a) Calculation of Adjusted Financial Ratios

i) Adjusted Ratios for the Year Ended 31 December 2022 (Excluding the Sold Business Unit)
Adjusted Figures:
Revenue: GH¢60,000 – GH¢20,000 = GH¢40,000
Cost of Sales: GH¢36,000 – GH¢12,000 = GH¢24,000
Gross Profit: GH¢24,000 – GH¢8,000 = GH¢16,000
Distribution Costs: GH¢6,000 – GH¢1,500 = GH¢4,500
Administrative Expenses: GH¢3,800 – GH¢2,000 = GH¢1,800
Profit Before Interest and Tax (PBIT): GH¢13,000 + 1,200 – GH¢4,500 = GH¢9,700

1. Gross Profit Margin:
   Gross Profit Margin = (Gross Profit / Revenue) × 100
   (GH¢16,000 / GH¢40,000) × 100 = 40.0%
2. Operating Profit Margin:
   Operating Profit Margin = (PBIT / Revenue) × 100
   (GH¢9,700 / GH¢40,000) × 100 = 24.25%
3. Return on Capital Employed (ROCE):
   ROCE = (PBIT / (Total Assets – Current Liabilities)) × 100
   Total Assets – Current Liabilities (adjusted): GH¢37,200 – GH¢5,200 = GH¢32,000
   (GH¢9,700 / GH¢32,000) × 100 = 30.31%
4. Net Asset Turnover:
   Net Asset Turnover = Revenue / (Total Assets – Current Liabilities)
   = GH¢40,000 / GH¢32,000 = 1.25 times
   (6 marks)

ii) Adjusted Ratios for the Year Ended 31 December 2023 (Excluding the Gain from the Sale of the Business Unit)
Adjusted Figures:
PBIT (adjusted): GH¢9,900 + 600 – GH¢2,000 = GH¢8,500

1. Gross Profit Margin:
   Formula: Gross Profit Margin = (Gross Profit / Revenue) × 100
   Calculation: (GH¢18,000 / GH¢45,000) × 100 = 40.0%
2. Operating Profit Margin:
   Operating Profit Margin = (PBIT / Revenue) × 100
   (GH¢8,500 / GH¢45,000) × 100 = 18.89%
3. Return on Capital Employed (ROCE):
   (PBIT / (Total Assets – Current Liabilities)) × 100
   Total Assets – Current Liabilities: GH¢30,500 – GH¢4,000 = GH¢26,500
   Calculation: (GH¢8,500 / GH¢26,500) × 100 = 32.08%
4. Net Asset Turnover:
   Net Asset Turnover = Revenue / (Total Assets – Current Liabilities)
   = GH¢45,000 / GH¢26,500 = 1.70 times
   (1.5 per ratio × 8 ratios) = (6 marks)

b) Assessment of Financial Performance and Position of Ben Garzy LTD as of 31 December 2023
Ben Garzy LTD has undergone significant changes in its financial and operational landscape between the fiscal years ending 31 December 2022 and 31 December 2023. These changes were driven primarily by the sale of a key business unit and the implementation of a new information technology (IT) system aimed at enhancing operational efficiency. The impact of these strategic decisions is evident in the company’s financial performance and position, which must be evaluated to understand how well Ben Garzy LTD has adapted to its new structure.

Impact on Profitability
The sale of the business unit in early 2023 brought an immediate financial benefit in the form of a GH¢2 million gain, which contributed to the year’s profitability. However, when this non-recurring gain is excluded, Ben Garzy LTD.’s underlying profitability reveals a mixed picture.
The gross profit margin remained steady at 40.0% in both years, reflecting the company’s ability to maintain consistent profitability from its core operations despite the reduction in overall revenue following the sale. This suggests that Ben Garzy LTD has been successful in managing its production costs relative to sales, even as the scale of its operations decreased.
However, the operating profit margin tells a different story. After adjusting for the one-time gain, the operating profit margin for 2023 drops to 18.89%, down from the adjusted 24.25% in 2022. This decline indicates that the company has struggled to control its operating expenses—namely, distribution and administrative costs—relative to its reduced revenue base. The decrease in operating efficiency could be attributed to the fixed nature of some costs, which remained relatively high despite the downsized operations. The implementation of the new IT system, while aimed at enhancing efficiency, may not have fully offset these costs during its first year of deployment.

Return on Capital Employed (ROCE)
The ROCE is a critical measure of how effectively a company uses its capital to generate profit. For Ben Garzy LTD, the ROCE increased from an adjusted 30.31% in 2022 to 32.08% in 2023 (excluding the gain from the sale). This improvement suggests that the company has become slightly more efficient in generating profits from its capital base, despite the significant reduction in assets following the sale of the business unit. The sale reduced the company’s capital employed, and the IT system may have contributed to better utilization of the remaining assets. However, the ROCE is still below the unadjusted 44.38% in 2022, indicating that the company has not fully recovered the high returns it achieved before the sale. This could imply underutilization of the remaining resources or inefficiencies that have not been fully addressed.

Net Asset Turnover
The net asset turnover ratio, which measures how efficiently a company generates revenue from its assets, improved from 1.25 times in 2022 (adjusted) to 1.70 times in 2023. This increase indicates that Ben Garzy LTD has become more effective in using its reduced asset base to generate sales. The introduction of the IT system likely contributed to this improvement by streamlining operations and enhancing productivity, allowing the company to generate more revenue per unit of asset.
This improvement in asset turnover is a positive sign and suggests that Ben Garzy LTD is on the right track in terms of maximizing the efficiency of its operations following the sale of the business unit. However, it also underscores the importance of continuing to leverage technology and process improvements to sustain and further enhance operational efficiency.

Liquidity and Solvency
The reduction in current liabilities from GH¢5,200 in 2022 to GH¢4,000 in 2023, alongside a decrease in total assets from GH¢37,200 to GH¢30,500, suggests that the company has maintained a stable liquidity position. The proceeds from the business unit sale, part of which were distributed as a special dividend, did not appear to strain the company’s liquidity, as the net asset base remains robust. The decrease in finance costs from GH¢1,200 in 2022 to GH¢600 in 2023 further indicates improved solvency, possibly due to reduced debt levels or better financing terms post-sale.

Impact of the IT System
The deployment of the advanced IT system in 2023 was intended to enhance operational efficiency, reduce costs, and improve financial reporting accuracy. While the improved net asset turnover suggests that the IT system has had a positive impact on operational efficiency, the decline in operating profit margin indicates that the anticipated cost savings have not yet fully materialized. This could be due to initial implementation costs, training expenses, or a lag in realizing the system’s full benefits. Over time, as the system becomes fully integrated, it is expected to further reduce operating costs and improve profitability.

Conclusion
In summary, Ben Garzy LTD has shown resilience in maintaining a stable gross profit margin and improving its asset turnover following significant structural changes. The sale of the business unit provided a one-time financial boost but also reduced the company’s revenue and capital base, leading to challenges in maintaining operating efficiency. The implementation of the IT system has contributed to improved asset utilization but has not yet fully offset the increased operating costs relative to the reduced revenue. The slight improvement in ROCE and stable liquidity position are positive indicators, but the decline in operating profit margin highlights the need for further cost management.
Moving forward, Ben Garzy LTD should focus on fully integrating the IT system to realize the anticipated efficiency gains and cost reductions. Additionally, the company should explore ways to optimize its remaining capital base, such as investing in high-return projects or further streamlining operations, to improve ROCE and sustain long-term growth. The strategic decisions made in 2023 have set the foundation for a leaner and potentially more efficient operation, but continued efforts are needed to fully capitalize on these changes and enhance overall financial health.
(8 marks)
(Total: 20 marks)

EXAMINER’S COMMENTS
The question required candidates to compute some ratios and to use the results to analyse the financial performance and position of an entity, after adjusting for the effect of a disposal of a business segment/unit.
The question was very clear in meaning. Candidates were expected to use formulas known to them to answer this question. Most candidates quoted the formulas correctly but could not adjust the results to exclude the effect of the discontinued business unit. However, some candidates were able to do a good assessment of the performance and position for the entity.