Fairfield Foods plc is a catering establishment which also owns shops and cafes. Due to increased competition the company has recently experienced declining profitability. In order to ascertain whether this is a sector-wide problem the directors wish to investigate this trend. As a result, they have acquired average ratios for the sector. Some of these equivalent ratios are shown below. Sector averages for the year ended 30 June 2020: Return on capital employed 18.6% Operating profit margin 8.6% Net asset turnover 2.01 Inventory holding period 4 days Debt to equity 80% The following information has been extracted from the draft financial statements of Fairfield Foods plc for the year ended 31 December 2020: Statement of profit or loss for the year ended 31 December 2020: £’000 Revenue 201,600 Cost of Sales (140,000) Gross Profit 61,600 Operating expenses (35,280) Profit from operating 26,320 Extracts from the Statement of financial position as at 31 December 2020 £’000 Non-current assets 110,000 Inventory 7,920 Equity: Equity shares of £1 each 34,000 Revaluation surplus 10,800 Retained earnings 20,960 Total Equity 65,760 Non-current liabilities: 10% bank loan 28,800 Other relevant information to Fairfield Foods plc: 1. In 2019, Fairfield Food plc acquired a popular brand name. At 31 December 2020, the brand represented 20% of non-current assets. The remaining 80% of non-current assets comprises the property from which Fairfield Foods operates and its shops and cafes. This property is owned by Fairfield Foods plc and has no directly associated finance. The property was revalued in 2019. 2. In January 2021, it was decided to discount some slow-moving seasonal inventory which had a selling price of £3m. Under normal circumstances these would have a gross margin of 20%. The inventory was sold in January 2021 for 50% of what it had cost to produce. The financial statements for the year ended 31 December 2020 were authorised for issue on 15 March 2021 required: Briefly consider possible limitations of the comparison between Fairfield Foods plc and the equivalent sector average ratios.
Fairfield Foods plc is a catering establishment which also owns shops and cafes. Due
to increased competition the company has recently experienced declining profitability.
In order to ascertain whether this is a sector-wide problem the directors wish to
investigate this trend. As a result, they have acquired average ratios for the sector.
Some of these equivalent ratios are shown below.
Sector averages for the year ended 30 June 2020:
Return on capital employed 18.6%
Operating profit margin 8.6%
Net asset turnover 2.01
Inventory holding period 4 days
Debt to equity 80%
The following information has been extracted from the draft financial statements of
Fairfield Foods plc for the year ended 31 December 2020:
Statement of profit or loss for the year ended 31 December 2020:
£’000
Revenue 201,600
Cost of Sales (140,000)
Gross Profit 61,600
Operating expenses (35,280)
Profit from operating 26,320
Extracts from the
£’000
Non-current assets 110,000
Inventory 7,920
Equity:
Equity shares of £1 each 34,000
Revaluation surplus 10,800
Retained earnings 20,960
Total Equity 65,760
Non-current liabilities: 10% bank loan 28,800
Other relevant information to Fairfield Foods plc:
1. In 2019, Fairfield Food plc acquired a popular brand name. At 31 December
2020, the brand represented 20% of non-current assets. The remaining 80% of
non-current assets comprises the property from which Fairfield Foods operates
and its shops and cafes. This property is owned by Fairfield Foods plc and has
no directly associated finance. The property was revalued in 2019.
2. In January 2021, it was decided to discount some slow-moving seasonal
inventory which had a selling price of £3m. Under normal circumstances these
would have a gross margin of 20%. The inventory was sold in January 2021 for
50% of what it had cost to produce. The financial statements for the year ended
31 December 2020 were authorised for issue on 15 March 2021
required: Briefly consider possible limitations of the comparison between Fairfield Foods plc
and the equivalent sector average ratios.
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