- 20 Marks
MA – L2 – Q66 – Performance Analysis
Question
Ashanti Pharmaceuticals Ltd has an objective in its long-term business plan of achieving significant growth in its business in the period Year 1 to Year 5. It is now the end of Year 2.
Its results for the years to 31st December Year 1 and Year 2 are summarised below.
Statement of profit or loss for the year ended 31 December
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| Sales | 31,200,000 | 26,000,000 |
| Cost of sales | 18,720,000 | 15,600,000 |
| Gross profit | 12,480,000 | 10,400,000 |
| Operating costs | 6,780,000 | 5,200,000 |
| Interest charges | 500,000 | – |
| Taxation | 3,000,000 | 3,000,000 |
| Net profit | 2,200,000 | 2,200,000 |
Statement of financial position as at 31st December
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| Non-current assets | 27,300,000 | 26,000,000 |
| Net current assets | 15,600,000 | 7,800,000 |
| Total assets | 42,900,000 | 33,800,000 |
| Borrowings | 9,000,000 | – |
| Net assets | 33,900,000 | 33,800,000 |
| Share capital and reserves | 19,500,000 | 19,500,000 |
| Retained earnings | 14,400,000 | 14,300,000 |
| Total equity | 33,900,000 | 33,800,000 |
Sales are seasonal, and are much higher in the first six months of the year than in the second six months. The half-yearly sales figures in the past two years have been as follows:
Sales
| Year 2 (GH₵) | Year 1 (GH₵) | |
|---|---|---|
| First six months | 21,645,000 | 16,900,000 |
| Second six months | 9,555,000 | 9,100,000 |
| Total | 31,200,000 | 26,000,000 |
The company employs part-time workers during the first six months of each year. Part-time workers operate for a full working week during the weeks that they are employed. Employee numbers have been as follows:
Employee numbers
| Year 2 | Year 1 | |
|---|---|---|
| Full-time | 318 | 260 |
| Part-time (first six months) | 494 | 310 |
The company introduced four new products to the market in Year 1 and another five new products in Year 2.
Required:
Explain with reasons whether the company appears to be on course for achievement and production.
Answer
Sales
Sales increased by 20% in Year 2 compared with Year 1. However, the strong growth in sales occurred in the first six months of the year (28% compared with the same period in Year 1). In the second half of the year, sales growth compared with the same period in Year 1 was down to 5%. There is insufficient information to judge whether the growth in sales revenue is slowing down or coming to an end.
Net profit
There was no increase in net profit between Year 1 and Year 2. The increase in sales (20%) is offset by an increase of 30.4% in operating costs and some interest charges. In terms of annual net profit, the business is therefore not growing.
If a part-time employee is the equivalent of 50% of a full-time employee, there were 415 equivalent full-time employees in Year 1 (260 + 50% × 310). There were 565 equivalent full-time employees in Year 2 (318 + 50% × 494). Sales revenue per equivalent full-time employee was therefore GH₵62,651 in Year 1 and GH₵55,221 in Year 2. This fall in employee productivity is one reason for the failure to achieve growth in the annual net profit.
Investment
The investment in non-current assets has risen by just 5%, but the investment in working capital has doubled. The increase in net assets has been almost entirely financed by borrowing. (Presumably, this means that most of the profits earned in Year 1 have been paid in taxation or distributed as dividends to shareholders.) It is difficult to draw definite conclusions from the limited amount of data, but management should be concerned about a 100% increase in working capital when the increase in annual sales is only 20%. Could there be large quantities of unsold inventory, or poor control over receivables?
- Topic: Performance Analysis
- Uploader: Salamat Hamid