FR – March 2023 – L2 – Q4 – Financial Statement Analysis

Analyze and compare the financial performance of Boomu Ltd and Sintim Ltd using profitability, liquidity, efficiency, and gearing ratios.

Question

Boomu Ltd is an agro-processing company with strong competition from Sintim Ltd. The Board of Directors of Boomu Ltd wants to measure the performance of the company against its competitor. Below are the statement of comprehensive income of the two companies for the year ended 31 December 2021, and the statement of financial positions as at that date.

Statement of Comprehensive Income:

	Boomu Ltd (GH¢000)	Sintim Ltd (GH¢000)
Revenue	619,085	956,200
Cost of Sales	(424,700)	(762,400)
Gross Profit	194,385	193,800
Administrative Expenses	(58,635)	(84,940)
Other Income	6,335	9,270
Operating Profit	142,085	118,130
Finance Cost	–	(3,000)
Profit Before Income Tax	142,085	115,130
Income Tax Expense	(23,460)	(34,220)
Profit for the Year	118,625	80,910

Statement of Financial Position:

	Boomu Ltd (GH¢000)	Sintim Ltd (GH¢000)
Non-Current Assets
Property, Plant & Equipment	231,636	197,884
Intangible Assets	105,320	111,928
Total Non-Current Assets	336,956	309,812
Current Assets
Inventories	33,960	37,480
Trade Receivables	26,216	3,836
Cash and Cash Equivalents	91,328	42,472
Total Current Assets	151,504	83,788
Total Assets	488,460	393,600

Equity & Liabilities:

	Boomu Ltd (GH¢000)	Sintim Ltd (GH¢000)
Equity
Share Capital	20,000	30,000
Retained Earnings	390,536	283,820
Total Equity	410,536	313,820
Non-Current Liabilities
Deferred Taxation	18,120	13,948
20% Loan Notes	–	30,000
Total Non-Current Liabilities	18,120	43,948
Current Liabilities
Trade and Other Payables	42,904	28,040
Current Tax	16,900	7,792
Total Current Liabilities	59,804	35,832
Total Equity & Liabilities	488,460	393,600

Required: As the Finance Manager of the company, write a report to the Board of Directors, assessing the comparative performance of the company for the year ended 31 December 2021 using THREE (3) profitability ratios, TWO (2) liquidity ratios, THREE (3) efficiency ratios, and TWO (2) gearing ratios.

Answer

Memorandum

To: The Board of Directors
From: The Finance Manager
Date: 3rd April 2022
Subject: Analysis of the performance of Boomu Ltd

The performance of Boomu Ltd for the year ended 31 December 2021 has been assessed in this report. The performance of Sintim Ltd, a competitor, is used as a benchmark. The ratios used include profitability, working capital management, and gearing.

Profitability:

The revenue of Boomu Ltd was 35.26% lower than that of Sintim Ltd. However, Boomu Ltd generated higher returns for all investors.
Boomu Ltd’s return on capital employed was 34.61%, while Sintim Ltd had a return of 34.36%.
Boomu Ltd also generated a higher return on equity (28.90%) compared to Sintim Ltd (25.78%).
The gross profit margin was higher for Boomu Ltd (31.40%) than Sintim Ltd (20.28%), indicating better control over cost of sales.

Liquidity:

Boomu Ltd’s current ratio was 2.53 times compared to 2.34 times for Sintim Ltd, suggesting better liquidity.
The acid-test ratio of Boomu Ltd was 1.97 times, higher than Sintim Ltd’s 1.29 times, indicating that Boomu Ltd had more current assets (excluding inventory) to cover liabilities.

Efficiency:

Boomu Ltd’s inventory turnover was 29 days, higher than Sintim Ltd’s 18 days, indicating that Sintim Ltd was faster at selling its inventory.
Boomu Ltd took 15 days to collect receivables, whereas Sintim Ltd took just 1 day, showing superior efficiency in receivables management for Sintim Ltd.
Boomu Ltd had a trade payables settlement period of 37 days, compared to Sintim Ltd’s 13 days, indicating that Boomu Ltd had better credit terms from suppliers.

Gearing:

Boomu Ltd is fully equity-financed, meaning no financial risk to shareholders from debt. Sintim Ltd, however, had debt in its capital structure, with a debt-to-equity ratio of 9.56%.

Conclusion: Boomu Ltd performed better than Sintim Ltd in terms of profitability and liquidity but lagged in inventory and receivables management.

Appendix:

(1/4 mark for each correct computation of ratio = 5 marks; 15 marks for the report)
(Total = 20 marks)