Equinox Design Ltd is a graphic design business - Leaving Cert Business - Question 6 (B) & (C) - 2017

The Current Ratio is calculated using the formula:

$Current Ratio = \frac{Current Assets}{Current Liabilities}$

Substituting the values:

$Current Ratio = \frac{20,000}{16,000} = 1.25$

The Return on Investment (ROI) can be calculated using:

$ROI = \left( \frac{Net Profit}{Capital Employed} \right) \times 100$
Capital Employed = Issued Share Capital + Long-Term Loan + Retained Earnings

$Capital Employed = 300,000 + 400,000 + 600,000 = 1,300,000$

Now substituting in the ROI formula:

$ROI = \left( \frac{30,400}{1,300,000} \right) \times 100 = 2.34\%$

The Debt to Equity Ratio is calculated as:

$Debt/Equity Ratio = \frac{Total Debt}{Total Equity}$

Total Debt = Long-Term Loan = €400,000
Total Equity = Issued Share Capital + Retained Earnings = €300,000 + €600,000 = €900,000

Thus:

$Debt/Equity Ratio = \frac{400,000}{900,000} = 0.44$

Profitability:

1. Net Profit Margin (NPM) decreased from 20.5% to 15.2%, indicating less profit per sales dollar, which might require review of the business's cost structure.

2. Return on Investment (ROI) fell from 8% to 2.34%, potentially concerning shareholders as they may look for better returns elsewhere.

Liquidity:

The Current Ratio decreased from 2:1 to 1.25:1, suggesting possible liquidity issues as it indicates the business may struggle to meet its short-term liabilities.

No, Equinox Design Ltd should not expand as all key financial indicators are showing a decline, which may increase the risk associated with expansion.

1. Financial ratios may not fully reflect the current state of the business as they are often based on historical data, and circumstances can change rapidly.

2. Ratios may not consider external factors such as market conditions, competition, or economic influences which can impact the business's performance.