Assignment 1Q10. Read the comparative statement of financial position and the statement of financial performance of Imaginary Computers Limited. Prepare a credit assessment report using the techniques of financial statements analysis as explained in this chapter. Comment on the financial strengths and weaknesses of the firm.Imaginary Computers Ltd.Statement of financial positionas at 31 December ($ '000) (Balance sheet)
2001
2002
2003
Share capital
5.3
7.5
8.5
Reserves and surplus
6.7
5.7
7.4
Long-term debt
4.1
3.2
4.2
Short-term bank borrowing
5.6
5.2
8
34.9
57.4
Cost of goods sold
24.5
26.2
45.8
Gross Profit
5.3
8.7
11.6
Operating Expenses
3.7
4.2
7.0
Operating profit
1.6
4.5
4.6
Non-operating surplus/deficit
0.2
0.1
0.4
EBIT
1.8
4.6
5.0
Interest
1.0
0.9
2.0
Profit before tax
0.8
3.5
3.0
Tax
0.6
-
Profit after tax
0.8
2.9
3.0
Dividends
0.6
0.6
1.1
Retained earnings
0.2
2.3
1.9
A.10: Trend of ratios and interpretation thereof
Ratio
Formula
2001
2002
2003
Comments
Liquidity ratio
Current ratio
1.79
0.55
0.73
Lower than benchmark, declining trend. Shows liquidity problems
Quick Ratio
0.76
0.12
0.21
Same as above
Efficiency ratios
Inventory turnover ratio
Can't be calculated as figures of inventory are not available
Average collection period
43
29
19
Shows collection efficiency has improved
Profitability ratio
Gross Profit/sales
0.05
0.12
0.08
Needs to be compared to industry trends. Not very favourable
Net profit/sales
0.03
0.08
0.05
Same as above
Leverage ratios
Debt to equity ratio
1.09
1.12
1.07
Shows high stake of proprietors in business. Good indication
Interest coverage ratio
1.8
5.11
2.5
Good. Shows that firm will have no problems in paying interest.
Fixed charges ratio
Can't be calculated as relevant figures are not available
