Question

Carey, Knowles & Towers-Clark: Accounting - A Smart Approach, 3rd edition

Prezzo plc

Prezzo plc runs a chain of restaurants in the UK that serve mainly Italian style food including pizza, pasta, and grilled dishes as well as a few Chimichanga Mexican restaurants. During 2012, the number of restaurants in the group increased from 184 to 210. Prezzo shares are listed on AIM, which is a stock market for smaller growing companies. Extracts from Prezzo’s annual report 2012, including financial statements for the year to 30 December 2012 and extracts from the director’s report, are given:

Table FA.1

Prezzo plc Extracts from the statement of profit or loss for the years:
		2012 £’000	2011 £’000
Sales		144,524	123,873
Cost of sales		123,614	105,221
Gross profit		20,910	18,652
Administration costs		(3,582)	(2,540)
Operating profit		17,328	16,112
Net interest received /(paid)		(4)	19
Profit before tax		17,324	16,131
Taxation		(4,380)	(4,389)
Profit for the financial period and total comprehensive income		12,944	11,742
Earnings per share		5.66p	5.17p

Table FA.2

Prezzo plc Extracts from the statement of financial position as the financial year-ends:
		2012 £’000	2011 £’000
Non-current assets
Intangibles		1,508	1,560
Property, plant and equipment		112,957	97,431
Other non-current assets		4,804	4,748
		119,269	103,739
Current assets
Inventories		4,559	3,838
Trade receivables		3,578	1,927
Other current assets		5,823	5,129
Cash		4,367	39
		18,327	10,933
Total assets		137,596	114,672
Equity
Share capital		11,458	11,385
Retained profits and other reserves		80,245	67,422
		91,703	78,807
Non-current liabilities		9,506	8,730
Current liabilities		36,387	27,135
Total equity and liabilities		137,596	114,672

Table FA.3

Prezzo plc Extract from the statement of cash flows for the 2012 financial year
		2012 £’000
Cash flows from operating activities (after tax)		27,190
Cash flows from investing activities
Purchase of property, plant and equipment		(24,098)
Proceeds from sale of property, plant and equipment		1,387
Cash flows from financing activities
Issue of new shares		421
Equity dividend paid		(572)
Net increase in cash balances		4,328
Cash balances at 1 January 2012		39
Cash balances at 30 December 2012		4,367

Required:

a) Using extracts from the Annual Report, compute the following profitability ratios for Prezzo plc for 2012 and 2011 and interpret your findings, giving a possible reason for any observed changes in each ratios:

• return on capital employed

• operating profit margin

• use of assets

• gross profit margin

Identify one other profitability ratio that might enable you to gain a better understanding of the company's profitability. Compute that ratio for both years and discuss your findings.

b) Use ratios to assess the liquidity of the company at both year-ends and explain what has caused the movement in the ratios between the two year-ends.

c) Use the company’s statement of cash flows to discuss what has happened to the company’s cash position during 2012.

d) Complete the following table of share information and investment ratios:

Table FA.4

	2012	2011
Earnings per share
Dividend per share	0.25 pence	0.225 pence
Share price at the year-end	67.5 pence	56.5 pence
Dividend yield
Dividend cover
Price to earnings ratio

Interpret the investment ratios, explaining what they reveal to shareholders about the return their shares have generated.

e) Describe two other sources of information that might have enabled you to give a fuller interpretation of the company’s performance and financial position and explain how that information could have been used.

Answer 1