Page 365 - AFM Integrated Workbook STUDENT S18-J19
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Answers
Solution
Profitability ratios
Return on Capital Employed (based on pre-tax operating profit)
20X7: 100/473 = 21.1%
20X8: 57/542 = 10.5%
Return on Capital Employed (based on post-tax operating profit)
20X7: 100 (1 – 0.50)/473 = 10.6%
20X8: 57 (1 – 0.50)/542 = 5.3%
In 20X7, Zed had a much higher level of ROCE, indicating that the firm was
generating far more profit from its capital invested. However, as profitability fell
in 20X8, the ROCE fell too. It may be that the percentage return being
generated is not sufficient to meet the required returns of the investors.
Liquidity ratios
Debtor days = (Receivables/Credit sales revenue) × 365
20X7: (105/840) × 365 = 46 days
20X8: (132/830) × 365 = 58 days
Creditor days = (Payables/Cost of sales) × 365
(Cost of sales used since purchases is not given)
20X7: (133/554) × 365 = 88 days
20X8: (122/591) × 365 = 75 days
Inventory holding period = (Inventories/Cost of sales) × 365
20X7: (237/554) × 365 = 156 days
20X8: (265/591) × 365 = 164 days
Cash operating cycle = Debtor days + Inventory holding period – Creditor days
20X7: 46 + 156 – 88 = 114 days
20X8: 58 + 164 – 75 = 147 days
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