Financial Statement Analysis

You are considering investing in one of two companies. You only have access to the following information.

  Company A Company B
Return on Capital Employed 18.5% 18.9%
Earnings per share 23p 23p
Current ratio 1.2 2.1
Quick ratio 0.7 1.1
Trade payables period 49 days 39 days
Gearing 11% 5%

  1. a)Which of the two companies would you be inclined to invest in? Give reasons for your choice.
  2. b)What further information would you require before making a final decision?

 

 

Q2       Bentley Trading

Bentley Trading plc is a company which uses a variety of component parts in its manufacturing operations. As the current supplier has recently gone into liquidation Bentley is seeking an alternative supplier. Two companies have been identified as potential suppliers. Both companies prepare accounts in Sterling and both have a year end of 31 January. Bentley has obtained copies of the published accounts for both companies.

Required:

  1. a)Calculate the following ratios:
  • Sales Margin
  • Current
  • Asset Turnover
  • Acid test/Quick
  • Inventory
  • Interest cover
  • Debtor
  • Gearing
  • Creditor
  • RONA
  1. b)With reference to the ratios discuss which would be the most reliable source of supply.
  2. c)Identify what further information would be required before a final decision could be taken.

  X Ltd   Y Ltd
  £000   £000
Income Statement for the year to 31 January 2011      
            Turnover 5,720   6,310
            Cost of sales 3,840   4,240
Gross Profit 1880   2,070
            Operating Expenses 760   1,080
Profit before interest and tax (PBIT) 1120   990
            Interest payable 50   350
Profit before taxation 1,070   640
            Taxation 320   210
Retained profit 750   430
       
Statement of financial Position as at 31 January 2011      
Non-current Assets 4,570   6,330
Current Assets      
            Inventories 510   890
            Trade receivables 670   1,090
            Bank Balance 340   0
  1,520   1,980
Current Liabilities      
            Trade Payables 450   1,130
            Taxation 320   210
            Bank Balance 0   440
  770   1,780
Non-current Liabilities      
            Long term Loan 500   3,500
  4,820   3,030
Equity      
            Share capital 2,000   2,000
            Retained Earnings 2,820   1,030
  4,820   3,030

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