Calculation of Ratios and Financial Analysis

This document provides a calculation of ratios and financial analysis of Jolfa Limited. It includes the company's current ratio, debt to equity ratio, P/E ratio, and more. The analysis suggests ways to improve performance and manage risks. It also discusses different types of financial markets and the risks of opening a new outlet in China.

PART A
a) Calculation of Ratios
Calculation of Ratios
Industry
Benchmarks
Company
Ratios
Current ratio Current assets 1.45:1 0.68
Current Liabilities
Liquid Ratio Quick Assets 1.06:1 0.36
Current Liabilities
Debt to Equity Ratio Debt 160% 59%
Equity
Earnings per share Net Profit 0.45 per share 0.91
Weighted average Outstanding Shares
P/E ratio Market Price 15 18
EPS
Return on Equity Net Income 10.50% 8.05%
Shareholders’
Equity
Net Profit ratio Net Profit * 100 22% 5%
Sales
Times Interest Coverage
Ratio EBIT 4 times 1.7
Interest Expense

Dividend Payout ratio Dividends 20% 5%
Net Income
b) Report to the management
After calculating the ratios of the Jolfa Limited it can be analyzed that the current ratio of
the company is low in comparison and to improve the ratio the company shall improve the cash
conversion cycles and make sure that the obligations are paid off after the inclusion of the
current assets. The next ratio that has been calculated is the quick ratio which is again low in
comparison to the benchmark set by the industry. The possible reason is Jolfa is not able to
convert the assets into the liquid assets easily and therefore the current obligations of the
company are pending. As it can be observed form the debt to equity ratio the ratio is also in the
declining position.
The company earlier was sourcing itself from the debentures but now the count of the
debentures is low and therefore the company need not pay fixed income to the debenture holders.
This can be a good initiative to cut the costs yet form the point of view of taxation, the company
shall consider the debentures more.
The P/E ratio has also declined as the Net profit ratio has fallen from 22% to 5% in
comparison to the industry benchmark. The management shall focus on improving the net
income so that the value of the EPS gets improved. The volume of the sales has been drastic in
nature and therefore the gross profit literally affected the company. The cost of goods sold of the
company is 79% of the sales which is too high for any company. Also the company needs to
incur fixed expenses like salaries, depreciation, taxes which cannot be avoided hence the
company shall focus on reducing the cost of goods sold by manufacturing the material itself
(Cronk, 2017).
The times interest coverage ratio is also 4 times in the area of the industry whereas the
company is having low earnings to pay back the interest. Since the company is not able to
perform satisfactorily the dividends are also not available for the shareholders after their
investment. The company is not sharing the dividends to fuel the growth of the company and
hence the company should improve the performance according to the market returns so that the
positive reflection can be observed.
c)
The different types of the financial market are as follows.
Money market
Foreign exchange market

Derivatives market (Pilbeam, 2018)
Over the counter derivatives
Insurance market and
Exchange traded markets.
d)
There are several risks involved while opening a new outlet in any country. Since Jolfa
has an idea of opening the outlet in China following risks can be encountered by the company.
The first risk is the risk of the pricing while expanding the business. The risk is major
when the company is selling the custom made goods. Also at times there is the risk of the pricing
error.
The second risk is the risk of the economic conditions because the items which are sold
are of the disposable nature. Many of the retail stores are using downturns for their advantage but
later on are suffered by the economic crisis (Finkler, Smith and Calabrese, 2019).
The taste and preferences of the customer is again a challenge as well as the risk Jolfa is
going ot experience. The new city though has the opportunities yet the customer base cannot be
made without the needs and preferences being satisfied by the company.
Lastly the theft and the damage of the goods and the services could be a biggest risk for
the comaony operating in the competitive environment (Dees, 2017).
e)
Calculation of WACC
WACC
Market value of
Equity 1150
Market Value of
Debt 770
Total 1920
Cost of Equity 12%
Cost of Debt 17%
Corporate Tax 30%

WACC 17.3%
PART B
Question A)
i)
Net Profit After Tax For Each Year
90000 90000 90000 90000 90000
Less:
Depreciation 40000 40000 40000 40000 40000
50000 50000 50000 50000 50000
Tax @ 30 % 15000 15000 15000 15000 15000
Net Profit /
Loss 35000 35000 35000 35000 35000
ii)
The Annual Cash Flow for each year. 2011 2012 2013 2014 2015
90000 90000 90000 90000 90000
Less: Depreciation 40000 40000 40000 40000 40000
50000 50000 50000 50000 50000
Tax @ 30 % 15000 15000 15000 15000 15000
Net Profit / Loss 35000 35000 35000 35000 35000
Add: Depreciation 40000 40000 40000 40000 40000
75000 75000 75000 75000 75000
iii)
Accounting Rate of Return (using total investment).
Average Net Profit 90000
Average Investments 40000
ARR 2.25
iv)
Pay Back Period

0
-
20000
0
1 75000
-
125000.00
0
2 75000
-
50000.000
3 75000 25000.000
4 75000
100000.00
0
5 75000
175000.00
0
2.67
v)
Net Present Value. PV
Factor
@ 12%
Net
Present
Value
0
-
20000
0 1 -200000
1 75000 0.893
66964.2
9
2 75000 0.797
59789.5
4
3 75000 0.712
53383.5
2
4 75000 0.636
47663.8
6
5 75000 0.567
42557.0
1
70358.2
vi)
Internal Rate Of Return
0 -200000
1 75000
2 75000

3 75000
4 75000
5 75000
25%
Question B)
Answer iii)

References
Dees, J. G. (2017). 1 The Meaning of Social Entrepreneurship. In Case Studies in Social
Entrepreneurship and Sustainability (pp. 34-42). Routledge.
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher Education.
Cronk, B.C., 2017. How to use SPSS®: A step-by-step guide to analysis and interpretation.
Routledge.
Finkler, S.A., Smith, D.L. and Calabrese, T.D., 2019. Financial management for public, health,
and not-for-profit organizations. CQ Press.