GRAT Authority operates passenger railway service and is also responsible for the maintenance of track signalling equipment, and other facilities such as stations. In recent years it has been criticised for providing poor services to the travelling public in terms of punctuality, safety and the standard of facilities offered to passengers. Last year, GRAT Authority invested over GH¢20 million in new carriages, station facilities and track maintenance programmes in an attempt to address these criticisms.
Summarised financial results for GRAT Authority for the last two years are given below:
Required:
a) Calculate the following ratios for GRAT Authority for 2017 and 2018, clearly showing your workings. (8 marks)
i) Return on capital employed (ROCE)
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ii) Net profit margin
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. 2017 2018
iii) Asset turnover
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. 2017 2018
iv) Current ratio
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. 2017 2018
b) Evaluate the financial performance of the entity in 2017 and 2018 as revealed by the above ratios. (6 marks)
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Profitability
Return on capital employed has fallen from 2017 to 2018 caused by a decrease in operating profit and an increase in capital employed. The fall in operating profit may have been caused by an increase in costs, whilst the new investment programme will have caused an increase in capital employed.
Asset turnover has fallen. Sales have only increased by 2.8% between 2017 and 2018 so the new investment programme may not yet have had a significant effect upon sales.
In the short term, the investment programme has increased assets and costs but has not yet influenced sales.
Liquidity
The current ratio has deteriorated so the firm’s ability to meet its short-term obligations from its short-term resources has been reduced. The expenditure on the investment programme may have decreased the cash balance between 2017 and 2018, causing the deterioration in liquidity.