The financial statements of companies ABC and XYZ Ltd are presented below. They are wholesalers in the fast-moving consumer goods (FMCG) market. Credit sales equate to 60% of sales value for both companies and credit purchases equate to 50% of cost of sales for both companies.

Income Statement for Year Ended 31 December 2022
                                        ABC Ltd              XYZ Ltd
R R
Sales                              500 000              450 000
Cost of sales                300 000               280 000
Gross profit                  200 000               170 000
Operating expenses 100 000                   90 000
Operating profit          100 000                 80 000
Interest expense          25 000                 15 000
Profit before tax            75 000                65 000
Tax                                 21 000                 18 200
Profit after tax                54 000               46 800

Balance Sheet for the Year Ended 31 December 2022
Non-Current Assets     1 100 000             1 150 000
Buildings                            800 000              750 000
Equipment                       300 000                400 000
Current Assets                   700 000               500 000
Inventory                           250 000                  200 000
Debtors                           300 000                   200 000
Bank                                 150 000                  100 000
Total Assets                    1 800 000              1 650 000
Equity and Liabilities
Equity                              750 000                   650 000
Share Capital                   200 000                100 000
Retained Earnings          550 000                 550 000
Liabilities                          1 050 000              1 000 000
Non-Current Liabilities
Long Term Loans             700 000                  600 000
Current Liabilities
Creditors                               350 000                400 000
Total Equity and Liabilities 1 800 000             1 650 000

Required:
Used the information above to calculate and evaluate the following ratios for both the Companies and answer the questions that follow. Where applicable, round off answers correctly to two decimal places):
Calculate the current ratio (2)
 Calculate the quick / acid test ratio (4)
 Upon evaluating the quick ratio, what is your opinion on the level of inventory holdings in both companies? (2)
 Calculate the net profit margin (2)
 If the industry average of similar sized companies is a net profit margin of 15% and using this ratio as an indicator would you invest in either of these companies? (2)
 In general, what can be done to improve this ratio? (2)
 Calculate the debt to equity (2)
Calculate the interest cover (2)
Using interest cover as a single data point which company is riskier to invest in and why? (2)
 Calculate debtors’ days (3)
 Do you think debtors are being handled well in either of these companies. Please substantiate your answer.

Answer rating: 100% (QA)

To calculate and evaluate the ratios for both companies lets go through each ratio one by one 1 Current Ratio Current Ratio Current Assets Current Liabilities For ABC Ltd Current Ratio 700000 350000 2 ... View the full answer