Report to the Chairperson
To: Chairperson of the Board
From: Chief Finance Officer
Subject: Assessment of Financial Statement of Acquisition Targets

Introduction
The investigation into the financial statements of Addin Petroleum and Gyan Petroleum should be viewed as preliminary in nature since a more detailed examination of the two companies will be required before any final decision is made regarding acquisition.

Assumptions
It is assumed that the two companies use similar accounting policies and that the statements of financial position are representative of the companies’ normal levels of trading.

Financial Performance
Analysis of the Statement of Profit or Loss of the two companies leads to the conclusion that Addin Petroleum has a better prospect on the basis of their performance for the year ended September 2022. Its operating profit before tax was more than twice that of Gyan Petroleum. As provided in the attached appendices, Addin Petroleum has performed better in terms of profitability ratios in all measures used (Gross Profit Margin, ROCE, and Net Profit Margin).

Working Capital Efficiency
Consistent with the financial performance analysis, Addin has a better financial position outlook when the specific ratios are analyzed together.
On Working Capital Efficiency, using the inventory turnover and receivables collection period ratios, Addin Petroleum’s records indicate a better liquidity position as compared to Gyan Petroleum. Gyan Petroleum’s receivables collection period shows signs of a lack of credit control policies and procedures. The quick ratio of Gyan Petroleum is also better than that of Addin, indicating a slightly better immediate liquidity position.

Gearing
Despite the comparatively good performance of Addin Petroleum on the basis of profitability, it is significantly more geared than Gyan Petroleum. Nonetheless, this risk is to some extent compensated by the better interest cover of six times as a result of investing in assets through debt financing.

Conclusion
The above analysis leads one to conclude that Addin Petroleum is a stronger and more profitable company. Without any further material information from additional investigations and the projected cost of acquisition, Addin Petroleum may be considered the better option. Gyan Petroleum, on the other hand, has prospects if its internal controls on working capital management are strengthened. It may be prudent to also consider Gyan if its cost of acquisition is significantly lower than Addin Petroleum.

(Marks are evenly spread using ticks = 9 marks)