RATIO UETION

Consider the following financial information for Patterdale limited, a manufacturer of sauces for the food
industry, as at 31 December 2014 (with comparatives).
Patterdale Limited Statement of Financial Position as at 31 December
2014 2013
$'000 $'000
Non-Current Assets
Property, Plant & equipment 230,000 180,000
Total non-Current Assets 230,000 180,000
Current Assets
Inventories 19,500 15,200
Trade receivables 14,200 14,700
Cash & Cash equivalents 8,240 12,400
Total Current Assets 41,940 42,300
TOTAL ASSETS 271,940 222,300
Equity & Liabilities
Equity
Share Capital 80,000 50,000
Share Premium 10,000 5,000
Retained earnings 65,290 63,500
Total equity 155,290 118,500
Non-Current Liabilities
Long-term Loan 100,000 90,000
Total non-Current liabilities 100,000 90,000
Current liabilities
Trade Payables 15,900 13,300
Current Tax Payable 750 500
Total Current liabilities 16,650 13,800
TOTAL EQUITY & LIABILITIES 271,940 222,300
Other Relevant Information
Revenue 86,400 81,100
Cost of sales 68,990 67,074
Administrative expenses 2,460 2,146
Distribution Costs 4,750 4,080
Finance Costs 5,300 4,600
Income Tax 710 400
Profit after tax 4,190 2,800
Dividends Paid 2,400 1,700

REQUIREMENT:
Using the above information:
(a) Calculate six appropriate ratios in order to comment on, and assess, the liquidity, profitability and
gearing of Patterdale limited. (12 marks)
(b) Review the above financial statements and identify any additional long-term funding raised by
Patterdale limited in 2014. Indicate where this funding was spent. (4 marks)
(c) Identify and explain the main limitations of ratio analysis as a means of assessing the financial
performance of a business.
Question Redona Limited operates a hotel in Dublin and the following is its results for the last three years
with its year end being 31 december.
2013 2014 2015
Revenue increase / (decrease) (5%) 4% 12%
Non-Current Assets increase / (decrease) 40% 10% 2%
Gross Profit 60% 61% 66%
Net Profit 23% 25% 21%
Return on Capital employed 12% 15% 10%
Current ratio 1.4:1 1.6:1 1.8:1
Acid ratio 0.6:1 1.0:1 0.9:1
Debt to equity ratio 50% 44% 43%
Dividend Cover 4 times 8 times 10 times

REQUIREMENT:
(a) Using all of the above information, comment on the performance of redona limited from 2013 to 2015.
(12 marks)
(b) Identify and explain the main advantages of ratio analysis as a means of assessing the financial
performance of a business. (5 marks)
(c) Comment on the use of the Gross Profit ratio to the service industry. (3 marks)
[Total: 20 Marks]

Question Shacarn Limited is a company which supplies meat to the retail trade. The following are their
results for the last two years.
Shacarn Limited Statement of Profit or Loss and Other Comprehensive Income Statement for the Year-
ended 31 December 2018

2018 ($) 2017 ($)

Sales 24,000 18,000
Cost of Sales 16,800 12,000
Gross Profit 7,200 6,000
Distribution Costs 1,200 1,000
Administration Costs 800 750
Finance Costs 620 840
Profit before tax 4,580 3,410
Taxation 573 426
Profit for the Year 4,007 2,984
Other Comprehensive Income ___0______ ___0_____
Total Comprehensive Income 4,007 2,984

Shacarn Limited Statement of Financial Position for the Year-ended 31 December 2018
2018 2018 2017 2017
$’000 $’000 $’000 $’000
Non-Current Assets 13,200 11,000
Current Assets
Inventory 1,400 1,800
Trade Receivables 2,000 1,200
Cash and Cash Equivalents 1,200 400
Total Current Assets 4,600 3,400
Total Assets 17,800 14,400
Equity & Liabilities
Equity
 Ordinary Share Capital ($1) 2,000 2,000
Retained Earnings 4,767 760
Total Equity 6,767 2,760
Non-Current Liabilities
Long-term Debt 9,000 10,000
Total Non-Current Liabilities 9,000 10,000
Current Liabilities
Trade Payables 1,400 1,200
Bank Overdraft 240 60
Taxation 120 180
Accruals 273 200
Total Current Liabilities 2,033 1,640
Total Equity and Liabilities 17,800 14,400

Notes:
(i) The Opening Inventory for 2017 was $2,000,000.
(ii) The number of ordinary shares in issue is 2,000,000 for both years.
31/12/2018 31/12/2017
(iii) Current Share Price per Ordinary Share $26.00 $15.00

REQUIREMENT:
(a) Calculate for the following ratios for both years in relation to Shacarn Limited.
(1) Gross Profit Percentage
(2) Net Profit Percentage
(3) Quick Ratio
(4) Trade Receivable Days
(5) Trade Payable Days
(6) Interest Cover
(7) Earnings Per Share
(8) Price Earnings Ratio (8 Marks)
(b) Draft a report to the Board of Directors of Shacarn Limited in which you provide a commentary on
the company’s position and performance. Use the ratios calculated at (a) above as the basis for your
commentary. (10 Marks)

5. Bohermaw Limited is a company which is involved in the retail trade. The following are their results for
the last two years.
Bohermaw Limited
Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2016
2016 2015
$’000 $’000
Sales 5,800 3,990
Cost of Sales (4,123) (2,863)
Gross Profit 1,677 1,127
Distribution Costs (193) (177)
Administration Costs (218) (126)
Profit before Interest & Tax 1,266 824
Interest (188) (194)
Taxation (108) (120)
Profit for the Year 970 510

Bohermaw Limited Statement of Financial Position for the year ended 31 December 2016
2016 2016 2015 2015
 $’000 $’000 $’000 $’000
Non-Current Assets 3,610 3,225
Current Assets
Inventory 580 460
Trade Receivables 460 280
Cash & Cash Equivalents 200 160
Total Current Assets 1,240 900
Total Assets 4,850 4,125
Equity & Liabilities
Equity
Share Capital 1,000 1,000
Retained Earnings 1,525 555
Total Equity 2,525 1,555
Non-Current Liabilities
Long-term Debt 1,700 2,000
Total Non-Current Liabilities 1,700 2,000
Current Liabilities
Trade Payables 400 320
Bank Overdraft 147 30
Taxation 108 120
Accruals 47 100
Total Current Liabilities 702 570
Total Equity & Liabilities 4,927 4,125
Notes:
(i) The Opening Inventory for 2015 was €500,000.
(ii) The number of shares in issue is 1,000,000 for both years.
2016 2015
(iii) Market price per share at year-end $12.00 $6.20

REQUIREMENT:
(a) Calculate for both years the following ratios in relation to Bohermaw Limited. (8 marks)
1) Gross Profit Percentage
2) Net Profit Percentage
3) Current Ratio
4) Trade Receivable Days
5) Trade Payable Days
6) Return on Capital Employed
7) Earnings Per Share
8) Price Earnings Ratio.
(b) Draft a report to the Board of Directors of Bohermaw Limited in which you provide a commentary on
the company’s position and performance. Use the ratios calculated at (a) above as the basis for your
commentary. (10 Marks)
(c) Discuss whether or not you would recommend to the Directors to sell the company for €15m as offered
by a third party. (2 marks)
[Total: 20 Marks]
SOLUTION 5 2015
Please note that different variations of ratio formulae will be accepted provided that they are correct.
(a) Calculation of Six Relevant Ratios
Patterdale Limited Possible Ratios in relation to its liquidity, profitability and gearing
2014 2013
Current 2 .52:1 3 .07:1
Quick 1 .35:1 1 .96:1
T. Receivable 6 0 days 6.6 days
T. Payable 8.4 days 7 2 days
Inventory 1 03 days 8 3 days
ROCE 4.00% 3.74%
Gross Profit 20.15% 17.29%
Net Profit 4.85% 3.45%
Gearing 39.17% 43.17%
Interest Cover 1.92 times 1.70 times
Debt to Equity 64.40% 75.95%

Commentary
The current and quick ratio is good. However, the company is carrying too much inventory unless the
company is stockpiling for future sales. Inventory days are too high and have increased by over 24% year
on year which is worrying and management need to investigate the reasons for this increase in case there
will be losses from obsolete inventory. Trade receivable days have decreased by size 6 days year on year
and Trade Payable days have increased by 12 days year on year which is pleasing. both ratios appear to be
high for the industry. It appears as if management have focused on getting in trade receivables quicker and
held off payment to trade payables so as to manage the working capital and pay for the increase in
inventory and property, plant and equipment. gross and net Profit are strong but the return on capital
employed is low highlighting that the return on the sizeable amount of assets is poor. Interest cover is low
especially considering the amount of profit versus the interest repayments on the loan. The gearing and debt
to equity ratio have improved year on year which is pleasing, the gearing ratio is acceptable but one would
like to see the debt to equity ratio continue to decline for the company. overall, the ratio analysis shows
some positive indications when comparing 2014 to 2013 but a lot of work is needed to manage the working
capital and liquidity of the company as well as earning a stronger return on its investment which reducing
debt levels. (12 marks)

(b) The external funds raised were an increase in long term loans of $10 million as well as the issuance of
new shares which generated funds of $35 million. This funding was used to finance the purchase of
new property, plant and equipment. (4 marks)

(c) Possible limitations of ratios are as follows:

(i) Underlying accounting principles: involves the application of both rules and judgement. This may
result in differing accounting numbers for similar circumstances for example, assets may be included
at cost or revalued amount which will lead to different ratio results for the same asset or different
methods of valuing inventory will provide different results and potentially render the ratios
meaningless.
(ii) Timing problems: some businesses are subject to heavy seasonality e.g. milling, construction etc. This
may lead to final accounts being unrepresentative of the normal situation.
(iii) The impact of price changes: Comparing the accounts of an enterprise with updated figures due to
inflation with those showing historic costs may be misleading.
(iv) Ratio analysis just gives a solution shown as a number – it does not provide the explanation behind the
ratio.
(v) Different formulae used to calculate ratios may make it difficult to compare ratios from different
sources.
(vi) Financial information can be “massaged” in several ways to make the figures used for ratios more
attractive. For example, many businesses delay payments to trade payables at the end of the financial
year to make the cash balance higher than normal and the trade payables days figure higher too
(4 marks)

Solution 5 2016 April

(a) Commentary on Performance of Redona Limited from 2013 to 2015
Revenue increase / (decrease)
The decrease and increase in redona limited revenue appears to be in line with how the hotel sector has
performed in the recession and coming out of the recession in 2014. The hotel sector in dublin has shown a
noticeable improvement in revenue in 2015 so redona limited has displayed a decent performance with its
revenue over the period.
Non-Current Assets increase / (decrease)
redona limited appears to have carried out a sizeable capital improvement programme in 2013 with some
residue of this spend rolling over to 2014. The 2015 spend is small and is consistent with the hotel not
needing much capital spend given the refurbishment in 2013 and 2014.
Gross Profit Percentage
A good performance by redona limited in capitalising on improving market conditions in 2015 by
increasing its rates and thereby increasing its gross margin. Again the results are in line with the hotel
sector in dublin.
Net Profit Percentage
Redona Limited performed poorly in this ratio. As Dublin gradually came out of recession in 2014, redone
Limited net profit percentage increased and showed the hotel was performing well. However, there has
been a sizeable decrease in the net profit percentage from 2014 to 2015 which is very disappointing
especially in light of the increase in the gross profit percentage. This is an area that the hotel management
and shareholders needs to examine closely to identify and correct the reasons for the decrease in net profit
percentage from 2014 to 2015.
Return on Capital Employed
Again a disappointing return and the decrease in profit is the significant reason for the decrease in the ratio.
underneath the line, the capital employed would have increased year on year which would also help to
decrease the ratio but the change in profit from 2014 to 2015 has been the main driver for the decrease in
the ratio from 2014 to 2015.
Current Ratio
The company has struggled with this ratio particularly in 2013 and 2014 but it is improving and 2015 is
getting closer to the norm of 2:1. overall, the result from 2013 to 2015 has been decent and continued focus
on this ratio can ensure that it gets to a satisfactory level in the years ahead.
Acid Ratio
Again this ratio has improved from 2013 to 2015 but it is disappointing to see that it decreased from the
2014 level. Therefore, management need to find the reasons for the decrease and work to ensure that it gets
back to the norm of 1:1 at a minimum. The 2013 ratio shows that the hotel was carrying a sizeable quantity
of inventory which then decreased in 2014 and increased again in 2015. This is surprisingly high for a hotel
and needs serious investigation as normally inventory would not be at this level in a hotel.
Debt to Equity Ratio
It is pleasing to note the improvement in this ratio from 2013 to 2015 as the company has paid down its
debt and improved its reserves. The decrease has slowed down in 2015 which is probably due to decreased
profits leading to decreased cash flow to pay back debt as well as the company trying to improve its current
ratio by holding on to more of its cash.
Dividend Cover
This ratio is going in the right direction as increased profits due to higher revenue are helping to increase
the cover. It also appears as if a decision was made to reduce the amount of the dividend and leave more of
the profit in the hotel to be used for future investment. Management need to ensure that the shareholders are
happy with the decrease in the level of the dividend given the increased profits despite lower profit
margins, the hotel is enjoying.
Overall, the hotel is performing well with management’s main focus to ensure that inventory levels are
reduced to hotel norms and to remedy the decrease in net profits for 2015 while ensuring that the hotel
improves its ratios overall due to a more buoyant hotel market existing in dublin.
(12 marks)

(b) Comparison
Financial ratios provide a standardised method with which to compare companies and industries. ratios can
put all companies on a relatively equal playing field in the eyes of analysts; companies are judged on their
performance rather than their size, sales volume or market share.
Industry Analysis
Ratios can reveal trends in particular industries, creating benchmarks against which the performance of all
industry players can be measured thus providing valuable information to users, shareholders, trade
payables, banks.
Stock Valuation
Ratios help investors and analysts to evaluate the strengths and weaknesses of individual companies or
industries and allow them to highlight companies to invest in or to avoid investing in.
Planning and Performance
Ratios can provide guidance to entrepreneurs when creating business plans or preparing presentations for
lenders and investors. Ratios can also serve as an impetus for strategic change within an organisation,
providing management with relevant guidance and feedback as ratio valuations shift in response to
organisational changes. Ratios help to ensure managers perform by revealing financial weaknesses and
opportunities.
Simplicity
It highlights important information in simple formats. A user can judge a company by just looking at a
small amount of numbers instead of reading the whole financial statements.
(5 marks)
(c) It depends on the service industry. for example, an accountancy practice will usually not have any cost
of sales and therefore, the gross profit ratio is meaningless as all its costs are under expenses. however, a
hotel while providing a service will have a cost of sales for its food and beverage operations and therefore,
the gross profit ratio is relevant.
(3 marks)

SOLUTION 5 2019 April

Gross Profit Percentage
Net Profit Percentage
Quick Ratio
Trade Receivable Days
Trade Payable Days
OR
Interest Cover
Earnings per Share
Price Earnings Ratio
2018
7,200/24,000 = 30.00%
4,007/24,000 = 16.70%
(4,600 - 1,400)/2,033 = 1.57:1
2,000/24,000*365 = 30 Days
1,400/16,800*365 = 30 Days
1,400/16,400*365 = 31 Days
5,200/620 = 8.39 Time
4,007/2,000 = $2.00
$26.00/$2.00 = 13.00
2017
6,000/18,000 = 33.33%
2,984/18,000 = 16.58%
(3,400 – 1,800)/1,640 = 0.98:1
1,200/18,000*365 = 24 Days
1,200/12,000*365 = 37 Days
1,200/11,800*365 = 37 Days
4,250/840 = 5.06 Times
2,984/2,000 = $1.49
$15.00/$1.49 = 10.07

Gross Profit Percentage

The Gross Profit percentage has decreased from 33.33% to 30.00%, a decrease of over 9.99% on the
percentages year on year which is a negative trend for the company. Revenues increased by 33.33% year on
year but unfortunately, the cost of sales increased by 40% year on year. If we look at Purchases, these have
increased from $11.8 million to $16.4 million which is an increase of 38.98%. This increase is greater than
the increase in Revenue and for the Company’s point of view, it appears that they have experienced price
increases in purchases which the company have been unable to pass on to its customers and is something
that management need to address in 2019.
2018 2017 % Increase
Opening Inventory 1,800 2,000 - 10.00%
Purchases (Balancing Figure) 16,400 11,800 + 38.98%
Closing Inventory (1,400) (1,800) - 22.22%
Cost of Sales 16,800 12,000

Net Profit Percentage

The Net Profit % has increased from 16.58% to 16.70% which is an increase of just over 0.72% year on
year on the percentages. This is a decent performance considering the decrease in the gross profit
percentage. The main reason for the change in fortunes from Gross to Net Profit is due to the decrease in
the finance costs year on year. The company has decreased the amount of long term debt by 10% year on
year but they have seen a 26.19% decrease in finance costs which suggests that they have refinanced their
debt at a better interest rate (especially given an increase in bank overdraft in 2018 versus 2017) which
management should be commended for. The company also kept a reasonable check on administration costs
which increased by 6.67% year on year. A distribution cost increased by 20% year on year but again this
was a decent result given the percentage increase in sales.

Quick Ratio
This ratio has increased from 0.98:1 to 1.57:1 this year which is an improvement of over 60% year on year
percentage wise. The main reason for the increase is the fact that Current Assets minus Inventory increased
by 100% driven mainly by the increase in Bank which increased by 200% and Trade Receivables
increasing by $800,000 or over 66% year on year. Current Liabilities increased by under 24% driven
mainly by the increase in the Bank Overdraft of $180,000. This was a good result overall as the company
have increased their revenue significantly which can put some strain on working capital. Yet the quick ratio
has increased this year and the company have also purchased some extra Non-Current Assets and paid off
some of Non-Current Debt (decreased by 10%). Some of this decrease in debt may have been funded
through the Bank Overdraft so Shacarn Limited should ensure that their source of funding is appropriate
from a time point of view. Shacarn Limited should reduce some of their cash and cash equivalents in
Current Assets in order to reduce the Bank Overdraft and ultimately save even more on bank interest costs.

Trade Receivable Days

This has increased from 24 to 30 days, an increase of 25% year on year, which is a deterioration even if a
trade receivable days of 30 is still a good overall result. Revenue has increased by over 33.33% but Shacarn
Limited should have tried to ensure that there was no deterioration in Trade Receivables Days. The
company needs to try and ensure that the increase in Revenue is not being fuelled by having customers who
are demanding longer credit before they would purchase goods from Shacarn. The company should
continue to focus on managing their Trade Receivables in the coming year.
Trade Payable Days
This decreased from 37 days to 30 days which is a deterioration of nearly 19% year on year. This is not a
good result given the fact that the company should be aiming for closer to 45-60 days. The increase in
purchases probably ensured that some of the supplier company’s set limits on the amount of Inventory they
would sell before getting paid and therefore, this meant that the trade payable days decreased. If we
compare to 2017, the difference between when money was received in from Trade Receivables and paid
out to Trade Payables has decreased from 13 days to 0 days which has obviously put pressure on the cash
flow of the company and probably has contributed to the increase in the Bank Overdraft.
Earnings per Share
This has increased from 149 cent per share to 200 cent per share, which is an increase of over 34%. This is
a positive trend and is driven by the increase in profit which the company has gained in 2018. The company
will be able to use this profit within the company to fuel current and future growth.
Price Earnings Ratio
This ratio has increased from 10.07 to 13.00, an increase of over 29% year on year. This increase is
primarily due to the increase in the share price which has increased by 73.33% year on year. As we saw in
previous section, the earnings per share increased by a sizeable percentage this year but the share price
really changed during the course of the year. A P/E ratio of 13 is a decent P/E ratio when compared to the
average P/E ratio for companies and obviously investors are seeing this company as a ‘buy’ which
primarily must be due to the sales, net profit growth and good management of cash and loans from 2017 to
2018

SOLUTION 5 2017 Aug

(a)
Gross Profit Percentage
Net Profit Percentage
Current Ratio
Trade Receivable Days
Trade Payable Days
Return on Capital Employed
Earnings per Share
Price Earnings Ratio
2016
$1,677/ $5,800 = 28.91%
$970/ $5,800 = 16.72%
$1,240/ $702 = 1.76:1
$460/ $5,800*365 = 29 Days
$400/ $4,123*365 = 35 Days
$1,266/ $4,148 = 30.52%
$970/ $1,000 = $0.97
$12.00/ $0.97 = 12.37
2015
$1,127/ $3,990 = 28.25%
$510/ $3,990 = 12.78%
$900/ $570 = 1.58:1
$280/ $3,990*365 = 26 Days
$320/ $2,863*365 = 41 Days
$824/ $3,555 = 23.18%
$510/ $1,000 = $0.51
$6.20/ $0.51 = 12.16

(b) To: Board of Directors – Bohermaw Limited

From: Assistant Financial Accountant
Re: Company’s Position and Performance
Date: August 2017
Gross Profit Percentage
The Gross Profit percentage has increased from 28.25% to 28.91%, an increase of over 2.33% which is a
positive trend for the company. This is also positive for the fact that the company sales increased by over
45%. An increase of this magnitude presented a challenge for a company and the company has in the main
responded positively to this challenge. The increase resulted from the fact that sales increased faster than
Cost of Sales (44%). However, one should note that purchases increased at a slightly higher rate than sales
and was offset by higher closing inventory.
2016 2015 % Increase
$’000s $’000s
Opening Stock 460 500 - 8.00%
Purchases 4,243 2,903 46.16%
Closing Stock (580) (460) 26.09%
Cost of Sales 4,123 2,863
Net Profit Percentage
The Net Profit % has increased from 12.78% to 16.72% which is an increase of nearly 31%. This is an
extremely good performance. The main reason for the increase is due to the increase in Sales which has
meant that the Gross Profit has increased from $1,127k to $1,677k, an increase of $550k. This increase has
been offset to a degree by the increase in Admin Expenses of $92k which is an increase of just over 73%.
This increase is high so the company needs to watch this cost going forward.
Current Ratio
This is less than the average of 2:1. However, the current ratio has increased by over 11.39% which is an
improvement. The reason for the improvement is primarily due to the increase in Current Assets (up
37.78%) which in turn has been driven by the increase in inventory from $460k to $580k an increase of
over 26%, increase in trade receivables of $180k (over 64% increase) and an increase in cash of €40k or
25%. The increase in trade receivables is not a great result as the sales increased by over 45% which would
indicate that there may have been a problem collecting debts or else the company, to increase sales, had to
sell to customers who demanded more credit from the company. However, if we were to look at Trade
Receivables Days we will see that they increased by less than 12% so therefore, this level of increase is less
than the increase in Sales. However, the trend is negative and therefore the company collection of Trade
Receivables should be pushed hard to ensure that they are collecting them as efficiently as possible and
bring the Trade Receivables back in line with the previous year. Current Liabilities increased by 23.16%.
The main drivers of Current Liabilities were the increase in the Bank Overdraft of $117k, an increase of
over 390%. The increase in the bank overdraft stems from the purchase of non-current assets as well as a
decrease in the long-term debt and an increase in working capital. Trade Payables increased by €80k or
25% but this increase was mainly due to the decrease in accruals of $53k.
Trade Receivables Days
This has increased from 23 to 26 days, an increase of over 11%. Sales have increased by over 45% but this
is no excuse for the deterioration in Trade Receivables Days. The company needs to ensure that the
increase in Sales is not being fuelled by having customers who are demanding longer credit before they
would Purchase goods from Boherash Limited. Another possible reason is that the credit department was
poor in collecting debts and given the increase in Administrative Expenses, one would expect that the credit
control department was adequately staffed to cope with the increased workload in collecting debts from
having more sales.
Trade Payables Days
This decreased from 41 days to 35 days which is a deterioration of over 14.63%. This is not a good result
given the fact that the company should be aiming for 45 days plus. Obviously with the increase in
purchases, some of the supplier company’s set limits on the amount of stock they would sell before getting
paid and therefore, this meant that the Trade Payables days decreased. If we compare to 2015, the
difference between when money was received in from Trade Receivables and paid out to Trade Payables
has decreased from 15 days to 6 days which has obviously put pressure on the cash flow of the company
Return on Capital Employed
This has increased from 23.18% to 30.52% which is an increase in percentage terms of nearly 32%. Again,
this is a very positive result. The main driver of this increase is the increase above the line in the Profit
before Interest and Tax from $824k to $1,266k, an increase of $442 or 53.64%. Capital Employed also
increased from $3,555k to $4,148k, an increase of $593k or 16.68%. The main increases here were the
increase in Non-Current Assets and Current Assets which we have discussed already.
Earnings per Share
This has increased from 51 cent per share to 97 cent per share, which is an increase of over 90%. This is a
positive trend and is driven by the increase in profit which the company has gained in 2016.
Price Earnings Ratio
This ratio has increased slightly from 12.16 to 12.37, an increase of 1.73%. Basically, what has happened is
that the increase in EPS has been offset by the increase in share price from $6.20 to $12 dollar. The current
P/E ratio is at a healthy level and basically investors have become quite interested in the company and the
profits the company were going to make and their interest has driven the price of the shares up
significantly.
(10 Marks)
(c) Yes I would recommend the sale of the company for $15 million. Basically, the return for 2016 has
been very good and provided that this was not a one off year, then one would expect the company to
continue to perform well going forward. The cash position is the one which is of most concern in
purchasing this company i.e. that the current ratio is not great but if we increase Trade Payables and
squeeze Trade Receivables back to where they were in 2015, this would increase the cash position by
$175k and increase the current ratio to greater than the norm. The current offer values the company at $15 a
share which is at a 25% premium to the current share price. Overall, I would recommend the sale of the
company at $15 million provided no issues are unveiled in the due diligence process.
(2 Marks)