. Interest Cover Ratio

For the year 2006 Interest Cover Ratio = Earnings before interest and tax
Interest charges

= 77,600
8,800

= 8.82

For the year 2005 Interest Cover Ratio = Earnings before interest and tax
Interest charges

= 60,000
9,600

= 6.25

4. Return on Ordinary shareholders' equity

For the year 2006 ...

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