Sparsh Textiles reported the following for the year: Net credit sales Rs.8,40,000, average accounts receivable Rs.60,000, net profit Rs.1,20,000, net sales Rs.10,00,000, long‑term debt Rs.2,00,000, and shareholders’ equity Rs.5,00,000. Compute (a) Receivables Turnover Ratio, (b) Average Collection Period in days, (c) Net Profit Margin, (d) Debt‑to‑Equity Ratio. Comment on the company’s liquidity, profitability, and solvency.
Answer
14.0, 26.0, 12.0%, 0.40
The correct answer is 14.0, 26.0, 12.0%, 0.40 — Comment: A low collection period (26 days) indicates good liquidity; a net profit margin of 12% reflects healthy profitability; a debt‑to‑equity of 0.40 shows moderate solvency.
Step-by-step solution
- Compute receivables turnover: net credit sales ÷ average accounts receivable = 8,40,000 ÷ 60,000 = 14.0.
- Compute average collection period: 365 ÷ receivables turnover = 365 ÷ 14 ≈ 26.0 days.
- Compute net profit margin: net profit ÷ net sales = 1,20,000 ÷ 10,00,000 = 0.12 → 12.0%.
- Compute debt‑to‑equity ratio: long‑term debt ÷ shareholders’ equity = 2,00,000 ÷ 5,00,000 = 0.40.
- Comment: A low collection period (26 days) indicates good liquidity; a net profit margin of 12% reflects healthy profitability; a debt‑to‑equity of 0.40 shows moderate solvency.
Common mistake: Mixing up credit sales with total sales, or using wrong denominator for ratios
Concept tested: Turnover, profitability, solvency ratios
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