- 6 Marks
Question
The Board of Directors of Suncity Limited are reviewing the performance of their business for the year 2014 and are considering using ratio analysis for this purpose. You have been presented with the following statement of comprehensive income for the years 2013 and 2014:
| 2014 (GH₵’000) | 2013 (GH₵’000) | |
|---|---|---|
| Sales | 42,000 | 30,000 |
| Less: cost of sales | 33,200 | 21,500 |
| Gross profit | 8,800 | 8,500 |
| Operating expenses | 2,750 | 2,120 |
| Profit before finance charges | 6,050 | 6,380 |
| Finance charges | 500 | 700 |
| Profit before tax | 5,550 | 5,680 |
| Taxation | 1,110 | 1,136 |
| Profit after tax transferred to income surplus | 4,440 | 4,544 |
Required:
i. Compute common size ratios for Suncity Limited for 2013 and 2014 (4 marks)
ii. Comment on any four of the ratios computed (2 marks)
Answer
i. Common Size Ratios for Suncity Limited:
| Ratio | 2014 | 2013 |
|---|---|---|
| Sales | 100% | 100% |
| Cost of Sales | 79% | 72% |
| Gross Profit | 21% | 28% |
| Operating Expenses | 7% | 7% |
| Profit Before Finance Charges | 14% | 21% |
| Finance Charges | 1% | 2% |
| Profit Before Tax | 13% | 19% |
| Taxation | 3% | 4% |
| Profit After Tax | 11% | 15% |
ii. Comments on the Ratios:
- Gross Profit Margin: Decreased from 28% in 2013 to 21% in 2014, indicating a possible increase in cost of sales or pricing pressures.
- Operating Profit Margin: Reduced from 21% to 14%, suggesting that operating efficiency may have declined, or operating costs increased.
- Profit After Tax Margin: Decreased from 15% to 11%, which could be due to increased cost of sales, higher expenses, or reduced revenue growth.
- Cost of Sales Ratio: Increased from 72% in 2013 to 79% in 2014, indicating higher production or procurement costs impacting overall profitability.
- Tags: Common Size Ratios, Financial Performance, Ratio Analysis, Vertical Analysis
- Level: Level 2
- Topic: Business valuations
- Series: NOV 2015
- Uploader: Kwame Aikins