Comparative Balance Sheet Analysis

The assignment content compares the balance sheets of Ariel Ltd. and Snowy Ltd. for the year ended June 30, 2015. The comparison highlights differences in their liquidity, gearing ratio, net profit margin, asset turnover ratio, inventory turnover ratio, interest cover ratio, and receivables period.

Part B
(A)
Ariel Ltd. And Snowy Ltd.
Comparative Balance Sheet
For the year ended 30 June, 2015.
Ariel Ltd. Snowy Ltd.
Amount ($) Percentage Amount ($) Percentage
Assets
Current Assets
Cash 160,000 4.09% 440,000 10.38%
Short term investments 16,000 0.41% 380,000 8.96%
Accounts Receivable (net) 200,000 5.12% 260,000 6.13%
Inventory 1,120,000 28.66% 600,000 14.15%
Total Current Assets 1,496,000 38.28% 1,680,000 39.62%
Non-Current Assets
Property, plant & equipment (net) 2,400,000 61.41% 2,560,000 60.38%
Patents 12,000 0.31% 0 0%
Total Non-Current Assets 2,412,000 61.72% 2,560,000 60.38%
Total Assets 3,908,000 100.00% 4,240,000 100.00%
Liabilities
Current Liabilities
Accounts payable 360,000 9.21% 620,000 14.62%
Non-Current Liabilities
Bank Loan 680,000 17.40% 660,000 15.57%
Total Liabilities 1,040,000 26.61% 1,280,000 30.19%
Shareholders’ Equity
Paid-up Capital($10 shares) 2,600,000 66.53% 2,600,000 61.32%
Retained Profits 268,000 6.86% 360,000 8.49%
Total Shareholders’ Equity 2,868,000 73.39% 2,960,000 69.81%
Total Liabilities & Shareholders’ Equity 3,908,000 100.00% 4,240,000 100.00%

(B)
Ariel Ltd.:
Current ratio = 1,496,000/360,000
= 4.16
Quick Ratio = (1,496,000 - 1,120,000)/360,000
= 1.04
Net Working Capital = 1,496,000 – 360,000
= 1,136,000
Gearing Ratio = 680,000/(2,868,000+680,000)
= 0.19
Net Profit Margin = (620,000/3,548,000) * 100
= 17.4%
Asset Turnover Ratio = 3,904,000/3,548,000
= 1.10 times
Receivables period = (260,000/2,200,000)*365
= 43.1 days
Inventory Turnover = Cost of Sales/Avg Inventory
= 2,400,000/1,080,000
= 2.22
Interest Cover Ratio = EBIT/Interest Paid

= 620,000/120,000
= 5.17
Snowy Ltd.:
Current Ratio = 1,680,000/620,000
= 2.71
Quick Ratio = (1,680,000 – 600,000)/620,000
= 1.74
Net Working Capital = 1,680,000 – 620,000
= 1,060,000
Gearing Ratio = 660,000/(660,000+2,960,000)
= 0.18
Inventory Turnover Ratio = Cost of Sales/Avg Inventory
= 2,200,000/720,000
= 3.06
Interest Cover Ratio = EBIT/Interest Paid
= 800,000/80,000
= 10.0
Net Profit Margin = (800,000/3,620,000)*100
= 22.1%
Asset Turnover Ratio = 3,800,000/3,620,000
= 1.04 times

Receivables Period = (220,000/3,000,000)*365
= 26.7 days
(C)
Ariel Ltd. has a better current ratio but a low quick ratio suggests that it might be less liquid as
compared to Snowy Ltd. which, despite having a slightly lower current ratio has a relatively good quick
ratio. Hence, even if the inventory is not sold quickly, it is still in a better liquidity position. Moreover,
this also points to the fact that Snowy Ltd. has used its assets more efficiently than Ariel Ltd.
(D)
Snowy Ltd. is using leverage more efficiently and as a result it is generating more net profit as
compared to Ariel Ltd. Snowy is 30% financed by debt which although slightly increases the risk of
defaulting but it is generating a net profit of about 22% so that covers the risk somewhat. On the other
hand, even though Ariel Ltd. is financed less by debt but it is producing only 17% profits. Snowy’s
interest cover ratio is always better than Ariel’s so it is doing better there too.
(E)
We are not provided any information regarding the dividends paid on equity so we cannot calculate
ratios in regards to shareholders equity payments. Also if we were provided a few more details
regarding tax rate, expenses, market value per share and net income etc, we would have been able to
calculate a few more ratios.

Part D
An accountant’s job is to determine whether a transaction has taken place or not. What kind of
transaction took place. Then he fills the ledger and makes sure that the balances are constant. As a
result, this helps in then generating the company’s financial statements and helps determine the
performance of the country. Anything in which a company has invested, you cannot term it as useless.
It has to be reported.