Question
In: Accounting
You have the following financial statements for two building companies and have been asked to compare...
You have the following financial statements for two building companies and have been asked to compare them:
Income statements for the year to 31st December 2019
|
Potts Ltd |
Tony Ltd |
|
|
£`000 |
£`000 |
|
|
Sales |
3500 |
3880 |
|
Cost of Sales |
(900) |
(1000) |
|
Gross Profit |
2600 |
2880 |
|
Operating expenses |
(560) |
(790) |
|
Operating Profit |
2040 |
2090 |
|
Interest Payable |
(57) |
(76) |
|
Profit Before Taxation |
1983 |
2014 |
|
Taxation |
(80) |
(68) |
|
Profit After Taxation |
1903 |
1946 |
|
Dividends |
(35) |
(42) |
|
Retained Profits |
1868 |
1904 |
Statements of financial position as at 31st December 2019
|
Potts Ltd |
Tony Ltd |
|
|
£`000 |
£`000 |
|
|
Non-current assets |
3,056 |
3,768 |
|
Current assets |
||
|
Inventories |
350 |
245 |
|
Trade receivables |
270 |
257 |
|
Cash at bank |
120 |
80 |
|
Less: Current liabilities |
||
|
Trade payables |
(70) |
(65) |
|
Taxation |
(68) |
(42) |
|
Non current liabilities |
||
|
Long-term loan |
(800) |
(1000) |
|
Net assets |
2,858 |
3,243 |
|
Shareholders' funds |
||
|
£1 ordinary shares |
700 |
800 |
|
Retained earnings |
2,158 |
2,443 |
|
2,858 |
3,243 |
Additional information:
- All purchases and sales were on credit”
Required:
- Calculate the following ratios for each company.
- Pre-tax Return on Equity (use total shareholders’ funds as your denominator)
- Operating profit margin
- Net profit (before tax) margin
- Trade receivable (debtor) period in days
- Current ratio
- Acid test ratio (Quick ratio)
- Gearing ratio (use debt + equity as your denominator)
- Interest cover
- Dividend cover
- Dividend per share (in pence)
[30 marks]
- “Amy Ltd supplies, installs and maintains burglar alarms systems for business clients. The accountant has provided a horizontal analysis and is concerned about the firm's performance.”
|
Amy Ltd: comparison to previous year |
|||
|
2017 |
2018 |
2019 |
|
|
Accounts receivable |
1.20% |
8.2% |
7.4% |
|
Inventory |
8.4% |
1.7% |
4.9% |
|
Sales |
-3.0% |
1.2% |
5.4% |
|
Non-current assets |
2.3% |
4.8% |
7.6% |
|
Borrowings |
3% |
9.8% |
19.8% |
Required: provide a brief report on the results of the analysis? Comments should include any concerns you may have.
(Maximum word count: 100)
Solutions
Expert Solution
| i. Pre-tax Return on Equity (use total shareholders’ funds as your denominator) | ||
| Formula : | Pre tax Income | |
| Shareholder's Equity | ||
| Potts Ltd | Tony Ltd | |
| Profit Before Taxation | 1983 | 2014 |
| Shareholder's Equity | 2,858 | 3,243 |
| Pre - tax Return on Equity = | 0.693842 | 0.62103 |
| ii. Operating profit margin | ||
| Formula : | Operating Profit | |
| Net sales | ||
| Potts Ltd | Tony Ltd | |
| Operating Profit | 2,040.00 | 2,090.00 |
| Sales | 3,500.00 | 3,880.00 |
| Operating Profit Margin = | 0.58 | 0.54 |
| iii. Net profit (before tax) margin | ||
| Formula : | Net profit before tax | |
| Net sales | ||
| Potts Ltd | Tony Ltd | |
| Profit Before Taxation | 1,983.00 | 2,014.00 |
| Sales | 3,500.00 | 3,880.00 |
| Net profit (before tax) margin = | 0.57 | 0.52 |
| iv. Trade receivable (debtor) period in days | ||
| Formula : | Trade Receivable | |
| Credit sales | ||
| Potts Ltd | Tony Ltd | |
| Trade receivables | 270.00 | 257.00 |
| Sales | 3,500.00 | 3,880.00 |
| Trade receivable (debtor) period in days = | 28.16 | 24.18 |
| v. Current ratio | ||
| Formula : | Current asset | |
| Current Liability | ||
| Potts Ltd | Tony Ltd | |
| Quick assets | 390.00 | 337.00 |
| Current Liability | 138.00 | 107.00 |
| Current ratio = | 2.83 | 3.15 |
| vi. Acid test ratio (Quick ratio) | ||
| Formula : | Current asset - Inventory | |
| Current Liability | ||
| Potts Ltd | Tony Ltd | |
| Current assets | 740.00 | 582.00 |
| Current Liability | 138.00 | 107.00 |
| Quick ratio = | 5.36 | 5.44 |
| vii. Gearing ratio (use debt + equity as your denominator) | ||
| Formula : | Debt | |
| Debt + Equity | ||
| Potts Ltd | Tony Ltd | |
| Debt | 800.00 | 1,000.00 |
| Equity | 2,858.00 | 3,243.00 |
| Gearing ratio = | 0.22 | 0.24 |
| viii. Interest cover | ||
| Formula : | Earning before interest | |
| Interest | ||
| Potts Ltd | Tony Ltd | |
| EBIT | 2,040.00 | 2,090.00 |
| Interest Payable | 57.00 | 76.00 |
| Interest Cover ratio = | 35.79 | 27.50 |
| ix. Dividend cover | ||
| Formula : | Net Income | |
| Dividend | ||
| Potts Ltd | Tony Ltd | |
| Profit After Taxation | 1,903.00 | 1,946.00 |
| Dividends | 35.00 | 42.00 |
| Dividend Cover ratio = | 54.37 | 46.33 |
| x. Dividend per share (in pence) | ||
| Formula : | Dividend | |
| Number of share | ||
| Potts Ltd | Tony Ltd | |
| Dividends | 35.00 | 42.00 |
| Number of shares | 700.00 | 800.00 |
| Dividend per share = | 0.05 | 0.05 |
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