a) Ratios Calculation

b) Analysis of Financial Performance and Position

The first thing to notice about Kack’s results is that the ROCE has increased by 4.2 percentage points, from 28.1% to 32.3%. On the face of it, this is impressive. However, we have to take into account the fact that the capital employed has been reduced by the plant disposal and the net profit has been increased by the profit on disposal. So, the ROCE has been inflated by this transaction, and we should look at what the ROCE would have been without the disposal. Taking out the disposal gives us the following ratios:

Comparing these ratios to those for the period ended 31 March 2014, we can see that ROCE has fallen. This fall has been occasioned by the fall in the net profit margin. The asset turnover has improved on the previous year after adding back the disposal.

The gross profit percentage is 3.2% down on the previous year. This is probably due to the rebates offered to wholesale customers, which will have increased sales at the expense of profitability. The replacement of some production lines by bought-in products will probably also have reduced profit margins. Sales may have been increased by the advertising campaign, but this has been an additional expense charged against the net profit.

Kack’s liquidity has also declined over the current year. The current ratio has gone down from 1.6 to 1.3. However, there has been a sharp decline in the inventory holding period, probably due to holding less raw material for production. It could be that the finished goods can be delivered directly to the wholesalers from the supplier, reducing the current ratio. The receivables collection period has remained fairly constant, but the payables payment period has decreased by 10 days. This fall in the payables period may indicate that the finished goods supplier demands prompt payment. The liquidity situation would have been much worse without the GHS 120 million from the plant sale.

The dividend yield has increased from 3.75% to 6%, which looks attractive to potential investors. However, the dividend amount is the same as last year, meaning that the dividend per share is unchanged. Therefore, the increase in dividend yield can only have come from a fall in the share price, which reflects the market’s dissatisfaction with Kack’s performance. Furthermore, the dividend cover has declined, indicating that the same dividend has been paid on less profit.

Conclusion: Kack’s overall performance and position have declined compared to the previous year, and the plant disposal has helped mask the underlying issues.