Quick questions on Financial ratio analysis for diversification decisions (QCE Business Unit 3)

$$\text{Gross profit ratio} = \frac{\text{Gross profit}}{\text{Sales}} = \frac{\text{Sales} - \text{COGS}}{\text{Sales}}$$

$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$

A business considering diversification (a new market, a new product line, FDI) uses financial ratios to test capacity.

$$\text{Gross profit ratio} = \frac{1{,}600{,}000}{4{,}000{,}000} = 0.40 = 40\%$$

If acquiring an overseas business, the target's ratios reveal its financial position. Strong target ratios mean a smoother acquisition; weak ratios mean an integration challenge.

The business has the financial capacity for moderate FDI. A $5 million Vietnam investment could be funded with$3 million debt (taking D/E to about 0.9, still moderate) and $2 million from operating cash and retained profits. The strong profitability supports the investment thesis; the moderate gearing leaves headroom for the next stage of investment.

Strong profitability (40% gross, 16% ROE), healthy liquidity (1.5 current ratio), conservative gearing (0.6 D/E). The business is in good financial shape and has capacity to invest in diversification, growth, or higher shareholder distributions.