- 20 Marks
CML – APRIL 2023 – L3 – Q2 – Critical Examination of Restaurant Property Acquisition Loan
Critically examine a loan request from Aduane Restaurants and Mobile Food Ltd for 80% financing (GHC 640,000) of a new premises purchase, using company background and financials.
Question
Aduane Restaurants and Mobile Food Ltd. has operated an account with us for the past ten years since the inception of the company. The company has ten restaurants located at strategic parts of Accra, two at Takoradi and two in Kumasi.
The CEO of the company Mr. Sampson Arthur has come to see you for a discussion about the future of the company. Due to road construction, his key head office restaurant branch located at East Legon is no longer viable. He has identified another premises located close to the center of Accra which he wishes to acquire. According to him the vendors, who are siblings who inherited the property from their deceased parents, wish to dispose of the property in order to avoid unnecessary disputes among themselves. The property is also a bit dilapidated and would need to be overhauled. The company has been given a favourable price of GHC 800,000.00 to facilitate a quick sale. The company is able to provide 20% of the purchase and is asking the bank to finance the difference.
The company provides services primarily to workers within their vicinity. The company has become a household name due to the quality of their food and services. The company has a fleet of vans which assist in the delivery, one van for each branch. The ambience of their premises is also attractive and their restaurants are always milling with clientele mostly bank staff, civil servants and staff of private companies, at lunch time. They are also a favorite choice for wedding and other social occasions.
Their bank account operations however declined due to the onset of Covid and its impact on workers having to work from home. You have nonetheless discerned a slight improvement in their operations from the current bank account operations.
Management team comprises, Mr. Samson Arthur, aged 46, Chairman and CEO of the Company, Mrs. Mary Arthur, aged 45, COO and Chief Matron of the company and Mr. Kweku Johnson, aged 32 CFO of the company. Mr., Samson Arthur is a graduate in Economics from University of Ghana Legon and an MBA in Marketing. He worked in one of the top banks in the country for ten years prior to his resigning to take over his aged mother’s restaurant. Mrs. Mary Arthur, his wife has a degree in Food Science and Nutrition from the Ho University. She served as a matron at Wesley Grammar High School prior to joining the company at its inception. Kweku Johnson is a close family friend of the CEO and holds a Diploma in Accounting from the University of Professional Studies, Accra. Prior to joining the company Kweku worked at the Labone Polyclinic as an accounts staff.
Each branch has a manager and a chief cook, supported by two matrons. In addition, they hire waiters and waitresses on temporary basis and put them through some rigorous training before deploying them.
Critically examine this proposition as per information above and the related financial statements below.
Aduane Restaurant and Mobile Food Ltd Profit and Loss Extracts for the year ending 31st Dec
| 2020 GHC | 2021 GHC | 2022 GHC | |
|---|---|---|---|
| Sales | 1,899,500 | 2,796,460 | 3,215,929 |
| Opening Inventory | 204,570 | 321,215 | 503,363 |
| Production cost | 968,945 | 1,482,124 | 1,768,761 |
| 1,173,515 | 1,803,339 | 2,272,124 | |
| Closing Inventory | 321,215 | 503,363 | 643,186 |
| Cost of Sales | 852,300 | 1,299,976 | 1,628,938 |
| Gross Profit | 1,047,200 | 1,496,484 | 1,586,991 |
| Overheads | 44,880 | 235,386 | 268,292 |
| Depreciation | 131,000 | 162,500 | 256,500 |
| Operating Profit | 871,320 | 1,098,598 | 1,062,199 |
| Interest Paid | 38,000 | 54,000 | 102,000 |
| Profit Before Tax | 833,320 | 1,044,598 | 960,199 |
| Tax | 208,330 | 261,150 | 240,050 |
| Profit After Tax | 624,990 | 783,449 | 720,149 |
| Noncurrent Assets | 2020 | 2021 | 2022 |
|---|---|---|---|
| Building | 615,000 | 600,000 | 585,000 |
| Equipment | 75,000 | 118,500 | 232,000 |
| Motor Vehicles | 210,000 | 200,000 | 395,000 |
| Furniture and Fixtures | 114,000 | 123,000 | 118,000 |
| Total | 1,014,000 | 1,041,500 | 1,330,000 |
| Current Assets | |||
| Inventory | 321,215 | 503,363 | 643,186 |
| Receivables | 445,880 | 701,150 | 1,010,560 |
| Prepayment | 19,250 | 45,210 | 55,610 |
| Bank | 15,000 | 14,800 | 25,600 |
| 801,345 | 1,264,523 | 1,734,956 | |
| Current Liabilities | |||
| Trade Payables | 322,915 | 531,327 | 675,345 |
| Overdraft | 125,000 | 15,542 | 270,382 |
| Total Current Liabilities | 447,915 | 546,869 | 945,727 |
| Net Current Assets | 353,430 | 717,654 | 789,229 |
| Net Assets | 1,367,430 | 1,759,154 | 2,119,229 |
| Financed by | |||
| Capital | |||
| Share Capital | 800,000 | 800,000 | 800,000 |
| Income Surplus | 567,430 | 959,154 | 1,319,229 |
| 1,367,430 | 1,759,154 | 2,119,229 |
Ratios
| 2020 | 2021 | 2022 | |
|---|---|---|---|
| Sales Growth | 47.22% | 15.00% | |
| Receivable Days | 86 | 92 | 115 |
| Payable Days | 122 | 131 | 139 |
| Inventory Turnover Days | 138 | 141 | 144 |
| Gross Margin | 55% | 54% | 49% |
| Overhead % | 2% | 8% | 8% |
| Net Margin | 43.87% | 37.35% | 29.86% |
| Interest Cover | 22.93 | 20.34 | 10.41 |
| Current Ratio | 1.79 | 2.31 | 1.83 |
| Quick Ratio | 1.07 | 1.39 | 1.15 |
| Tax Rate | 25% | 25% | 25% |
| Inventory to Sales | 17% | 18% | 20% |
| Receivables to Sales | 23% | 25% | 31% |
| Payables to Sales | 17% | 19% | 21% |
| Gearing | 9.14% | 0.88% | 12.76% |
| Dividend Payout Ratio | 50% | 50% | 50% |
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