Segregation of Ratios and Investment Analysis - Business Finance

Business Finance
Question 1
Answer 1
Segregation of ratios
Sl No Particular Category
1 Net Profit Margin Profitability
2 Average Collection Period Activity Ratio
3 Debt Ratio Debt Position
4 P/E Ratio Market Comparability
5 Inventory Turnover Ratio Activity Ratio
6 ROE Profitability
7 Average Payment Period Activity Ratio
8 Times interest earned ratio Debt Position
9 Total Asset Turnover Activity Ratio
10 Current Ratio Liquidity Position
11 Asset -to- equity Ratio Debt Position
12 ROA Profitability
13 Quick Ratio Liquidity Position
14 Fixed Asset Turnover Ratio Activity Ratio
Question 1 (a)
Answer 1 (a)
Sl
No Particular
Compan
y
Industr
y Remark
1
Current Ratio (MyAccountingCourse.com,
2018) 1.86 1.5 Favourable
2
Quick Ratio (MyAccountingCourse.com,
2018) 0.71 1.25
Not
Favourable
On the basis of above, one can understand that company has large volume of inventory piling
up compared to industry as the current ratio is better than industry while quick ratio is weaker
compared to industry.
Question 1 (b)
Answer 1 (b
Sl No Particular Company Industry Remark
1 Average Collection Period 24.3 30 Favourable
2 Inventory Turnover Ratio 6.3 12 Not Favourable
3 Average Payment Period 34.8 20 Favourable

4 Total Asset Turnover 1.5 1.4 Favourable
5 Fixed Asset Turnover Ratio 2.22 1.8 Favourable
On the basis of above, one can understand that company has four favourable activity ratio and
one against the industry. Thus, company is performing well, except huge inventory is piling
up at company level.
Further, revenue generated per rupee of asset is greater for company compared to company
symbolising company is performing well.
Question 1 (c)
Answer 1 (c)
Sl
No Particular
Compa
ny
Industr
y Remark
1 Debt Ratio (MyAccountingCourse.com, 2018) 0.5 0.5 Same
2 Times interest earned ratio 1.25 8.5 Not
Favourable
3 Asset -to- equity Ratio (Assets to Equity
Ratio, 2018) 3.08 2 Not
Favourable
On the basis of above, one can understand that company has no favourable ratio under this
category on account of higher debt taken by the company. Further, a high asset to equity ratio
shows a substantial amount of debt in the company. (Asset to Equity Ratio, 2018) Further,
low times interest ratio shows company is not having substantial profits compared to industry
to repay such interest.
Question 1 (d)
Answer 1 (d)
Sl No Particular Company Industry Remark
1
Net Profit Margin (CFI Education Inc. ,
2018) 0.20% 6.40% Not Favourable
2 ROE (MyAccountingCourse.com , 2018) 9.23% 18.00% Not Favourable
3 ROA (InvestingAnswers, Inc., 2018) 3.00% 9.00% Not Favourable
On the basis of above, one can understand that company is not earning substantial profits
compared to industry as reflected in the computation of aforesaid formulas.All the three
profitability ratios are against the company when compared to industry.
Question 1 (e)
Answer 1 (e)

Sl No Particular Company Industry Remark
1 P/E Ratio 15 23 Favourable
On perusal of the above, one can understand that the said ratio is in favour of the company as
the P/E of the company compared to industry is lower giving significant chances to the
company to grow in future. Further, the company is undervalued.
Question 1 (f)
Answer 1 (f)
The summary of above computation has been presented here-in-below:
Sl No Particular Company Industry Remark
1 Net Profit Margin 0.2% 6.40% Not Favourable
2 Average Collection Period 24.33 30 Favourable
3 Debt Ratio 0.5 0.5 Same
4 P/E Ratio 15 23 Favourable
5 Inventory Turnover Ratio 6.25 12 Not Favourable
6 ROE 9.23% 18% Not Favourable
7 Average Payment Period 34.76 20 Favourable
8 Times interest earned ratio 1.25 8.5 Not Favourable
9 Total Asset Turnover 1.5 1.4 Favourable
10 Current Ratio 1.857143 1.5 Favourable
11 Asset -to- equity Ratio 3.076923 2 Not Favourable
12 ROA 3% 9% Not Favourable
13 Quick Ratio 0.714286 1.25 Not Favourable
14 Fixed Asset Turnover Ratio 2.22 1.8 Favourable
On the basis of above table, one can understand that number of ratios in favour of company
stands at 6 while against stands at 7. Further, under one Ratio Company is neutral. In
addition, company has majority of against or unfavourable ratios under debt position. In such
a position, no fresh loan should be sanctioned unless a highly profitable project is available at
disposal of company.
Question 2 (a)
Answer 2 (a)
The computation of expected return has been tabulated here-in-below:
Economy Probablity Tech.com Sam's Grocery ASX 200
Recession 30% -20% 5% -4%
Average 20% 15% 6% 11%
Expansion 35% 30% 8% 17%
Boom 15% 50% 10% 27%

Average Return 15.00% 7.00% 11.00%
Question 2 (b)
Answer 2 (b)
The standard deviation of securities and market has been computed using formula:
Accordingly, the standard deviation has been derived.
Economy Probablity Tech.com Sam's Grocery ASX 200
Recession 30% -20% 5% -4%
Average 20% 15% 6% 11%
Expansion 35% 30% 8% 17%
Boom 15% 50% 10% 27%
Average Return 15.00% 7.00% 11.00%
Standard
Deviation 30% 2% 13%
Question 2 (c)
Answer 2 (c)
The better measure is beta as it is a representative of systematic risk while standard deviation
is a measure of total risk. Further, unsystematic risk can be eliminated, hence beta is a better
measure compared to Standard Deviation.
Question 2 (d)
Answer 2 (d)
The computation has been provided here-in-below:
Sl No Particulars Tech.com Sam's
Grocery
1 Risk Free Rate 5% 5%
2 Market Rate of Return 13% 13%
3 Risk Premium (2-1) 8% 8%
4 Beta 1.68 0.52