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LMX Ltd has provided the information in the table as at 30 June 2010: | | LMX Ltd | Industry average | |-------------------|---------|------------------| | Debt to equity | 0.5 : 1 | 0.7 : 1 | | Accounts receivable turnover ratio | 52 days | 26 days | | Return on owners’ equity | 12% | 40% | | Gross profit ratio | 60% | 55% | (a) Outline ONE advantage for LMX Ltd of using comparative ratio analysis - HSC - SSCE Business Studies - Question 25 - 2010 - Paper 1
Question 25
LMX Ltd has provided the information in the table as at 30 June 2010: | | LMX Ltd | Industry average | |-------------------|---------|------------... show full transcript
Worked Solution & Example Answer:LMX Ltd has provided the information in the table as at 30 June 2010: | | LMX Ltd | Industry average | |-------------------|---------|------------------| | Debt to equity | 0.5 : 1 | 0.7 : 1 | | Accounts receivable turnover ratio | 52 days | 26 days | | Return on owners’ equity | 12% | 40% | | Gross profit ratio | 60% | 55% | (a) Outline ONE advantage for LMX Ltd of using comparative ratio analysis - HSC - SSCE Business Studies - Question 25 - 2010 - Paper 1
Step 1
Outline ONE advantage for LMX Ltd of using comparative ratio analysis.
Answer
One advantage of using comparative ratio analysis for LMX Ltd is that it allows the company to benchmark its performance against industry averages. This can highlight areas of strength and weakness, enabling management to make informed decisions to enhance operational efficiency and financial health.
Step 2
Explain the effect of the proposed extension on LMX Ltd’s efficiency.
Answer
The proposed extension of credit terms from 30 days to 90 days may significantly affect LMX Ltd's efficiency, particularly in its accounts receivable turnover. Currently, LMX Ltd has an accounts receivable turnover ratio of 52 days, which is already longer than the industry average of 26 days.
By extending the credit term, LMX Ltd may experience an increase in outstanding receivables, leading to even longer collection periods. This could potentially tie up cash that could be used for other operational needs. Over time, a higher accounts receivable turnover means less liquidity and may hinder the company's ability to meet short-term obligations, impacting overall operational efficiency.
In summary, while the extension may be beneficial for customer relations, it poses risks for LMX Ltd's cash flow and financial efficiency.