Question 1

Colour Group is considering an M&A plan and has identified Green and Yellow who operate in
the same industrial sector as its target.
Below are the financial ratios calculated from financial statements of Green and Yellow.
Profitability ratios Green Yellow Industrial average
ROCE before tax % 22 28 20
Return on equity % 18 22 15
Net profit margin % 11 5 7
Gross profit ratio % 25 12 20
Activity ratios
Total assets turnover = times 1.5 4.0 2.5
Non-current asset turnover = times 2.3 12.0 5.1
Receivables collection period in weeks 8.0 5.1 6.5
Inventory holding period in weeks 21.0 4.0 13.0
Liquidity ratios
Current ratio 1.8 1.7 2.8
Acid test 0.5 0.9 1.3
Debt–equity ratio % 80.0 20.0 65.0
Required:
(a) Prepare an analysis report to the directors of Colour Group to assess the performance of these
two companies from the information provided, indicate which one you believe to be a better
acquision.
(b) Identify areas which you consider required further information is needed before a final
decision can be made.

Question 2

Tea is a limited company which is seeking opportunity to grow through M&A. You are a
member of an investment team considering the purchase of Sugar, a listed company that
produces and trades a complementary products of Tea’s.

You are required to prepare a report evaluating the recent performance of Sugar and quality of its
management. Information which derived from the financial statements of Sugar for the three
years ended 31 December 2013, 2014 and 2015 is given below:

Financial year ended 31 Dec 2013 2014 2015

Revenue ($ million) 2,243 2,355 2,237
Cash and cash equivalent ($ million) -50 81 -97
ROE 13% 22% 19%
Sales revenue to total assets 2.66 2.66 2.01
Cost of sales to sales revenue 85% 82% 79%
Operating expenses to sales revenue 11% 12% 15%
Net income to sales revenue 2.6% 4.3% 4.2%
Current/ working capital ratio 1.12 1.44 1.06
Acid test ratio 0.8 1.03 0.74
Inventory turnover (months) 0.6 0.7 1.0
Credit to customers (months) 1.3 1.5 1.7
Credit from suppliers (months) 1.5 1.5 2.0
Net asset per share (cents per share) 0.86 0.2 0.97
Dividend per share (cents per share) 10.0 14.0 14.0
Earnings per share (cents per share) 11.5 20.1 18.7

Required:

Use the above information:

a. Assess the perfornance of Sugar;

b. Makes recommendations as to how Sugar could improve its performance
c. Indicates any limitations in your analysis.

Question 3

ROB is considering investing in LW, a listed entity, and has asked for your analysis of the
financial performance and financial position of LW based on the most recently published
financial information.

LW is a manufacturing entity operating in the technology sector. The entity has two large
manufacturing plants, one in Asia and the other in South America. The majority of sales revenue
is earned in Europe and North America.

LW recently invested in technology associated with mobile phone ports for motor vehicles and
sales of these items began on 1 April 2013.

The financial statements for LW are provided below:

Consolidated statement of comprehensive income for the year ended 31 December:

2013 2012
$m $m
Revenue 470 410
Cost of sales (285) (260)
Gross profit 185 150
Administrative (56) (35)
expenses
Distribution costs (70) (60)
Finance costs (5) (1)
Profit before tax 54 54
Income tax expense (15) (13)
Profit for the year 39 41
Other comprehensive income that will not be reclassified to profit or loss
Revaluation gains from 20 -
property (net of tax)
Total comprehensive 59 41
income

Consolidated statement of financial 2013 2012

position as at 31 December

ASSETS $m $m
Non-current assets
Property, plant and equipment 29 235
0
Intangible assets – development costs 50 30
340 265
Current assets
Inventories 110 80
Trade and other receivables 75 60
Cash and cash equivalents - 10
185 150
Total assets 525 415
EQUITY AND LIABILITIES
 Equity
Share capital ($1 shares) 80 60
Share premium 30 10
Other elements of equity 2 2
Revaluation reserve 20 -
Retained earnings 220 248
Total equity 352 320
Non-current liabilities
5% convertible debt 2015 22 20
Provisions 14 5
36 25
Current liabilities
Trade and other payables 120 70
Short-term borrowings 17 -
137 70
Total liabilities 173 95
Total equity and liabilities 525 415

Additional information:

1. Included in provisions is $8 million in respect of a lawsuit that was raised by a competitor, X

which is accusing LW of using technology developed by X, without a licence. The lawsuit was
filed in December 2013 and the provision represents the initial estimate by LW’s legal advisors
of a potential settlement. The provision has been recognised in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.

2. There was a significant labour dispute in February 2013 in the manufacturing plant in South
America. LW settled the dispute within one month but incurred significant legal fees in the
process.

Required:

(a) Analyse the financial performance and the financial position of LW from the view of
investors.
(b) Discuss why investors may find it useful to review the segmental information of LW when
attempting to assess the future profitability of LW.

Question 4

QW, a listed entity, manufactures recyclable packaging. On 1 September 2013, after much
negotiation, QW secured a contract with one of the largest supermarket chains in the country.
This contract is expected to double QW’s market share within the next two years.
On 1 December 2013 QW acquired 80% of the equity share capital of one of its suppliers, RT, in
order to safeguard its supply chain.
QW’s share price was $1.70 on 31 December 2012 and $3.42 on 31 December 2013. A client of
yours is considering investing in QW’s shares.

The following financial information for QW is available:

Consolidated statement of financial position as at 31 December

2013 2012
ASSETS $m $m
Non-current assets
Property, plant and 470 352
equipment
Goodwill 35 21
505 373
Current assets
Inventories 95 40
Receivables 70 52
Cash and cash equivalents 7 8
172 100
Total assets 677 473
EQUITY AND LIABILITIES
Equity
Share capital ($1 equity 200 170
shares)
Share premium 120 60
Retained reserves 82 71
 402 301
Non-controlling interest 98 58
Total equity 500 359
Non-current liabilities
Long term borrowing 34 40
Finance lease liability 40 -
74 40
Current liabilities
Trade and other payables 93 74
Finance lease liability 10 -
103 74
Total liabilities 177 114
Total equity and 677 473
liabilities
2013 2012
Consolidated statement
of profit or loss for the
year ended 31
December
$m $m
Revenue 660 480
Cost of sales (490) (390)
Gross profit 170 90
Distribution costs (30) (25)
Administrative expenses (44) (24)
96 41
Finance costs (6) (3)
Profit before taxation 90 38
Income tax expense (20) (10)
Profit for the year 70 28
Additional information:
Contingent liability

The notes to the financial statements include details of a contingent liability. On 20 October
2013 a chemical leak at one of QW’s plants caused a local river to be polluted and wildlife was
significantly affected. The investigation is at an early stage and it has not yet been proven that
QW acted negligently. QW has already incurred legal fees but the extent of the clean-up costs
and potential fines that QW will have to pay are uncertain at the reporting date.

(a) Analyse the financial performance and position of QW based on the information provided
and discuss whether you would recommend QW for equity investment at this time.
(b) Discuss what additional information you would recommend your client obtains before
making an investment decision.