Tutorial 1: Financial Analysis

Question 1:
Extracts from the accounts of Sidique Ltd, a Bahrain based food retailer for 2006 and 2007
are given below;

At 31st August 2007 2006

Non-current Assets BD000's
Cost Depn NBV Cost Depn NBV
Tangible assets 1194 300 894 821 156 665
Current assets
Stocks 280 221
Debtors 295 227
Bank 0 25
575 473
Current liabilities
Creditors 332 230
Dividend 33 49
Taxation 52 65
Bank overdraft 40 0
457 344
Working capital 118 129
Non-current liabilities
Debenture loans (175) (95)
837 699
Financed by:
Ordinary share capital 549 400
(BD1 shares)
Retained profits 288 299
837 699

Summarised Trading, Profit and loss account for the year ended
2007 2006
Sales 22,156 22,900
Less Cost of sales (14,800) (13,488)
Gross profit 7,356 9,412
Operating expenses (7,239) (7,640)
Operating profit 117 1,772
Interest paid (24) (12)
Profit before taxation 93 1,760
Taxation (43) (828)
Profit after tax 50 932
Dividends (61) (800)
Retained for the year (11) 132

Required:

a) Calculate eight appropriate financial ratios for both 2006 and 2007, which will enable
an assessment of financial performance and financial position of Sidique Ltd.
b) Based on the ratios you calculated under (a), comment on the financial situation of
Sidique Ltd.

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Question 2:

After many years of uninterrupted growth in sales and profitability, Little Gem plc (a
manufacturing company) is facing more difficult trading conditions. Prior to the recent
publication of its results a number of analysts had expressed concern about the company
and in particular were concerned about levels of profitability, liquidity, utilisation and gearing.
The results have now been published and extracts are shown below:

Balance sheet as at 31st August

2007 2008
m m
Non-current assets
Intangible assets 104 194
Property, plant and equipment 4,572 4,972
4,676 5,166
Current assets
Inventories 349 440
Trade and other receivables 935 1,042
Cash and cash equivalents 176 82
1,460 1,564

Current liabilities
Trade and other payables 356 358
Current income tax liability 416 418
Provisions for other liabilities and charges 142 97
914 873
Net current assets 546 691

Non current liabilities

Borrowings 2,275 2,338
Provisions for other liabilities and charges 250 147
2,525 2,485
Net assets 2,697 3,372

Shareholders equity
Ordinary shares 750 750
Share premium 160 160
Other reserves 650 900
Retained earnings 1,137 1,562
Total equity 2,697 3,372

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Income statement for the year ended 31 August
2007 2008
m m
Continuing operations
Revenue 7,620 7,848
Cost of sales (4,273) (4,391)
Gross profit 3,347 3,457
Selling and marketing costs (1,362) (1,402)
Administrative expenses (421) (424)
Other operating income 20 22
Operating profit 1,584 1,653
Finance cost (176) (220)
Finance income 12 15
Profit before income tax 1,420 1,448
Income tax expense (416) (418)
Profit for the year from continuing operations 1,004 1,030
Profit for the year from discontinued operation 27
Profit for the year 1,004 1,057

Notes:

(a) The increase in other reserves is principally explained by the revaluation of its property.

(b) The increase in intangible non-current assets arises from the capitalisation of
development expenditure.

(c) In the Directors Report, mention is made of the difficult trading conditions, but the
Directors remain optimistic about future conditions. In particular they comment that they
have resisted the temptation to embark on a programme of cut backs. Rather they
remain confident that the organisation is in a good position to take advantage of the
recovery when it occurs.

Required:

(a) Calculate the following ratios for Little Gem for both years covered by the accounts:

- Return on equity - Current ratio

- Financial leverage multiplier - Inventory turnover
- Return on capital employed - Accounts receivable turnover
- Asset turnover - Accounts payable turnover
- Operating profit margin

(b) On the basis of the accounts and notes provided above, provide an analysis of the
companys profitability, liquidity, utilisation and gearing.
Your answer should include, but not be limited to, an evaluation of the ratios which
you have calculated in response to question (a) above.