- 10 Marks
FR – Nov 2024 – L2 – Q4a – Financial Ratios and Performance Evaluation
Calculation of key financial ratios for Nagbe LTD to compare with Suah LTD and evaluate financial performance.
Question
Dukuly LTD, a public entity, has been expanding through acquisitions. It is assessing two potential acquisition targets, Suah LTD and Nagbe LTD, which operate in the same industry. The indicative price for acquiring either entity is GH¢12 million.
The financial statements for Suah LTD and Nagbe LTD are provided as follows:
Statement of Profit or Loss for the year ended 30 September 2024
| Item | Suah LTD (GH¢’000) | Nagbe LTD (GH¢’000) |
|---|---|---|
| Revenue | 25,000 | 40,000 |
| Cost of Sales | (19,000) | (32,800) |
| Gross Profit | 6,000 | 7,200 |
| Distribution & Admin Expenses | (1,250) | (2,300) |
| Finance Costs | (250) | (900) |
| Profit Before Tax | 4,500 | 4,000 |
| Income Tax Expense | (900) | (1,000) |
| Profit for the Year | 3,600 | 3,000 |
Statement of Financial Position as at 30 September 2024
| Item | Suah LTD (GH¢’000) | Nagbe LTD (GH¢’000) |
|---|---|---|
| Non-Current Assets | 4,800 | 10,300 |
| Current Assets | 4,800 | 8,700 |
| Total Assets | 9,600 | 19,000 |
| Equity | 2,600 | 5,600 |
| Non-Current Liabilities | 5,000 | 9,200 |
| Current Liabilities | 2,000 | 4,200 |
| Total Equity & Liabilities | 9,600 | 19,000 |
Additional Information:
-
Carrying Amount of Plant Assets:
- Suah LTD: GH¢4,800,000
- Nagbe LTD: GH¢2,000,000
-
The following ratios for Suah LTD are provided:
Ratio Suah LTD Return on Capital Employed (ROCE) 62.5% Net Asset Turnover 3.3 times Gross Profit Margin 24.0% Profit Margin (Before Interest & Tax) 19.0% Current Ratio 2.4:1 Inventory Holding Period 31 days Trade Receivables Collection Period 31 days Trade Payables Payment Period 24 days Gearing Ratio 65.80% Acid Test Ratio 1.6:1
Required:
Using the financial statements provided, calculate the corresponding ratios for Nagbe LTD to compare with Suah LTD.
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