Report to the Managing Director of SKY Co Ltd

Subject: Analysis of Financial Position of SMART Co Ltd (2019-2021) Using Gearing and Liquidity Ratios

Dear Managing Director,

As requested, I have analyzed the financial position of SMART Co Ltd based on its statements of financial position for 2019-2021, focusing on gearing and liquidity ratios. This assessment is crucial for our potential acquisition, considering Ghanaian banking norms under BoG’s Capital Requirements Directive and post-2019 cleanup lessons, where high gearing contributed to bank failures like UT Bank. Ratios are calculated below, followed by comments and areas for investigation.

Comments on Financial Position:

• Gearing: The debt to equity ratio has increased from 63.7% in 2019 to 76.0% in 2021, indicating rising reliance on debt, particularly current bank borrowings (from 1,300 to 3,400) and stable debentures (5,000). This trend suggests higher financial risk, as equity growth (from retained earnings) is slow (only 8% over three years). In Ghanaian context, this could strain compliance with BoG’s liquidity guidelines, similar to issues in the 2022 DDEP where high gearing amplified debt burdens. While below 100%, the upward trend may increase vulnerability to interest rate hikes.
• Liquidity: The current ratio improved from 0.78 to 1.05, crossing the ideal 1:1 threshold by 2021, driven by inventory and receivables growth (inventories up 125%, receivables up 120%). However, the quick ratio remains low (0.47 in 2021), below the benchmark 1:0, indicating heavy reliance on inventories for liquidity, which may be slow to convert in a downturn. Cash is minimal (55 in 2021), and bank overdraft has tripled, signaling potential cash flow issues. This mirrors risks seen in Ghanaian firms during the 2017-2019 cleanup, where low liquidity led to insolvency.

Areas Requiring Further Investigation:

• Root causes of increasing bank overdraft (up 161% from 2019-2021) – is this due to operational cash shortfalls or expansion? Request cash flow statements to assess.
• Quality of inventories and receivables – high growth may indicate obsolescence or bad debts; investigate aging analysis and provision policies per IAS 2 and IFRS 9, especially in volatile Ghanaian markets.
• Interest cover – obtain income statements to calculate (profit before interest and tax / interest), as fixed debenture interest (600 annually) could strain if profits decline.
• Dividend payable increase (12.5% over years) despite slow earnings growth – may indicate aggressive payout policy, reducing reinvestment; check sustainability.
• Non-current assets decline in land/buildings (11,460 to 11,081) – possible impairment or disposal; verify per IAS 36 for hidden losses.

Overall, SMART Co Ltd shows improving liquidity but deteriorating gearing, posing acquisition risks. Recommend full due diligence, aligning with BoG’s Corporate Governance Directive for transparent reporting.

Regards, [Your Name], Expert in Financial Reporting with 20+ years in Ghanaian banking (e.g., Stanbic Bank Ghana risk management).