FR – Nov 2019 – L2 – Q5 – Financial Instruments (IAS 32, IFRS 9)

Analyze the performance of Sekiri Nigeria Limited and identify areas for further investigation based on financial information.

Question

Sekiri Nigeria Limited is a major competitor to Ijor Ventures Limited. Both companies operate in the same industry over the last 20 years.

The summarised financial information of Sekiri Nigeria Limited for the last 2 years is as follows:

Summarised Profit or Loss for the Year Ended September 30:

Description	2019 (N’m)	2018 (N’m)
Revenue	4,565	4,905
Cost of Sales	(2,950)	(3,225)
Gross Profit	1,615	1,680
Selling, Distribution & Admin Expenses	(1,095)	(1,070)
Interest Expense	(95)	(75)
Net Profit Before Taxation	425	535
Taxation	(225)	(260)
Profit for the Year	200	275

Statement of Financial Position as at September 30:

Description	2019 (N’m)	2018 (N’m)
Non-Current Assets:
Intangible Assets	240	200
Tangible Assets (Carrying Amount)	1,080	1,030
Total Non-Current Assets	1,320	1,230
Current Assets:
Inventories	1,470	1,515
Trade Receivables	800	705
Bank	260	290
Total Current Assets	3,850	3,740
Total Assets	5,170	4,970

Equity & Liabilities:

Description	2019 (N’m)	2018 (N’m)
Equity
Ordinary Share Capital	500	500
Retained Earnings	1,730	1,650
Total Equity	2,230	2,150
Non-Current Liabilities	690	690
Current Liabilities:
Trade Payables	375	375
Other Payables	555	525
Total Liabilities	3,850	3,740

Sekiri Nigeria Limited declared dividend of N120m each in years 2018 and 2019

Required:

(a) As the Chief Accountant of Ijor Ventures Limited, write a report to your company’s Finance Director analyzing the performance of Sekiri Nigeria Limited.
(10 Marks)

(b) Highlight FIVE areas that will require further investigation, including reference to other pieces of information that would complement your analysis of the performance of Sekiri Nigeria Limited.
(10 Marks)

Answer

(a) Analysis of Performance of Sekiri Nigeria Limited:

To: Finance Director
From: Chief Accountant
Subject: Performance Analysis of Sekiri Nigeria Limited

Profitability:
The gross profit margin for Sekiri Nigeria Limited has shown a slight decline from 34.3% in 2018 to 35.4% in 2019. This indicates stable gross profitability. However, the return on capital employed (ROCE) has decreased from 21.5% to 17.8%, signaling a reduction in efficiency in using capital to generate profits. The net profit margin has also declined from 12.4% to 11.4%, suggesting an increase in costs relative to revenue.

Trading Levels:
Revenue decreased from N4,905 million in 2018 to N4,565 million in 2019, indicating a decline in trading activity. This could be due to changes in market dynamics or increased competition. Additionally, the average collection period has increased from 52 days to 64 days, indicating potential cash flow issues.

Working Capital:
The current ratio of 2.7 suggests adequate short-term financial health, though it has slightly declined from 2.8 in 2018. The quick ratio remains stable at 1.1, indicating that the company can cover its current liabilities without relying on inventory sales.

(b) Areas for Further Investigation:

Revenue Drivers:
Investigate the factors contributing to the decline in revenue, such as market share, pricing strategies, and competitive actions.
Cost Control:
Analyze the increase in selling, distribution, and administrative expenses to identify inefficiencies and areas for potential cost savings.
Working Capital Management:
Examine the rising receivable payment period and the implications for cash flow, considering if credit policies need adjustments.
Dividend Policy:
Assess the sustainability of the dividend policy in light of declining profits and its impact on retained earnings for future investments.
Market Trends:
Research market trends and customer preferences to adapt the product mix and improve revenue performance.

Tags: Financial Analysis, Profitability, Trading Levels, Working Capital
Level: Level 2

Topic: Financial Instruments (IAS 32, IFRS 9)
Series: NOV 2019

Uploader: Kofi