- 10 Marks
Question
Dukuly LTD, a public entity, has been expanding through acquisitions. It is assessing two potential acquisition targets, Suah LTD and Nagbe LTD, which operate in the same industry. The indicative price for acquiring either entity is GH¢12 million.
The financial statements for Suah LTD and Nagbe LTD are provided as follows:
Statement of Profit or Loss for the year ended 30 September 2024
| Item | Suah LTD (GH¢’000) | Nagbe LTD (GH¢’000) |
|---|---|---|
| Revenue | 25,000 | 40,000 |
| Cost of Sales | (19,000) | (32,800) |
| Gross Profit | 6,000 | 7,200 |
| Distribution & Admin Expenses | (1,250) | (2,300) |
| Finance Costs | (250) | (900) |
| Profit Before Tax | 4,500 | 4,000 |
| Income Tax Expense | (900) | (1,000) |
| Profit for the Year | 3,600 | 3,000 |
Statement of Financial Position as at 30 September 2024
| Item | Suah LTD (GH¢’000) | Nagbe LTD (GH¢’000) |
|---|---|---|
| Non-Current Assets | 4,800 | 10,300 |
| Current Assets | 4,800 | 8,700 |
| Total Assets | 9,600 | 19,000 |
| Equity | 2,600 | 5,600 |
| Non-Current Liabilities | 5,000 | 9,200 |
| Current Liabilities | 2,000 | 4,200 |
| Total Equity & Liabilities | 9,600 | 19,000 |
Additional Information:
-
Carrying Amount of Plant Assets:
- Suah LTD: GH¢4,800,000
- Nagbe LTD: GH¢2,000,000
-
The following ratios for Suah LTD are provided:
Ratio Suah LTD Return on Capital Employed (ROCE) 62.5% Net Asset Turnover 3.3 times Gross Profit Margin 24.0% Profit Margin (Before Interest & Tax) 19.0% Current Ratio 2.4:1 Inventory Holding Period 31 days Trade Receivables Collection Period 31 days Trade Payables Payment Period 24 days Gearing Ratio 65.80% Acid Test Ratio 1.6:1
Required:
Using the financial statements provided, calculate the corresponding ratios for Nagbe LTD to compare with Suah LTD.
Answer
Calculated Financial Ratios for Nagbe LTD
| Ratio | Formula | Calculation for Nagbe LTD | Result |
|---|---|---|---|
| Return on Capital Employed (ROCE) | (Profit Before Interest & Tax / Capital Employed) × 100 | (4,900 / 14,800) × 100 | 33.11% |
| Net Asset Turnover | Revenue / Net Assets | 40,000 / 5,600 | 7.14 times |
| Gross Profit Margin | (Gross Profit / Revenue) × 100 | (7,200 / 40,000) × 100 | 18.0% |
| Profit Margin (Before Interest & Tax) | (PBIT / Revenue) × 100 | (4,900 / 40,000) × 100 | 12.25% |
| Current Ratio | Current Assets / Current Liabilities | 8,700 / 4,200 | 2.07:1 |
| Inventory Holding Period | (Closing Inventory / Cost of Sales) × 365 | (3,400 / 32,800) × 365 | 37.82 days |
| Trade Receivables Collection Period | (Trade Receivables / Revenue) × 365 | (5,100 / 40,000) × 365 | 46.54 days |
| Trade Payables Payment Period | (Trade Payables / Cost of Sales) × 365 | (2,100 / 32,800) × 365 | 23.36 days |
| Gearing Ratio | (Debt / (Debt + Equity)) × 100 | (10,200 / (10,200 + 5,600)) × 100 | 64.6% |
Key Observations from the Ratios:
- ROCE is significantly lower for Nagbe LTD (33.11%) than Suah LTD (62.5%), indicating that Suah LTD generates higher returns on its capital employed.
- Net Asset Turnover is higher for Nagbe LTD (7.14 times) than Suah LTD (3.3 times), meaning Nagbe LTD is more efficient at using its assets to generate revenue.
- Gross Profit Margin is lower for Nagbe LTD (18.0%) than Suah LTD (24.0%), showing that Nagbe LTD has lower profitability on its sales.
- Profit Margin (Before Interest & Tax) is also lower for Nagbe LTD (12.25%) than Suah LTD (19.0%), meaning Suah LTD converts a greater portion of its revenue into profit.
- Current Ratio is slightly weaker for Nagbe LTD (2.07:1) compared to Suah LTD (2.4:1), showing a marginally lower short-term liquidity position.
- Inventory Holding Period is higher for Nagbe LTD (37.82 days) than Suah LTD (31 days), indicating Nagbe LTD takes longer to sell inventory.
- Trade Receivables Collection Period is longer for Nagbe LTD (46.54 days) than Suah LTD (31 days), meaning Nagbe LTD takes more time to collect receivables.
- Trade Payables Payment Period is slightly lower for Nagbe LTD (23.36 days) than Suah LTD (24 days), showing both companies settle payables at a similar rate.
- Gearing Ratio is slightly lower for Nagbe LTD (64.6%) than Suah LTD (65.8%), indicating Nagbe LTD relies marginally less on debt financing.
- Topic: Financial Statement Analysis
- Series: Nov 2024
- Uploader: Salamat Hamid