- 20 Marks
Question
Presented below are the common-sized financial statements of Towobo Ltd over the last five years:
Vertical Common-Sized Statements of Profit or Loss for the Years Ended 31 December
| % | 2022 | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|---|
| Revenue | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| Cost of sales | (88.58) | (85.45) | (84.92) | (87.36) | (92.70) |
| Gross profit | 11.42 | 14.55 | 15.08 | 12.64 | 7.30 |
| Distribution & marketing costs | (1.00) | (0.86) | (0.83) | (1.15) | (0.87) |
| Administrative expenses | (0.74) | (0.79) | (0.88) | (0.85) | (0.73) |
| Other operating income | 2.06 | 1.78 | 0.77 | 0.58 | 0.69 |
| Other operating expenses | (1.36) | (0.86) | (1.21) | (1.20) | (0.94) |
| Profit from operations | 10.38 | 13.82 | 12.93 | 10.02 | 5.45 |
| Finance cost | (0.02) | (0.04) | (0.02) | (0.05) | (0.10) |
| Profit before tax | 10.36 | 13.78 | 12.92 | 9.97 | 5.35 |
| Tax | (3.25) | (3.98) | (4.05) | (3.25) | (2.61) |
| Profit after tax | 7.11 | 9.80 | 8.86 | 6.72 | 2.74 |
Vertical Common-Sized Statements of Financial Position as at 31 December
| % | 2022 | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|---|
| Non-current assets | |||||
| Property, plant & equipment | 8.49 | 8.55 | 15.50 | 20.27 | 23.33 |
| Intangible assets | 0.52 | 0.72 | 0.44 | 0.51 | 0.70 |
| Capital work-in-progress | 0.13 | 0.39 | 7.39 | 0.28 | 0.66 |
| Long-term loans & advances | 0.33 | 0.22 | 0.52 | 3.20 | 3.65 |
| Total non-current assets | 9.47 | 9.88 | 23.85 | 24.26 | 28.31 |
| Current assets | |||||
| Inventories | 14.20 | 13.19 | 25.51 | 40.61 | 32.25 |
| Receivables | 0.16 | 0.09 | 0.53 | 0.32 | – |
| Prepayments, advances, & other receivables | 22.33 | 17.65 | 6.21 | 10.69 | 20.33 |
| Short-term investments | 35.15 | 40.67 | 7.10 | – | – |
| Cash and bank balances | 18.69 | 18.52 | 36.80 | 24.12 | 19.11 |
| Total current assets | 90.53 | 90.12 | 76.15 | 75.74 | 71.69 |
| Total assets | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| Equity | |||||
| Issued, subscribed & paid-up capital | 2.43 | 2.77 | 8.81 | 10.25 | 11.59 |
| Retained earnings | 16.50 | 10.69 | 18.24 | 3.78 | 0.62 |
| Other reserves | 10.10 | 11.91 | 21.95 | 22.74 | 7.20 |
| Total equity | 29.03 | 25.37 | 49.00 | 36.77 | 19.41 |
| Non-current liabilities | |||||
| Pensions liabilities | 0.16 | 0.12 | 0.51 | 0.38 | 0.36 |
| Deferred tax | 0.74 | 0.71 | 0.83 | – | – |
| Deferred revenue | 0.02 | 0.02 | 0.06 | 0.08 | 0.10 |
| Total non-current liabilities | 0.92 | 0.85 | 1.40 | 0.46 | 0.46 |
| Current liabilities | |||||
| Trade, dividend & other payables | 70.04 | 73.15 | 49.60 | 62.73 | 80.02 |
| Current portion of deferred revenue | 0.01 | 0.01 | 0.04 | 0.03 | – |
| Income tax | – | 0.62 | – | 0.01 | 0.11 |
| Total current liabilities | 70.05 | 73.78 | 49.60 | 62.77 | 80.13 |
| Total equity & liabilities | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
Required:
As the Financial Advisor to ABC Mutual Funds, report on the financial health or otherwise of Towobo Ltd based on the vertically analysed financial statements and advise ABC Mutual Funds on whether to invest in Towobo Ltd. Your report should focus on the profitability and cost control analysis, asset structure, capital structure, and working capital structure.
Answer
To: CEO, ABC Mutual Funds
From: Financial Advisor
Date: 1/7/2023
Subject: Report on the Financial Health of Towobo Ltd
Introduction:
This report highlights the financial health of Towobo Ltd using five-year vertically analysed common-sized financial statements. The report focuses on profitability and cost control analysis, asset structure, capital structure, and working capital structure.
Profitability and Cost Control Analysis:
Towobo Ltd has generally maintained profitability over the past five years, with gross profit improving up to 2020, then showing a decline in 2022. The cost of sales has been high, but the gross profit margin increased from 2018 to 2020 before declining. Towobo has maintained low overheads, but its operating and net profit margins decreased in 2022, suggesting weakening cost control over operating expenses. Interest coverage has been strong, suggesting the company has minimal interest-bearing debt.
Asset Structure:
The company has consistently invested more in current assets than non-current assets. While inventory and cash were significant in 2019 and 2020, Towobo’s investments have shifted towards short-term financial assets like prepayments and short-term investments. The reduction in non-current assets suggests a possible change in business focus.
Capital Structure:
Towobo Ltd relies heavily on trade payables, with liabilities comprising a large portion of the company’s financing. However, most of these liabilities are non-interest bearing, reducing the risk of financial distress.
Working Capital Structure:
Towobo Ltd’s liquidity is strong, with current assets comfortably exceeding current liabilities. Cash and near-cash assets form the bulk of current assets, ensuring the company can meet short-term obligations.
Conclusion:
Conclusion:
Towobo Ltd shows a reasonable financial performance, with healthy liquidity and minimal reliance on interest-bearing debt. However, declining profitability in 2022 is concerning, and stronger cost control measures may be required. Based on the current analysis, ABC Mutual Funds may consider investing in Towobo Ltd but should monitor profitability trends closely.
(Signed)
Financial Advisor
- Topic: Analysis and Interpretation of Financial Statements
- Series: JULY 2023
- Uploader: Dotse