An investor is considering the purchase of shares in either Gees Baking Ltd or 9 west Ltd. Both companies are in the same line of business and their accounts are summarised below: Income statements for the year ended 31 December 2019 Gees Baking Ltd 9 west Ltd $000 $000 $000 $000 Sales revenue 596 678 Cost of sales (394) (526) ––––– –––––– Gross profit 202 152 Expenses: Administrative (36) (45) Selling and distribution (53) (56) Depreciation (14) (19) Loan note interest – (8) ––––– –––––– (103) (128) ––––– ––––– Net profit 99 24 –––––––––– –––––– Statements of financial position as at 31 December 2019 Gees Baking Ltd 9 west Ltd Assets $000 $000 $000 $000 Non-current assets At cost 420 1,070 Accumulated depreciation (113) (144) ––––– –––––– 307 926 Current assets Inventory 138 167 Receivables 69 98 Cash and cash equivalents 96 303 9 274 ––––– ––––– –––––– –––––– 610 1,200 –––––––– –––––– Equity and liabilities Share capital and reserves Share capital ($1 Ordinary shares) 370 900 Retained earnings 170 69 ––––– –––––– 540 969 Non-current liabilities 10% Loan note – 80 Current liabilities Trade payables 60 120 Interest payable – 1 Income tax 10 70 30 151 ––––– ––––– –––––– ––––– Total equity and liabilities 610 1,200 –––––––––– –––––– The market price for each share for each company: $1.60. $1.50 1. As a financial advisor, explain to a potential investor THREE (3) reasons why using ratios is a good way to analyze and interpret the published financial statements of a company and THREE (3) reasons why they can be misleading. 2. Analyze the performance of both companies using the following ratios: Current ratio Return on capital employed Receivables collection period Inventory turnover period Interest cover ratio Debt to Equity ratio (Show all workings)
An investor is considering the purchase of shares in either Gees Baking Ltd or 9 west Ltd. Both companies are in the same line of business and their accounts are summarised below:
Income statements for the year ended 31 December 2019
Gees Baking Ltd 9 west Ltd
$000 $000 $000 $000
Sales revenue 596 678
Cost of sales (394) (526)
––––– ––––––
Gross profit 202 152
Expenses:
Administrative (36) (45)
Selling and distribution (53) (56)
Loan note interest – (8)
––––– ––––––
(103) (128)
––––– –––––
Net profit 99 24
–––––––––– ––––––
Gees Baking Ltd 9 west Ltd
Assets $000 $000 $000 $000
Non-current assets
At cost 420 1,070
Accumulated depreciation (113) (144)
––––– ––––––
307 926
Current assets
Inventory 138 167
Receivables 69 98
Cash and cash equivalents 96 303 9 274
––––– ––––– –––––– ––––––
610 1,200
–––––––– ––––––
Equity and liabilities
Share capital and reserves
Share capital ($1 Ordinary shares) 370 900
––––– ––––––
540 969
Non-current liabilities
10% Loan note – 80
Current liabilities
Trade payables 60 120
Interest payable – 1
Income tax 10 70 30 151
––––– ––––– –––––– –––––
Total equity and liabilities 610 1,200
–––––––––– ––––––
The market price for each share for each company: $1.60. $1.50
1. As a financial advisor, explain to a potential investor THREE (3) reasons why using ratios is a good way to analyze and interpret the published financial statements of a company and THREE (3) reasons why they can be misleading.
2.
- Analyze the performance of both companies using the following ratios:
Current ratio - Return on capital employed
- Receivables collection period
- Inventory turnover period
- Interest cover ratio
- Debt to Equity ratio (Show all workings)
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