Compute the following ratios for 2005 and 2006: i. Gross profit margin ii. Return on capital employed iii…

Question

Compute the following ratios for 2005 and 2006: i. Gross profit margin ii. Return on capital employed iii. Net profit margin iv. Current ratio

ScanSolve AI Tutor · Accepted Answer

Here are the computations for the requested ratios for 2005 and 2006: Data from Financial Statements: Item — 2006 (N'000) — 2005 (N'000)Turnover — 2,713,285 — 3,089,973 Gross profit — 805,866 — 1,135,347 Profit on ordinary activities before tax — 284,168 — 532,666 Profit on ordinary activities after tax — 214,330 — 341,491 Inventories — 1,456,182 — 1,380,730* Receivables — 579,826 — 310,322 Bank and cash balances — 525,574 — 79,059 Payable (Due within one year) — 1,479,217 — 1,557,347 Capital and reserves — 1,973,818 — 992,463 Note: For 2005 Inventories, "1,380,73" is interpreted as N1,380,730 to be consistent with other figures in thousands. Calculations: i. Gross profit margin The formula for gross profit margin is: Gross Profit Margin = Gross ProfitTurnover × 100% Step 1: Calculate for 2006. Gross Profit Margin₂₀₀₆ = (805,866)/(2,713,285) × 100% = 29.70% Step 2: Calculate for 2005. Gross Profit Margin₂₀₀₅ = (1,135,347)/(3,089,973) × 100% = 36.74% 2006: 29.70% 2005: 36.74% ii. Return on capital employed (ROCE) The formula for ROCE is: ROCE = Profit on ordinary activities before taxCapital Employed × 100% Capital Employed is taken as "Capital and reserves" from the statement of financial position. Step 1: Calculate for 2006. ROCE₂₀₀₆ = (284,168)/(1,973,818) × 100% = 14.40% Step 2: Calculate for 2005. ROCE₂₀₀₅ = (532,666)/(992,463) × 100% = 53.67% 2006: 14.40% 2005: 53.67% iii. Net profit margin The formula for net profit margin is: Net Profit Margin = Profit on ordinary activities after taxTurnover × 100% Step 1: Calculate for 2006. Net Profit Margin₂₀₀₆ = (214,330)/(2,713,285) × 100% = 7.90% Step 2: Calculate for 2005. Net Profit Margin₂₀₀₅ = (341,491)/(3,089,973) × 100% = 11.05% 2006: 7.90% 2005: 11.05% iv. Current ratio The formula for current ratio is: Current Ratio = Current AssetsCurrent Liabilities Step 1: Calculate Current Assets and Current Liabilities for 2006. Current Assets_2006 = Inventories + Receivables + Bank and cash balances; Current Assets_2006 = 1,456,182 + 579,826 + 525,574 = 2,561,582; Current Liabilities_2006 = Payable (Due within one year) = 1,479,217 Step 2: Calculate Current Ratio for 2006. Current Ratio₂₀₀₆ = (2,561,582)/(1,479,217) = 1.73:1 Step 3: Calculate Current Assets and Current Liabilities for 2005. Current Assets_2005 = Inventories + Receivables + Bank and cash balances; Current Assets_2005 = 1,380,730 + 310,322 + 79,059 = 1,770,111; Current Liabilities_2005 = Payable (Due within one year) = 1,557,347 Step 4: Calculate Current Ratio for 2005. Current Ratio₂₀₀₅ = (1,770,111)/(1,557,347) = 1.14:1 2006: 1.73:1 2005: 1.14:1

Compute the following ratios for 2005 and 2006: i. Gross profit margin ii. Return on capital employed iii. Net profit margin iv. Current ratio

Step-by-step solution

Part i· 2 steps

Calculate for 2006.

Calculate for 2005.

Part ii· 2 steps

Calculate for 2006.

Calculate for 2005.

Part iii· 2 steps

Calculate for 2006.

Calculate for 2005.

Part iv· 4 steps

Calculate Current Assets and Current Liabilities for 2006.

Calculate Current Ratio for 2006.

Calculate Current Assets and Current Liabilities for 2005.

Calculate Current Ratio for 2005.

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