Mini Case study

Chemical supplies Ltd. (CSL) is a distributor of specialised chemicals for the industrial
sector, established in the year 2014 started operations with an initial capital of Rs. 30 million.

Their products continue to have high acceptance of customers in the past but in the year with
significant levels of profitability. In the preceding year 31st March, 2018 the company saw a
dip in profits compared to previous years, despite increased turnover, which situation has
however since recovered in the subsequent year ending 31st March, 2019. The management is
quite pleased with its recovery and confident of the trend continuing in the future.

CSL has also invested its surplus funds of the past in investments from which the company
continues to receive dividends which helps to increase its earn returns. One area of concern is
the high level of bad debts which was due to a large amount due from a customer who went
bankrupt during the year.

The company has a sales mix on average of Cash sales of 20% and Credit sales of 80%. A
significant amount has been invested in the current year for marketing related activities to
ensure higher revenues from sales.

They also operate with around 400 small and medium sized dealers, and have a credit policy
of extending 60 days credit to them. Due to the need to obtain cash from its customers CSL
employs special debt collection officers and monitors the level of bad debts incurred. The
company also has a policy of attempting to keep its cost of sales at 65% of its selling price.
All purchases by the company have also been on credit terms.

The sales pattern during the period April 2018 to March 2019 is made available together with
the Income statement Balance sheet and Cash flow statement.

Required:
1. Comment on the performance of the company paying emphasis to the given
background information.
Hint: Use ratio analysis and determine the % YOY change
2. How cash has been utilized during the year,
3. What impact do you expect the monthly sales pattern to have on the ratios computed
above, and how would this affect your judgement on performance of the company?

1
Income Statement for the year ended 31st March
2018 2019 2018 2019
Rs. 000's Rs. 000's YOY change
Sales 54,900 45,100 22% Cash sales 10,980 9,020 20%
Less: Cost of sales Credit sales 43,920 36,080 80%
Opening stock 14,600 11,500 54,900 45,100
Purchases 42,950 35,000
Less: Closing stock (16,900) (14,600)
40,650 31,900 27%

Gross profit 14,250 13,200

Add: Other Income
Dividends received 3,500 600

Less: % exp on sales

Administration expenses 4,040 3,200 26% 2016 2015
Depreciation 2,500 1,950 28%
Marketing & Distribution exp 3,200 2,700 19% 5.8% 6.0%
Bad debts 2,550 1,560 63% 5.8% 4.3%
Interest 3,870 2,985 30%
16,160 12,395 30%

Profit before tax 1,590 1,405

Taxation 215 110
Profit after tax 1,375 1,295

Less: Dividends paid 1,000 800

Retained profits for the year 375 495
Retained profits b/f 1,389 894
Retained profits c/f 1,764 1,389

Monthly sales for the year ended 31st March 2019

Rs. 000's
April 2015 980
May 1,860
June 2,540
July 3,500
August 3,405
September 4,620
October 7,250
November 10,510
December 12,445
January 2016 3,940
February 2,160
March 2016 1,690
54,900

2
Balance Sheet as at 31st March 2018 2019
ASSETS Rs. 000's Rs. 000's
Property, Plant & Equipment 63,800 55,300
(at net book value)
Investments 16,400 8,400
80,200 63,700
Current Assets
Inventory 16,900 14,600
Accounts receivable (Debtors) 13,700 9,100
Cash 3,684 200
34,284 23,900

Total Assets 114,484 87,600

EQUITY & LIABILITIES

Stated capital 55,000 40,000
Retained Profits 1,764 1,389
Equity 56,764 41,389

Long-term Liabilities
Bank loans 30,000 20,000

Current liabilities
Accounts payable (Creditors) 11,300 9,800
Accrued expenses 900 1,330
Current portion of LT Liabilities 9,500 8,000
Bank overdraft 6,020 7,081
27,720 26,211

Total liabilities 57,720 46,211

Total liabilities and Equity 114,484 87,600

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No. of shares in issue 5,500,000 4,000,000