Statements of comprehensive income for the year ended
Abacus Benet
Shs ‘million’ Shs ‘million’
Sales 20,000 30,000
Cost of sales (7,000) (15,000)
Gross profit 13,000 15,000
Other expenses (2,000) (5,000)
Administrative expenses (1,000) (2,000)
Profit before interest and tax 10,000 8,000
Interest (1,000) (1,200)
Profit after interest before tax 9,000 6,800
Tax (at 30%) (2,700) (2,040)
Profit after tax 6,300 4,760
Statement of financial position as at 31 December:
Abacus Benet
Shs ‘million’ Shs ‘million’
Non-current assets:
Property plant & equipment 13,400 17,000
Current assets: Receivables 9,500 12,200
Inventory 8,200 6,000
Cash 6,000 2,360
Total assets 37,100 37,560
Equity & liabilities:
Ordinary shares 9,200 10,200
Reserves 8,300 6,160
Total equity 17,500 16,360
Non-current liabilities:
Long-term debt 5,000 6,000
Current liabilities:
Other accounts payable 8,000 6,200
Accruals 6,600 9,000
14,600 15,200
Total equity & liabilities 37,100 37,560
The following selected ratios are also provided:
Ratio Industry average
Current ratio 2:1
Quick/ acid test ratio 1:1
Net profit margin 25%
Debt to equity ratio 40%
Interest coverage ratio 4 times
Receivables days 60 days
You may assume 360 days in a year.
Mr. Bemba is also aware that he can use preference shares as one of the sources of finance. One potential investor has offered to buy 10% redeemable preference shares of Shs 20,000 each at Shs 25,000 and these shares will be redeemed after 10 years at par. Mr. Bemba has been has indicated that he is ready to embark on any project that comes his way provided it fits within his capital investment budget.
Required:
Mr. Bemba has shared with you the information in his possession and is seeking guidance on the following issues:
(a) Using the industry ratios as a benchmark, advise on which company to partner with. 17 marks
(b) Ratio analysis is a widely used technique to evaluate the financial position and performance of a business. However, there are certain problems associated with using ratios.
Required:
Briefly explain the key aspects of financial position and performance that may be evaluated by ratios, and list some of the problems referred to in the above statement.