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Below are the financial ratios calculated from the 2020 annual report of PVC Pipes Ltd....

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Question

Finance

Below are the financial ratios calculated from the 2020 annual report of PVC Pipes Ltd.

Ratio

2020

2019

Current

1.52x

1.48x

Quick

1.01x

0.98x

Average collection period

65 days

58 days

Days inventory held

36 days

28 days

Days payable outstanding

61 days

47 days

Cash conversion cycle

40 days

39 days

Fixed asset turnover

4.91x

4.02x

Total asset turnover

1.70x

1.43x

Debt to total assets

67.10%

63.08%

Long Term debt to

total capitalization

46.82%

42.51%

Times interest earned

(5.10x)

1.65x

Fixed charge coverage

(2.34x)

1.40x

Cash flow adequacy

0.32x

0.87x

Gross profit margin

10.10%

12.81%

Operating profit margin

(5.93%)

2.75%

Net profit margin

(4.98%)

0.91%

Cash flow margin

3.84%

7.00%

Return on assets

(8.63%)

1.28%

Return on equity

(25.49%)

3.51%

Cash return on assets

6.90%

9.10%

REQUIRED:

  1. Using the financial ratios above, illustrate the short-term liquidity, operating efficiency, capital structure and long-term solvency and profitability of PVC Pipes Ltd. (40 marks)
  2. Discuss TWO approaches which would be able to improve the Return on assets.

(10 marks)

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