, 2010). The solvency ratio assesses the level of cash generated in a year as a percentage of the debt. The cash generated is calculated by taking the net profit after tax and adding back the depreciation. The total liabilities are calculated by adding together the current and the long-term (non current) liabilities. Table 3; Solvency ratio for Tootise Roll Industries Inc.

2006

2007

Net profit after tax (a)

65,919

51,625

Depreciation (b)

15,816

15,859

Adjusted net profit (a + b) (c )

81,735

67,484

Current liabilities (d)

62,211

57,972

Non-current liabilities (e)

98,747

116,523

Total liabilities (d + e) (f)

160,958

174,495

Solvency ratio (c/f)

50.78%

38.67%

The solvency ratio has decreased from 50.78% in 2006 to 38.67% in 2007, showing that the cash generated as a percentage of the indebtedness is increasing this may be a concern and indicate some inefficiency in the firm. However, it is generally believed that where the ratio is below 20% there are indications of problems. Tootise is well above the danger level, but a lender may wish to explore the reasons behind the decline further to assess risk.

4.

Profitability

The ability of a firm to repay debt will inevitably reflect the firms' ongoing profit; firms which make losses are unlikely to survive. The firm needs to be generating sufficient profit to repay the loan and meet other obligations and expectations. Profit margins are a primary efficiency ratio. Profit is usually measured using the operating or the net profit margin; both will...

The operating profit margin shows the percentage of the operating profits (sales less the operating costs only) as a parentage of sales. The net profit margin shows the net profit which is the sales less all costs including interest and deprecation, as a percentage of the sales.
Table 4; Operating profit Margin for Tootise Roll Industries Inc.

Operating profit margin

2006

2007

Total revenue (a)

501,150

497,717

Operating profit (b)

87,529

70,852

Operating profit margin (a/b)

17.47%

14.24%

Table 5; Net profit Margin for Tootise Roll Industries Inc.

Net profit margin

2006

2007

Total revenue (a)

501,150

497,717

Net profit (after tax) (b)

65,919

51,625

Net profit margin (a/b)

13.15%

10.37%

In both cases it appear that the firm is showing a degree of decline, however the profit margins are still positive and appear to be well within stakeholder expectation. This decline may also be the reason the firm wishes to make an investment.

5.

Conclusion

The firm appears to be showing some indicators that there is a decline, but at the current time it appears an increase of 10% in liabilities in affordable, and may be needed if it is investment which will help to restore performance.

References

Paper is based on a case supplied by the student

Howells P.G.A, Bain, K, (2007), Financial Institutions and Markets, London, Longman

Libby, R; Libby, P. Short D, (2010), Financial Accounting, McGraw-Hill