Accounting Business Reporting for Decision Making

CHAPTER 8 Analysis and interpretation of financial statements 373

Expected sales

Gross profit as a percentage of sales

Expenses as a percentage of sales

Tax rate on profits

Dividend payout ratio

$120 000

35%

15%

30%

50%

Debt to equity ratio

Current assets as a percentage of cost of sales

Current ratio

Return on equity

0.8:1

20%

2:1

15%

8.44 Interpreting ratios   LO4, 7, 9

The following table provides an historical summary of key financial ratios for Somy Corporation.

Ratio 2015 2016 2017

Return on equity 10.8% –3.1% –1.4%

Return on assets 3.0% –0.8% –0.3%

Cost of sales to sales 75.6% 78.5% 74.8%

Research and development expenses to sales 6.3% 6.9% 6.6%

EBITDA to sales* 10.2% 2.3% 5.6%

Debt to total assets 72.4% 75.3% 76.9%

*EBITDA is earnings before interest, tax, and depreciation.

a. With reference to the appropriate ratios, analyse the trend in Somy’s profitability providing

plausible reasons for any changes.

b. The CEO of Somy Corporation noted the following:

Somy Corporation plans to maintain tight inventory controls heading into the crucial year-end shop-

ping season... Somy implemented tighter inventory controls to prevent the type of punishing losses

from slow demand that forced deep discounting or write-downs for unsold goods. It slashed inven-

tory turnover during last year’s October–December quarter to 38 days from 61 days a year ago.

Explain what an inventory turnover ratio is measuring and how inventory turnover impacts on

Somy’s profitability.

c. Somy Corporation publishes on its website and discloses key CSR activities and important

topics of interest to stakeholders. Describe an environmental performance indicator and a social

performance indicator that may be of interest to Somy’s stakeholders.

8.45 Analysing profitability, liquidity and financial stability   LO9

Lincoln Indicators professes nine golden rules for successful sharemarket investing. The golden

rules relate to financial health, management assessment, outlook/forecast, share price value, share

price sentiment, liquidity and size, principal activities, price sensitive announcements; and follow

all of the rules above. Details on the golden rules are available at http://www.lincolnindicators.com.au.

a. List the nine golden rules.

b. Identify two listed companies in the same industry. Apply the nine golden rules investment

framework and write a report judging whether these stocks satisfy the investment criteria.

8.46 Performing ratio analysis   LO5, 6

The following financial statements were prepared for the management of MNM Ltd. The state-

ments contain some information that will be disclosed in note form in the general purpose finan-

cial statements to be issued.