Accounting ratios
compares two financial result from different accounting period, establishing
the relationship between them. Most times these ratios are used to assess the
company’s financial performance. The concerns of the Board of Garden City’s
dwindling financial position of the company lead to the calculation of these following
ratios to compares both years and find out areas which had been affected. Click here to see Question
That will be the
(b) part of the question, which will be coming up later. For now we’ll be
looking at the relevant ratios.
a.
Calculate
the following ratios for the year ended September 30, 2015 and 2016 in columnar
form
i.
Return on Capital Employed
ROCE ratio expresses a company’s profit as
a percentage of the amount of capital invested. ROCE is expressed as:
Profit
before longterm interest and tax/Share capital and reserves plus Noncurrent
liabilities *100%

ROCE can also be
further broken down thus;
Profit
before interest and tax/Sales * Sales/Net Asset

2016

2015

N’(M)

N’(M)

45,000/100,000 *
100,000/52,700

70,000/160,000 *
160,000/47,500

45% * 1.90 times

43.75% * 3.37 times

86%

147%

ii.
Total Assets Turnover
This ratio measures the efficiency with
which a company’s assets are used to generate sales revenue.
We calculate Asset Turnover as:
Sales/Capital
Employed

2016

2015

N’(M)

N’(M)

100,000/52,700

160,000/47,500

1.90
times

3.37 times

iii.
Quick Ratio
The Quick ratio provides a more severe test
of liquidity by omitting inventories to ascertain how fast a company can meet
its liquidity obligations. We calculate the ratio as follow:
Current
AssetsInventories/Current Liabilities

2016

2015

N’(M)

N’(M)

56,50032,500/43,800

50,0007,500/60,000

24,000/43,800

42,500/60,000

0.55

0.71

iv.
Debt Equity Ratio
This ratio measures how much of the entity’s
longterm fund have been provided by lenders. The formula for Debt Equity Ratio
is:
Long term
Debt/Share Capital Plus Reserve * 100%

A company is said to be highlygeared when
its debt capital exceeds its share capital reserves. On the other hand, a
company is said to be lowgeared when the amount of its debt capital is less
than its share capital and reserve.
2016

2015

N’(M)

N’(M)

12,500/23,000 + 17,200

50,0007,500/60,000

= 12,500/40,200

=14,500/33,000

31%

44%

v.
Fixed Interest Cover
Interest Cover measures the number of times
that the interest payable for an accounting period could have been paid out of
the available profit. The ratio is calculated as follows:
Profit
before Interest and Tax/.Interest Payable

Investors
are very particular about this ratio as it is an indication of the financial strength
of the company. A high interest cover is a positive sign, on the other hand a
low interest cover might be a sign of financial distress.
2016

2015

N’(M)

N’(M)

45,000/23,750

70,000/28,750

1.90

2.43

vi.
Earnings Yield
Earnings Yield is another ratio that investors
find interest in, as it helps them decide if their investment was worth the
risk associated with it. The ratio compares the company’s yearly earnings with
its market price. The ratio for earnings yield is as follows:
Earnings
per share/market Price * 100%

2016

2015

N’(M)

N’(M)

0.57/0.08

1.09/0.12

7.125

9.08

vii.
Price Earnings Ratios
This ratio compares Earnings per share
(EPS) with the market price of an ordinary share with the market price of an
ordinary share and calculate the number of years which it would take to recover
the market price paid for share. We calculate this ratio thus:
Market
Price Per Ordinary Share/Earnings Per Share

2016

2015

N’(M)

N’(M)

0.08/0.57

0.12/1.09

0.14

0.11

A high P/E is an indication that the market
is expecting a better performance from the company.
viii.
Dividend Yield
This ratio expresses as a percentage the dividend
per ordinary share to the market price per ordinary shares. The ratio is
calculated as follows:
Dividends
per Ordinary Shares/Market price per Ordinary Shares * 100%

This ratio measures the cash return on
investment of the ordinary shareholder. A short term investor might be
discouraged by a low Dividend yield, but a long term investor might not be deterred
but will be more concerned with the capital growth of the company.
2016

2015

N’(M)

N’(M)

0.26/8 * 100%

0.37/12 * 100%

3.25%

3.08%

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