- 15 Marks
Question
Osamco Limited, a manufacturer of wire and cables, was bought from its conglomerate parent company in a management buyout deal in August 2010. Six years later, the managers are considering the possibility of listing the company’s shares on the Nigerian Stock Exchange.
The following financial information is made available:
OSAMCO LIMITED
Income Statement for the Year Ended June 30, 2016
| Item | Amount (N’million) |
|---|---|
| Turnover | 91.25 |
| Cost of sales | (79.00) |
| Profit before interest and taxation | 12.25 |
| Interest | (3.25) |
| Profit before taxation | 9.00 |
| Taxation | (1.25) |
| Profit attributable to ordinary shareholders | 7.75 |
| Dividend | (0.75) |
| Retained profit | 7.00 |
Statement of Financial Position as at June 30, 2016
Average performance ratios for the industry sector in which Osamco Limited operates are as stated below:
Industry Sector Ratios
| Ratio | Industry Average |
|---|---|
| Return before interest and tax on long-term capital employed | 24% |
| Return after tax on equity | 16% |
| Operating profit as a percentage of sales | 11% |
| Current ratio | 1.6:1 |
| Quick (acid test) ratio | 1.0:1 |
| Total debt: equity (gearing) | 24% |
| Dividend cover | 4.0 |
| Interest cover | 4.5 |
Required:
- (a) Evaluate the financial state and performance of Osamco Limited by comparing it with that of its industry sector. (10 Marks)
- (b) Discuss four probable reasons why the management of Osamco Limited is considering Stock Exchange listing. (5 Marks)
Answer
(a). The performance and financial health of Osamco Limited in relation to that of the industry sector as a whole can be evaluated by comparing its financial ratios with the industry averages, as follows:
Analysis:
- Profitability: Osamco Limited outperforms the industry in profitability metrics (return on capital employed, return on equity, and operating profit margin).
- Liquidity: Osamco’s liquidity ratios are below the industry averages, indicating a weaker ability to meet short-term obligations.
- Gearing: Osamco’s gearing is significantly higher than the industry average, suggesting higher financial risk due to reliance on debt.
- Dividend and Interest Cover: While dividend cover is strong, interest cover is below the industry standard, indicating limited buffer for interest payments.
(b) Four Probable Reasons for Considering Stock Exchange Listing
- Capital Raising:
- Listing enables access to equity capital for expansion and reducing reliance on debt.
- Liquidity for Shareholders:
- A stock exchange listing provides existing shareholders with an opportunity to liquidate their investments.
- Enhanced Credibility:
- Being a listed company enhances corporate reputation and credibility among investors, creditors, and customers.
- Market Valuation and Visibility:
- Listing allows the company to be valued based on market perceptions and increases its visibility in the industry.
- Tags: Financial Ratios, Gearing, Industry comparison, Profitability, Stock Exchange
- Level: Level 3
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