- 20 Marks
Question
Below are the statements of financial position of Onye Nigeria Plc as at October 31, 2020, and an extract from the statement of profit or loss for the year ended on that date.
Onye Nigeria Plc
Statement of Financial Position as at October 31, 2020
| Item | 2020 (N’000) | 2019 (N’000) |
|---|---|---|
| Non-current assets | ||
| Property, plant and equipment | 8,325 | 6,435 |
| Current assets | ||
| Inventories | 2,880 | 2,205 |
| Trade receivables | 5,535 | 4,860 |
| Cash and bank | 360 | 540 |
| Total Assets | 17,100 | 14,040 |
| Equity and Liabilities | ||
| Equity | ||
| Ordinary share capital | 3,600 | 3,600 |
| Retained earnings | 5,603 | 3,938 |
| Non-current liabilities | ||
| 10% loan notes | 3,600 | 2,700 |
| Current liabilities | ||
| Trade payables | 3,375 | 3,105 |
| Bank overdraft | 495 | 360 |
| Taxation | 135 | 90 |
| Accrued expenses | 292 | 247 |
| Total Equity and Liabilities | 17,100 | 14,040 |
Onye Nigeria Plc
Extracts from Statement of Profit or Loss for the Year Ended October 31
| Item | 2020 (N’000) | 2019 (N’000) |
|---|---|---|
| Revenue | 50,400 | 43,875 |
| Cost of sales | (38,070) | (30,713) |
| Profit before taxation | 2,093 | 1,440 |
Additional information:
- The profit before tax is after charging:
Item 2020 (N’000) 2019 (N’000) Depreciation 1,620 1,620 Interest on loan note 360 270 Interest on bank overdraft 68 41 Audit fees 54 45 - The latest industry average ratios are as follows:
Ratio Industry Average ROCE 18.50% Net profit margin 4.73% Gross profit margin 35.23% Assets turnover 3.91 times Current ratio 1.90:1 Quick ratio 1.27:1 Trade receivables period 52 days Trade payables period 49 days Inventory turnover 18.30 times Gearing ratio 32.71%
Required:
a. Calculate the above ratios of Onye Nigeria Plc for the years 2019 and 2020. (10 Marks)
b. Analyze the performance and liquidity of Onye Nigeria Plc for the year 2020. (5 Marks)
c. Comment on the limitations of using accounting ratios in financial statement analysis. (5 Marks)
Answer
(a) Computation of ratios of Onye Nigeria Plc for years 2019 and 2020
b. Analysis of Performance and Liquidity of Onye Nigeria Plc for Year 2020
- Performance:
- The ROCE of 19.16% in 2020 indicates a strong return on capital, above the industry average of 18.50%.
- The Net Profit Margin of 4.15% shows an improvement compared to 3.29% in 2019, indicating better cost control or increased pricing power.
- The Gross Profit Margin of 24.46% reflects a healthy profit margin, although it is lower than the industry average (35.23%), indicating potential cost issues in sales or production.
- Liquidity:
- The Current Ratio of 2.04:1 suggests strong liquidity, above the industry average of 1.90:1, indicating that the company can cover its short-term liabilities comfortably.
- The Gearing Ratio of 28.12% is within an acceptable range, indicating low financial risk and reliance on debt financing.
c. Limitations of Using Accounting Ratios in Financial Statement Analysis
- Historical Data:
Ratios are based on historical financial data, which may not accurately reflect the current financial situation or future performance of the company. - Industry Variability:
Different industries have different norms for financial ratios, making it difficult to compare ratios across industries. Ratios may not be meaningful if industry averages are not considered. - Manipulation of Accounts:
Companies may use accounting practices to manipulate figures, affecting the reliability of ratios derived from the financial statements. - Qualitative Factors Ignored:
Ratios provide quantitative analysis and may overlook qualitative factors such as management effectiveness, brand strength, or market conditions that can significantly impact a company’s performance. - Economic Changes:
Ratios may become outdated quickly due to economic changes, market dynamics, or regulatory adjustments that affect financial performance.
- Tags: Current Ratio, Financial Ratios, Net Profit Margin, Performance Analysis, ROCE
- Level: Level 2
- Topic: Presentation of Financial Statements (IAS 1)
- Series: NOV 2021
- Uploader: Kwame Aikins