CASE STUDY

The information below is taken from the record of two companies in the same industry.
The companies are X ltd. and Y ltd. and the data is as follows:

Particulars X Ltd. Y Ltd.

Cash Rs.2,10,000 3,20,000
Debtors 3,30,000 6,30,000
Stock 12,30,000 9,50,000
Plant & equipment 16,95,000 24,00,000
Total Assets 34,65,000 43,00,000
Sundry Creditors 9,00,000 10,50,000
8% Debentures 5,00,000 10,00,000
Equity & Share Capital 11,00,000 17,50,000
Retained earnings 9,65,000 5,00,000
Total Liabilities 34,65,000 43,00,000
Sales 56,00,000 82,00,000
Cost of goods sold 40,00,000 64,80,000
Other operating expenses 8,00,000 8,60,000
Interest Expenses 40,000 80,000
Income taxes 2,66,000 2,73,000
Dividends 1,00,000 1,80,000

Answer each of the following questions by making a comparison of one, or more

relevant ratios.
1. Which Co. is using equity shareholder’s money more profitably?
2. Which Co. is better able to meet its current debts?
3. If you were to purchase the debenture of one Co., which company’s debenture
you would buy?
4. Which co. collects its receivables faster assuming all sales to be credit sales?
5. Which co. is extended credit for a longer period by the creditors, assuming all
purchases (equivalent to cost of goods sold) to be credit purchases?
6. How long does it take each company to convert an investment in stock to cash?
7. Which company retains the larger proportion of income in the business?
1. Rate of return on Shareholder’s fund = Net profit after taxes x 100
Ave. total shareholder’s equity

= (Rs. 4,94,000/20,65,000) x 100 = 23.9% X Ltd.

= (Rs. 5,07,000/22,25,000) x 100 = 22.5 % Y Ltd.

X is using shareholder’s money more profitably

2. Current ratio = Current Asset/ Current Liability

17,70,000/9,00,000 = 1.97 (X)
19,00,000/10,50,000 = 1.81 (Y)

Quick Ratio = Luiqid Asset/ Current Liability

5,40,000/9,00,000 = 0.6 (X)
9,50,000/10,50,000 = 0.9 (Y)

Y is better able to meet its current debts

3. Debt-equity ratio = Total debt/equity

14,00,000/20,65,000 = 0.68 (X)
20,50,000/22,50,000 = 0.91 (Y)

Interest coverage ratio = EBIT

Interest
8,00,000/40,000 = 20 times (X)
8,60,000/80,000 = 10.75 times (Y)
The debentures of X should be bought

4. Debtors collection period = Ave. debtors x 360

Net credit sales
3,30,000/56,00,000 x 100 = 21 days (X)
6,30,000/82,00,000 x 100 = 28 days
X Ltd. collects its receivables faster

5. Average payment period = Ave. creditors x 360

Net credit purchase
9,00,000/40,00,000 x 360 = 81 days (X)
10,50,000/64,80,000 x 360 = 58 days (Y)

X is extended credit for a longer period by its creditors

6. Stock turnover ratio = Cost of goods sold/Average stock

40,00,000/12,30,000 = 3.25 times (X)

64,80,000/9,50,000 = 6.82 times (Y)

360/3.25 = 111 days (X)

360/6.82 = 53 days (Y)

Length of time required for conversion of investment in stock to cash

111 days + 21 days = 132 days (X)

53 days + 28 days = 81 days (Y)

7. Dividend payout ratio

Total dividend paid to equity shareholder’s/Total net profit x 100

1,00,000/4,94,000 x 100 = 20.2 %

1,80,000/5,07,000 x 100 = 35.5 %

Retention ratio

= 100 – 20.2 = 79.8 % (X)

100 – 35.5 % = 64.5 % (Y)

X Ltd. extended is credit for a longer period by the creditors