1.

Modern Appliances Corporation has reported its financial results for the year ended December 31,
2011.

Required: Using the information from the financial statements,

a) Calculate current/working capital and quick ratios and interpret the results

1
 Given:
Total Current Asset = 2,856,516,992
Total Current Liability = 1,578,337,233
Inventories = 981,870,990
Required: working capital and quick ratio

Solution:
Working capital = Total Current Asset – Total Current Liability
=2,856,516,992 - 1,578,337,233
=1,278,179,759
total current assets
working capital ratio=
total current liabilities
2,856,516,992
= 1,578,337,233
= 1.81
 Interpretation: the ratio 1.81:1 means that for every dollar of current liability, the
company has 1.81 of current assets. That means it can cover its short-term
obligations.
current asset −inventorires
Quick ratio = current liabiliteis
2,856,516,992−981,870,990
= 1,578,337,233

=1.19
 Interpretation: the firm has the ability to pay its short-term obligations with current assets.
Since the quick ratio is greater than 1, the company has enough quick assets to pay for its current
liabilities. i.e, For every $1 of current liability, the company has $1.19 of quick assets to pay for it.

b) Calculate gearing ratio and times interest earned ratio and interpret the results
Given:
Long term debt = 1,200,691,565

Retained earnings= 1,218,207,588

Total asset = 4,394,643,738

Total Liabilities and equity = 4,394,643,738

Common Stock(Shareholder fund)= 397,407,352

2
 Total Current liability= 1,578,337,233
Total non-current liability=1,200,691,565
(long term debt)

Required: gearing ratio and times interest earned ratio

Solution: Gearing ratio

But Shareholders’ funds=total assets −total liabilities

Total Liability = Total Current liability + Total non-current liability

= 1,578,337,233 + 1,200,691,565
= 2,779,028,798.00
Long−term debt
Gearing Ratio=
Shareholde r ' sfunds+ Long−term debt
1,200,691,565
= 397,407,352+1,200,691,565

= 0.75x100%
= 75%
Interpretation: This company is highly geared, since it’s gearing ratio is 75%. And it indicates most of
its funds are from debt than that of shareholders funds.

Profit before interest∧tax

Interest Cover Ratio=
Intereset payable
EBITDA
= Interest payable
Where EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization
EBITDA = 1,965,486,745
Interest Payable = 35,826,000
1,965,486,745
= 35,826,000
=54.86
≈ 55
Interpretation: this indicates that the firm has sufficient margin of safety to cover its interest charges.
That means also the firm has 55 times more earnings than its current interest payments
c) Calculate net profit margin, Gross Profit margin and Return on Capital Employed (ROCE)
and interpret the results
i) Required: Net profit margin
Given: Net income =430,316,805 Net sales = 5,398,412,000

3
 Solution:
Net Income
Net profit margin =
Net Sales
430,316,805
= 5,398,412,000
=0.08
= 0.08x100%
= 8%
Interpretation: A net profit margin of 8% means that for every dollar generated the

company kept $0.08 as profit.

ii) Required: gross profit margin
Given: Net sales = 5,398,412,000, Cost of sales=3,432,925,255
Gross profit = 1,965,486,745
Solution:
Gross profit
Gross profit Margin=
Net Sales

Gross Profit = Net sales – cost of sales

=5,398,412,000-3,432,925,255
1,965,486,745
=
5,398,412,000

=0.36
=0.36*100%
=36%
 Interpretation: In conclusion, This means that for every dollar the firm generated in
sales, the company generated 36 cents in gross profit before other business
expenses were paid.
iii) Required: Return on capital Employed
Given: Operative profit before interest and tax = 629,247,359

Shareholder’s fund = 1,615,614,940

Long term debt = 1,200,691,565

4
 Solution:
Operating profit before Interest∧Tax
Return on Capital Employed=
Shareholde r ' s Fund+ Longterm debt
629,247,359
= (397,407,352+1,200,691,565)
= 0.39
=0.39*100%
=39%
 Interpretation :Return on capital employed is 39 cents per capital dollar.