BUS4012 Introduction to Business Finance
We have solved other question from the coursework BUS4012 Introduction to Business Finance. To get the solution of questions, click question 2, question 3
Question 1
(i) Profitability Ratios:
Gross Profit Margin = Gross Profit / Sales Revenue
For the year 20X3: 30 / 190 =
15.79%
For the year 20X4: 43 / 200 =
21.50%
Net Profit Margin = Profit After Tax / Sales Revenue
For the year 20X3: 4 / 190 = 2.11%
For the year 20X4: 14 / 200 =
7.00%
Return on Equity (ROE) = Profit After Tax /
Shareholders' Equity
For the year 20X3: 4 / 71 = 5.63%
For the year 20X4: 14 / 78 =
17.95%
Current Ratio = Current Assets / Current Liabilities
For the year 20X3: 54 / 62 = 0.87
For the year 20X4: 66 / 60 = 1.10
Quick Ratio = (Current Assets - Stock) / Current
Liabilities
For the year 20X3: (54 - 24) / 62
= 0.48
For the year 20X4: (66 - 25) / 60
= 0.68
(iii) Gearing Ratios:
Debt to Equity Ratio = Total Liabilities /
Shareholders' Equity
For the year 20X3: (60 + 23) / 71
= 1.37
For the year 20X4: (60) / 78 =
0.77
Interest Coverage Ratio = Operating Profit / Interest
Payable
For the year 20X3: 10 / 2 = 5
For the year 20X4: 22 / 2 = 11
Inventory Turnover Ratio = Cost of Sales / Average
Inventory
For the year 20X3: 160 / ((24 +
25) / 2) = 13.16 times
For the year 20X4: 157 / ((25 +
25) / 2) = 12.56 times
Receivables Turnover Ratio = Sales Revenue / Average
Debtors
For the year 20X3: 190 / ((25 +
29) / 2) = 6.90 times
For the year 20X4: 200 / ((29 +
29) / 2) = 6.90 times
Asset Turnover Ratio = Sales Revenue / Total Assets
For the year 20X3: 190 / 94 = 2.02
times
For the year 20X4: 200 / 138 =
1.45 times
b) Comment upon the results of your
ratio analysis and AAA’s operating gearing ratio
Drawing from the computed ratios, I have formulated a series
of observations and remarks concerning the financial performance and standing
of AAA.
- Profitability ratios: The profitability ratios indicate that AAA experienced a favorable trend in its gross profit margin, which increased from 15.79% in 20X3 to 21.50% in 20X4. The net profit margin exhibited a notable increase from 2.11% during the fiscal year 20X3 to 7.00% in the fiscal year 20X4. This suggests that the organization has achieved enhanced profitability through efficient cost management and sales optimization. The company's return on equity (ROE) demonstrated a significant improvement, increasing from 5.63% in 20X3 to 17.95% in 20X4. This indicates that the company has successfully generated higher returns for its shareholders.
- Liquidity ratios: The liquidity ratios of the company were analyzed, and it was found that the current ratio exhibited an improvement from 0.87 in the year 20X3 to 1.10 in the year 20X4. This indicates that the company has enhanced its capacity to fulfill its immediate financial obligations. The quick ratio exhibited an improvement from 0.48 in 20X3 to 0.68 in 20X4, indicating an enhancement in the company's capacity to fulfill its immediate financial obligations without being dependent on its inventory.
- Gearing ratios: The gearing ratios of the company were analyzed, and it was observed that the debt-to-equity ratio experienced a noteworthy decline from 1.37 in the year 20X3 to 0.77 in the year 20X4. This indicates that the company has effectively decreased its dependence on debt as a means of financing its operations. The interest coverage ratio exhibited a positive trend, increasing from 5 in 20X3 to 11 in 20X4, which suggests an enhanced capacity of the company to meet its debt obligations.
- Efficiency ratios: The company's efficiency ratios were analyzed, revealing a slight decrease in the inventory turnover ratio from 13.16 times in 20X3 to 12.56 times in 20X4. This suggests that the company has demonstrated effective inventory management practices. The constancy of the receivables turnover ratio at 6.90 times suggests that the organization has been successful in maintaining a steady pace of debt collection. The asset turnover ratio exhibited a decline from 2.02 times in 20X3 to 1.45 times in 20X4, indicating a marginal reduction in the company's capacity to generate sales from its assets.
In general, the financial ratios of AAA indicate an
enhancement in the company's financial performance and standing from the year
20X3 to 20X4. It is noteworthy that the operating gearing ratio was not
furnished, and its inclusion would be advantageous in comprehending the
financial risk and leverage of the enterprise. The operating gearing ratio is a
metric that quantifies the degree to which a firm employs fixed expenses in its
business activities. This ratio can exert a substantial influence on a
company's level of profitability and exposure to risk.
c) Identify some of the key
advantages for AAA should they choose to invest in an effective, automated
bookkeeping system
The implementation of an efficient and automated bookkeeping
system is likely to offer AAA a number of significant benefits. For example;
- Increased efficiency: The automation of bookkeeping procedures can result in time-saving and error reduction, which are typically associated with manual data input. The delegation of certain tasks can potentially result in the optimization of staff time management, allowing for the allocation of resources towards other critical responsibilities, ultimately leading to enhanced productivity.
- Improved accuracy: Automated bookkeeping systems have the potential to mitigate the probability of human error, including but not limited to erroneous data entry, miscalculations, and misplaced receipts. The implementation of this approach may result in enhanced precision of financial statements and a decrease in the likelihood of non-compliance incidents and associated penalties.
- Improved accuracy: Automated bookkeeping systems have the potential to decrease the necessity for manual data entry, thereby leading to cost savings for AAA. Furthermore, the heightened precision and effectiveness may diminish the necessity for supplementary personnel or external accounting services.
- Better decision-making: Improved decision-making can be achieved through the implementation of an automated bookkeeping system, which can furnish AAA with up-to-date financial data and analytics, thereby facilitating prompt and effortless informed decision-making. This approach can aid the organization in recognizing prospective challenges and implementing necessary modifications to enhance its fiscal efficacy.
- Improved security: Enhanced security measures can be provided by automated bookkeeping systems, which encompass secure storage and backups, access controls, and encryption, thereby ensuring the safety of financial data. Implementing security measures can effectively mitigate the risk of unauthorized access and safeguard the financial information of the organization.
In general, the adoption of a proficient and automated bookkeeping system can yield substantial benefits for AAA, such as enhanced productivity, heightened precision, reduced expenses, superior decision-making, and enhanced security.