Assignment number two

Based on Horizon limited financial statements compute all the ratio

Discussed in this chapter for the Year 20X0 interpret it. Assume the
following for 20X0 in $ million
• Beginning inventory = 108

• Beginning total assets = 444

• Beginning fixed assets = 290

• Beginning debtors = 72

• Total equity = 240

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 Horizon limited balance sheet as on 31st December $ million

1.Sources of Funds 20X1 20X0

a)Shareholders found 262 256

Share capital 150 150

Reserves &surplus 112 106

b)Loan Funds

i)secured loans 143 131

Due after 1 year 108 29

Due within 1year 35 40

ii)Unsecured loans 69 25

Due after 1year 29 10

Due within 1 year 40 15

Current liabilities 105 81

&provisions

Total 579 501

2.Application of founds

a)Fixed Assets 330 290

b)Investment 15 15

Long term investments 12 12

Current investments 3 3

c)Current assets: 234 196

i)Inventories 105 108

ii)Sunday debtors 114 72

iii)Cash &bank balance 10 6

iv)loans &advances 5 10

Total 579 501

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N.B To calculate all ratio I have used to Horizon limited balance
sheet 20X0 and income statement of 20X2.
1. Liquidity

A. Current ratio = current assets/current liabilities

Current assets= cash & bank balance +sundry debtors +Inventory

+current investment.

10 +6+72 + 108 +3= 199

Current liabilities = current liabilities + secured +unsecured

81 + 15 +40. = 136

Current ratio = current assets/current liabilities

= 199/136 = 1.46 where analyzing these ratio, we

can see that company has current ratio of 1.46 indicating that has $1.46
in current assets for every $1.46 in current liabilities. This suggests that
company should be able to meet its short term Obligation.

B. Acid test ratio = (current assets - inventory)/current liabilities

= (199-108)/ 136 = 0.669 , A company should maintain

an acid test ratio of at least as many current assets as current liabilities.
A company with an acid test ratio below 1.0 may be in danger of
defaulting on its short term Obligation.

C. Cash ratio= (cash and cash equivalent)/current liabilities

= (10+3)/136 = 0.0956 , the cash ratio 0.0956 means it is less

than 1, there are more current liabilities than cash and cash equivalents.
It means insufficient cash on hand exists to pay of short term debt. This
may not be bad it is the company has a long credit terms with its
suppliers, efficiently managed inventory and very little credit extended
to its customers

2. Leverage ratio

A. Debt-equity ratio= total debt/total equity

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 Total debt = all debt + short term + long term

131+ 25+ 81= 237

Total equity=240 it's given

Debt-equity ratio = Total debt/total equity = 237/240= 0. 99

It has a debt to equity ratio of 0.99, it means that it uses 0 .99 of debt
financing for every $1 of equity financing, they use more equity than
debt.

B. Debt - assets ratio = Total debt / total asses

Total assets = fixed assets + investment s + inventory + debtor +cash

bank balance + loan & advance

= 290 + 15 + 196 =501

Debt-assets ratio= 237/501 =0.473 a debt ratio of $ 0.473 means that a

firm has $0.473 of equity for every dollar of debt or a debt ratio of $
0.473 means a firm has $ 0.45 of current liabilities for every dollar of
current assets.

C. Interested coverage ratio. = (Profit before interest and

taxes)/interest expenses

= 105/22 = 4.772 a high interest coverage ratio means that the firm
can meet its interest burden.

D. Fixed charge ratio = [(profit before interest & taxes +

depreciation)/ interest expenses] + (repayment of loan/1-tax rate)

assume that Horizon's tax rate to be 50 percent, the fixed charge ratio is

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 (105+26) /22+(75/1-0.5) = 132/172 = 0.761.

=0.762 The fixed charge ratio 1.25 or higher

preferred as healthy, however the fixed charge ratio should be used with
care.

E. Debt service coverage ratio= net operating income/total debt

service.

net operating = revenue - certain operating expense

revenue is total amount of money earned from product sales.

623-49 = 574

Debt service coverage ratio is 574/228 =2.517 debt service

coverage ratio means that the net operating income needs to be 251.7%
or 2.517 times the amount of the annual loan payments.

3. Turnover ratio

A .Inventory turnover ratio = Cost of Goods sold / Average inventory

=475/(105+108)/2 = 475/106.5 = 4.460

With an inventory of the 4.460, the company knows that it's inventory
was sold and replaced 4.460 times in the past quarter . This is a much
higher inventory turnover rate , but it is with in the range that is
considered healthy for an ecommerce business.

B. Debtor turnover ratio = Net credit sales/Average Account Receivable.

= 623/(114+72)/2 = 623/93 = 6.699

The higher value of the Debtor turn over ratio the more efficient is the
management of Debtors or more liquid the Debtors are , better the
company is in terms of collecting their accounts receivable.

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C. Average of collection period = 365/ Debtor

= 365/6.699 = 54.486

This company Average collection period was longer say more than 54
days the it would need to adopt more aggressive collection policy to
shorten that time frame other wise . It may find is self falling short when
it comes to paying its own debts.

D. Fixed asset Turnover ratio. = net sales / Average fixed asset.

= 623/(234+196)/2 = 623/332 = 1.876, therefore, the fixed

asset ratio of company is 1.876 . This means that for this period , for
this period, for every dollar of fixed assets Horizons plc owned , it
generated $1.876 of net sales.

E. Total assets turnover. = Net sales/ Average total assets

623/(579+ 501)/2.... = 623/540 = 1.154 this means that the

value of the assets used is lower than the income generated from them,
which speaks its has efficiency .The company therefore uses its assets
efficiency to generate income.

4. Profitability ratio.

A. Gross profit margin = Gross profit /net sales

148/623 = 0.237x100 = 23.7 %.Gross profit margin ratio 50

to 70% would be considered healthy, in some industries and business
models, a Gross margin of up to 90% can achieved. Gross margins of
less than 23.7% can be dangerous for businesses with high gross cost.

B. EBITDA = earning before interest, taxes, depn, amort/ net sales

(105+26)/623 = 0.23x100 = 23%. A good margin will

vary considerably by industry , but general rule of thumb , a 10% net

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profit margin is considered average , a 23% margin is considered high or
good .

C. Return profit margin = net profit/ net sales

42/623 = 0.067, 6.7% of profit margin would mean a

company had a profit of 0.67 for every dollar of revenue generate.

D. Return on assets. = net profit/ Average total assets

= 42/ (579+501)/2 = 42/540 =0.077x100 =7.7%.

A ROA of the over 5% is considered good and over 20% excellent, so the
7.7% is good ROA.

E. Return on Equity = net income/ Average equity

42/(262+256)/2 = 42/259 =0.162

0.162x100 = 16.2 % return on equity would be 16.7%. In general, it’s

hard to compare ROE ratios across industries because such industries
have different investments, debt level and income, but for most
industries, economists consider an ROA of 15% or more as healthy.

5. Valuation

A. price - earnings ratio = market price per share/ earning per share

= 20/2.80 = 7.142 in other words , a company's P/E

ratio is how much investors pay per dollar of annual company's P/E ratio
is 7, that means its its shares cost 7 times the profit it makes on a per-
share basis in a year .

B. EV-EBITDA ratio = EV/ EBITDA

to calculate a company's EV is net sales + cost of goods sold

+wages and salaries +retained earning +depreciation + interest
=623+475+55+15+26 +22 = 1216

EBITDA is gross profit +total expense +earning before tax +taxes + net
earning = 48 +2.8 +105 + 41 + 42 = 238.8

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 EV- EBITDA = 1216/238.8 =5.O9 the value is below 10 is commonly
interpreted a healthy.

C. Market value to book value ratio = market value per share/ book
value per share

20/17.07 = 1.171 a company is undervalued or in a declining

business if the value of market book to book ratio is 1 or less.

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