11 Define ratios LO3, 4, 5 Identify the appropriate ratio or ratios for each of the following descriptions: a shows the return to each share owned by an investor b measures the difference between current assets and current liabilities c measures the ability of a company to generate profits from sales d provides a measure of a company's capital structure e shows a company's ability to generate profits from its entire resource base f gives information as to how a company manages its inventory g measures a company's capital structure using liabilities and equity h shows how effectively a company uses its current equity to generate additional equity i measures a company's ability to meet its obligations in a few weeks rather than many months shows how well a company can pay interest on debt out of current-year earnings k measures a company's ability to collect sales on credit 1 provides an indication of current investor perceptions of the company. LO3 13 Profitability ratios The following financial information is available about Lim Limited for the financial year ended 31 December: $ 150 000 400 000 500 000 10.00 Net profits Ordinary shares, 1 January Ordinary shares, 31 December Share (market) price at 31 December Sales Total assets, 1 January Total assets, 31 December Shareholders' equity, 1 January Shareholders' equity, 31 December 945000 800 000 1 000 000 450 000 475 000 REQUIRED Calculate and interpret the following: a profit margin b return on equity c return on assets d earnings per share e price earnings ratio. LO4 14 Liquidity ratios The following information was taken from the financial statements of Connor Cookers and Olson Ovens: 2019 2018 $ 46 448 $249664 155 117 153 188 (in millions) Total current assets Connor Cookers Olson Ovens Cash Connor Cookers Olson Ovens Accounts receivable Connor Cookers Olson Ovens 24311 48936 28 894 28406 8216 186 766 114645 114511 13921 13962 Inventory Connor Cookers Olson Ovens Current liabilities 11578 10271 Connor Cookers 69 036 74457 Olson Ovens 80 220 85037 207349 194655 160123 176 896 Revenues (sales) Connor Cookers Olson Ovens Cost of goods sold Connor Cookers Olson Ovens 80153 79411 76740 71561 REQUIRED a For each company, calculate the following for 2019: i accounts receivable turnover ratio ii inventory turnover ratio current ratio iv quick ratio. b Based on your calculations, discuss the liquidity of both companies and indicate what caution needs to be exercised in drawing conclusions about either company's ability to pay their debts in the short term. LO5 17 Solvency ratios The following financial information regarding Emily's Editors Pty Ltd is available: 2019 Total assets Total liabilities Total shareholders' equity $ 530 000 140 000 390 000 2019 Statement of comprehensive income Revenue $ 250 000 Cost of goods sold 125 000 Gross profit 5000 Operating expenses 40000 Profits before interest and taxes 85000 Interest expense 10000 Profits before taxes 75 000 Income tax expense 25 000 Comprehensive income (no tax) 12000 Total comprehensive income $ 62 000 REQUIRED Calculate the following ratios: i debt to assets debt to equity iii equity to assets iv times interest earned. b Discuss the solvency of Emily Editors. Does the company rely more on equity or debt to finance its operations? What is the relation between the first three ratios? a