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Report for the directors of Glan NI Cheese Ltd

BSc Business Studies

Accounting for Business Decision

ACF 321 (Level 5)

October 2016

Module Coordinator: Andy Till

Students :

Mihaela Titianu B00703262

Erikas Bacevicius B00692176

Andrei Oprea B00703042

Bogdan Antonio Apostescu B00698986

Lu Jianyang B00703210

Words Count: 3264 (including citations)

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Table of Contents

1. Terms of Reference........................................................................................................................3

2. Methodology..................................................................................................................................3

3. Evaluation of the Financial Performance and Position of the Glan NI Cheese ( GNC ) Ltd.......3

3.1 Profitability..................................................................................................................................4

3.2 Efficiency.....................................................................................................................................5

3.3 Liquidity.......................................................................................................................................6

3.4 Financial Gearing.........................................................................................................................6

4. Analysis of Working Capital Problems.........................................................................................7

4.1 Managing of Trade Receivables...................................................................................................7

4.2 Managing of Cash........................................................................................................................8

4.3 Managing of Inventories..............................................................................................................8

4.4 Managing of Trade Payables........................................................................................................9

5. Evaluation of the Options for Raising Finance.............................................................................9

5.1 The Stock Exchange.....................................................................................................................9

5.2 The Alternative Investment Market (AIM)...........................................................................10

6. Evaluation of Alternative Sources of External Finance..............................................................10

6.1 Business Angels.........................................................................................................................10

6.2 Venture Capital...........................................................................................................................11

6.3 Government Assistance..............................................................................................................11

7. Conclusion....................................................................................................................................12

8. Recommendations to the Directors..............................................................................................13

9. References...................................................................................................................................14

10. Appendix....................................................................................................................................16

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MEMO

To: Board of Directors Glan NI Cheese Ltd

From: M. Titianu, E. Bacevicius, A. Oprea, B.A. Apostescu, L. Jianyang

Date: 06 November 2016

Ref: Financial Review 2014/2015

1. Terms of Reference

The aim of this report is to appraise the financial performance and position of the Glan Ni
Cheese Ltd ( GNC ).

2. Methodology

The report will evaluate the finances of the GNC Ltd using the following methods:

Contrasting of the financial statements of the GNC Ltd for the two financial years
using ratio analysis.
Analysis of the working capital problems faced by the company.
Evaluate the options for raising finance on the stock exchange or the alternative
investment market.
Appraisal of the alternative sources of external funding that may be used to finance the
expansion plans.
Present recommendations to the directors of the GNC Ltd

3. Evaluation of the Financial Performance and Position of the Glan NI


Cheese ( GNC ) Ltd

As Seal (2011) stated, that the accounting ratios are necessary gears and help to evaluate the
performance. The primary Ratios are Profitability, Efficiency (Working Capital), Liquidity (Cash
flow), Gearing (The level of Debt in your Capital Structure) and Investments. All these Ratios
needs to be analysed. This report is using Ratio analysis (See Appendix. Table 1. Calculations of
Ratios).

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3.1 Profitability

Return on capital employed (ROCE).

By analysing this ratio, a business can evaluate how shareholders investment is sufficient
(Abraham et al. 2008). GNC Ltd has suffered a poor performance regarding the ROCE. The
company declined from 20.42 % in 2014 to 16.32% at 30 September 2015. The reasons for the
drop in ROCE was due to decrease in gross profit margin and operating profit margin. On the other
hands, according to the Office for National Statistics (2015, p. 2), private non-financial
corporation profitability as measured by their net rate of return, was estimated at 11.9 in Quarter 1
2015, 0.2 % lower than the revised estimate of 12.1% in Quarter 4 2014. In turn, GNC Ltd
measures well.

Return on ordinary shareholders funds (ROSF)

Looking at this ratio for the two financial periods of time it can be observed a decline from
23.13 % in 2014 to 16.94% in 2015. It means that every 100 invested the owners only get back
16.94 net profit as a return. It mainly due to net profit for the year 2015 hence why GNC Ltd need
to investigate how to control expenses.

Operating profit

GNC Ltd tends to operate on the low-profit margin by looking at the distribution market which
are retailers in Ireland and the United Kingdom who tend to produce at low prices. Nonetheless,
numbers have increased in sales revenue decreased in percentage has been noticed after comparing
the two years. The performance has been partially disturbed by operating profit due to the level of
administration, selling and distribution expenses about sales revenue.

Gross profit margin

This ratio has relatively worsened from 60.60% in 2014 to 56.89% in 2015 as the cost of sales
has suffered a slight increase. The price for the raw material in 2015 has been increased comparing
with 2014. As a result, its significant effect on the gross profit margin hence why GNC Ltd may
consider to renew the deal with the supplier or find new suppliers without damaging the quality of
the products.

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3.2 Efficiency

Trade payable.

There was a growth between 2014 and 2015 in the period of the time that elapses by the
middle of purchasing crude material furthermore paying for them. Consequently, GNC Ltd is
making use of the credit provided by the supplier.

The average settlement for trade receivable

It has highly improved from 48 days to 76 days in 2015. Therefore the customers are taking
longer to paying back money owed. That means that too many funds tied up in trade receivables;
directors should concern that those funds may use for the most valuable purpose (Atrill and
McLaney, 2014).

The average inventories

This ratio has been calculated as the average of the opening and closing stocks levels of the
year (Atrill and McLaney 2015). That means, on average for GNC Ltd the inventories held are
being turnover every 35 days and kept the same for both years. The organic cheese purchased by
a company on a particular day would be sold about approximately five weeks far ahead.

Sales revenue to capital employed

The GNC Ltd has suffered deterioration on capital employed ratio. The assets of the
business are not used to the maximum of the efficiency to generate profit. In 2014 more sales
revenue was being generated. However the business land and buildings have a market value of 1.4
m in 2015 which explain the significant expansion of non-current liabilities, that means GNC Ltd
is more trustworthy to potential lenders which attracted by land and buildings as security (GNC Ltd
case study, 2016). As the company started receiving more orders from the European market
producing the organic soft cheese it may explain why the loan from the bank used to (or intending
to) expanding and increase sales revenue in the long term. However, not much benefit was
indicated concerning increased sales revenue or cost saving during 2015.

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3.3 Liquidity

Current Ratio

The present ratio of GNC Ltd has a decline from 5.96 times in 2014 to 2.3 times in 2015.
Although this is a decline, it is no matter of concern. It is believed for most of the business the
ideal current ratio benchmark to be 2:1 (Wood, 2012). Therefore, GNC Ltd has no problem to pay
for its current liabilities.

Acid ratio

The acid test ratio has dropped from 5.103 times in 2014 to 1.91 in 2015. Although this is a
decline, directors have no matter of concern. The lowest level for this ratio is most of the times
established as 1:1 current assets equal current liabilities (Drury, 2005). Consequently, GNC Ltd
can afford to pay nearly two times for its current liabilities. GNC Ltd invested in new equipment,
land, buildings, motor vehicle and development for the new organic cheese line into the European
market. It may stress the fact of the necessary expand of non-current assets which have
significantly increased in 2015. This sort of investment will generate long-term revenue for GNC
Ltd.

3.4 Financial Gearing


Gearing ratio

In 2014 the gearing ratio for GNC Ltd was at 47.4% which is considered to be very high.
Gearing Ratio in 2015 expands by 7.9% due to increased level of borrowings. In turn, investors
will consider it before investing money in a company as the high gearing ratio will put their loans
in danger.To reduce gearing ratio, the Directors of GNC Ltd may decrease own dividends and
leave more equity into the company.

Interest cover ratio

In 2014 this ratio suffered a decline from 5.97 times at 3.68 times in 2015. It mainly
generated by the increase in borrowings in 2015 and also profitability in that year. However, the
situation looks stable, and GNC Ltd can cover its interest payable about three times.

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4. Analysis of Working Capital Problems

According to Atrill and McLaney (2014), the working capital represents the current assets
(CA) less current liabilities (CL), where the most essentials of current assets are:

Trade receivables
Cash
Inventories

Moreover, the fundamental elements of current liabilities are:

Trade payable
Bank overdraft
By adjusting these primary elements on CA and CL, management able to change working capital to
the desired level.

4.1 Managing of Trade Receivables

Trade receivable investigates the relationship between debtors and credit sales by
displaying the period that a borrower could pay back its credit sales as a liability in the financial
year (Abraham et al. 2008).

As Bery and Jarvis (2011) point out, that the following five Cs of credit complement a
useful list: capital, capacity, collateral, conditions, and character. Credit limits must settle if
eventually a customer is considered creditworthy. Trade receivable for 2015 rose by 40 %; the
average debtor turnover period is 76 days, about ten weeks waiting on that money to use. It shows
a poor performance and an increase in the risk of bad debts compared to 2014.

Therefore, GNC Ltd should concern the amount of funds set - aside for trade receivable and
attempt to reduce it to minimal. In turn, GNC Ltd may establish an efficient accounting system to
send out invoices and reminders on time to consumers who delayed in payment. The accounting
system should refer to managers to stop further deliveries on a customer neglects with reacting on
an indication. Additionally, directors may consider developing customer relationship with the
influential members who are purchasing on credit and may offer discounts to its clients who are
taking longer to pay to stimulate the fastest payment.

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4.2 Managing of Cash

According to Atrill and McLaney (2015), there are three main reasons why businesses are
holding cash: to meet day to day commitments, for precautionary purpose and to exploit the
opportunity. In indefinite marketplaces, organizations must retain a decent level from demanding
cash to meet operating expenses, furthermore also should diminish the cost of maintaining money
(Singh, 2008).

Looking at GNC Ltd cash level comparing the two financial years a substantial decrease
can be observed. In 2014 company was holding 525 million in cash which means the business
was overtrading, in turn in 2015 business had at the end of the financial year only 12 million
which can see as a negative leap. Mismanaging the working capital could lead to a small cash
balance.

GNC Ltd may consider anticipating any cash shortages and making appropriate
arrangements in advance to reach a right balance in cash management. A failure in managing the
cash flow correctly will lead GNC Ltd to the risk of running up unauthorized overheads and
incurring penalty bank overcharging (Gowthorpe, 2011).

4.3 Managing of Inventories

Inventory is the physical goods for resale that has not yet been sold. (Singh, 2008). Wood
(2012) stated that appropriate inventory management develops the inexpensive capacity and helps
reduce production costs.

According to case study GNC Ltd, kept the right balance of Inventory. In turn, an average
inventories turnover period in 2014 and 2015 prominently are 35 days. A longer inventory turnover
period (ITP) implies that business is holding stock in inventory to a lengthy time as shorter ITP
demonstrates a rapid stock change (Singh, 2008).

Comparing GNC Ltd 2014 and 2015 years Sales revenue, it could be concluded that
company manages well their inventories.However, it could be suggested to GNC Ltd directors that
they deliberate and implement of stockpiles reordering and recording systems in order to manage
inventory effectively and efficiently (Temtime, 2016).

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4.4 Managing of Trade Payables

The average settlement period for trade payable for GNC Ltd rose from 27 days in 2014 to
34 days in 2015. This ratio draws attention to the fact that GNC Ltd must be ready to pay its
suppliers within 34 days and the business is looking to receive funds on the goods sold on credit
within a period of 76 days. Receipts are coming in after money is being paid out to suppliers. In
turn, GNC Ltd likely to run into a cash problem. The company should arrange with the suppliers to
increase payment terms and respectively hold the money longer.

5. Evaluation of the Options for Raising Finance

According to the case study, The Directors of GNC Ltd secured additional funding in
2014 for the development of new organic cheese line. The company is seeking further additional
funding to satisfy the new orders and hope to develop further links. They have therefore
considering raising finance on the UK stock exchange or the Alternative Investment Market
(GNC Ltd case study, 2016).

The business has the following options of raising finance of the share issues:1. Rights
issues. 2. Public issues. 3. Private placement. Right issues are established by a business that
pursues to raise additional funds by issuing new share to they existing shareholders who have
entitlement first to purchase any new share. It is cheap and no cost to issue but it impels existing
shareholders to supply additional finance. The public issue is confidentially sponsored by the
companies. The shares are traded to an issuing household which sells them on to the possible
investor. Private placings are a proposal for institutional investors to subscribe and introduces new
shareholders and it is rapid and inexpensive of fundraising funds. (Atrill and McLaney, 2015).

A business possibly will issue shares in some ways. The most common reasons for the issue
of shares are to raise money to finance the business, to repay some or all of the company borrowing
and to grow the business.

5.1 The Stock Exchange

The Stock Exchange plays an important part of providing funds for business. The stock
exchange acts as both an essential primary (permit the company to raise new funding), and
secondary capital market (allow investors to trade their securities) for business. The Stock
exchange is usually the most convenient way of buying or selling shares (Stringham, et all, 2012).

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A stock market trading system can have particular drawbacks for business. These
incorporate strict rules, commentariat, keeps under observation activities of listed business,
pressure to accomplish well and the cost of acquiring and retaining a listing are enormous (Atrill
and McLaney, 2015).

In another word, to enter on the Stock Market Exchange, GNC Ltd must be aware of the
process involving time-consuming and expensive due to the listing. Therefore, directors may
consider other alternative investment sources to raise capital.

5.2 The Alternative Investment Market (AIM)

AIM resembles in style to the central London stock exchange, but it is affordable for the
firm to access. AIM has been proving to be a very effective market where new equity finance can
raise, and shares can trade. The listening requirement of AIM is less strict than Stock Exchange.

As Hornok (2015, p.335) indicates an investor buying stock in a company that lists on the
AIM is more likely to find return lower after eighteen months than an investment in another
company that chose to list on the Main Market.

However, AIM is a similar in style to the central London Stock Exchange, but it would be
cheaper to enter hence is made-to-order for smaller, young and growing business as GNC Ltd.
Directors may consider the fact that AIM policies are much supple than the main market.

6. Evaluation of Alternative Sources of External Finance

Development and grow an efficient business usually comprises moving into new areas.
Enlargement requires investment which could seek after from sources outside the company (Berry
et all, 2011). One of the main these resources are Business Angels, Venture Capital, and
Government Assistance.

6.1 Business Angels

Business angels are private investors, who have expanded affluence and experience and
investing in small and medium innovativeness to help young entrepreneurs and to make prots for
themselves (Ramadani, 2009).

Mason and Harrison (2008) points out that business angel fundings are 25 times superior
to venture capital investments and nance from 30 to 40 times more. The advantages that GNC Ltd

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may find from Business Angels could allow the company to access their investor's sector
knowledge and contacts, and private investors are willing to make more flexible business
agreements. On the other hand, GNC Ltd must be ready to give away a share from the business,
additional funds rarely may be provided if necessary and also it may take a considerable time to
find an appropriate investor.

6.2 Venture Capital

According to Atrill and McLaney (2015, p. 434),Venture Capital is long term capital
provided to small and medium sized businesses that wish to grow but do not have ready access to
stock markets. It is a very high-risk investment because the investors are unclear how well the
company could perform, but the returns can be extremely high.

Venture usually provide ordinary shares, representation on board directors, often five years and
more. Venture capitalist investing in new businesses- without financial records or history in
business. However, institutional investors or individuals who wish to invest in growing companies
with great prospects for the future, in return require a delegate on the board of directors ( Bovaird,
1990). Accompanied by great possibilities, GNC Ltd may raise the interest for the Venture Capital
investors. As the company aims to extend to the Europen Market, its returns on Capital shares may
expand hence why it appears a profitable investment.

6.3 Government Assistance

The Enterprise Finance Guarantee Scheme (EFG) is the guaranty loan scheme which lending
money to small and medium-sized corporations. EFG has exchanged the Small Firms Loans
Guarantee (SFLG) Scheme and UK Government set up The British Business Bank. It has more
broad criteria, in that it offer up to 1 million, as opposed to 250,000, and is accessible to
organizations with a turnover of up to 41million, as opposed to 5.6m (GOV.UK).

In addition to it, EFG required to settle up extra a supplementary 2 % annual premium which
covers the cost of supplying the guarantee. The business has to repay the loan over a period of 3
months to 10 years ( GOV.UK). Hence, Glan Ni Cheese LTD eligible for EFG but it would be
further borrowing which company must avoid as the gearing ratio is too high.

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7. Conclusion

Evaluation of financial performance and position reveal that Glan Ni Cheese (GNC) Ltd
continues to be profitable but could ameliorate its efficiency to satisfy stockholders. Concerning
return on liquidity, the company had an acceptable performance. The increase in borrowing has an
adverse impact on the profitability of the business, but nevertheless, the company carries forward
as a valuable investment.

The working capital analyses indicate the need for directors to enforce procedures and
strategy to improve the administration of trade receivable and inventories. The GNC Ltd may
consider anticipating any cash shortages and making appropriate arrangements in advance to reach
a right balance in cash management.

Evaluation of raising finance on the Alternative Investment Market (AIM) may well enable
the business to grow and boost the company profile. However, directors need to be able to comply
with the governance of investors and demand of market regulators. In addition to it, directors
should examine if there are other sources of financing to allowed expansion without passing a
significant percentage from the companys shares.

Business Angels, Venture Capital, Government Assistance and AIM could all provide fund
development. Government assistance will be further borrowing which company must avoid.
Venture Capital institutions are based on qualitative data researchers and high-risk return while
Business Angels behave differently in their investment process. Both have the disadvantage of
being difficult to find. GNC Ltd can issue equity shares via AIM public or private placing that
would deliver the better opportunity for financing onward projects.

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8. Recommendations to the Directors

In response to the need to enhance a better Glen Ni Cheese (GNC) Ltd Financial
Performance, fulfillment investors, and shareholders few proposals are provided to company
directors as follows:

1 Need to boost sales.


2 To ponder overheads and examine if there is any opportunity to reduce them.
3 To identify ineffective assets and removed them.
4 To negotiate with customers to decrease payment terms. Alternatively, arrange with the
suppliers to increase payment terms and respectively hold the money longer.
5 To increase the velocity in collecting receivable, decrease inventory and extend the period
required for trade payable, which all produces cash and will help to reduce the gearing
ratio by liquidating loans.
6 Directors may consider diminishing dividends that taken for non-business use.
7 To monitor the profitability of the products sold and to verify they are profitable.
8 GNC Ltd may consider implementing a business strategy using the 5 Porters competitive
forces. It is a valuable tool which identifies three primary generic strategies based on
competing on price, differentiation and focusing on a niche market.

9 References

Abraham, A, Glynn, J, Murphy M, Wilkinson B. (2008) Accounting for managers. London:


Cengage Learning EMEA.

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Atrill, P., McLaney, E. (2014) Accounting and Finance for Non Specialists, 9th ed. FT Prentice
Hall.

Atrill, P., McLaney, E. (2015) Accounting and Finance for Non Specialists, 9th ed. Pearson
Education Limited.

Berry, A., Jarvis, R. (2011) Accounting in a business context, 5th ed. South-Western Cengage
Learning.

Bovaird, Chris. (1990) Introduction to Venture Capital Finance. London: Pitman Publishing.

Drury, C. (2005) Management Accounting for Business Decisions, 3rd ed. Bath: Thomson.

Gowthorpe, C. (2011) Accounting and Finance, 3rd ed. South-Western Cengage Learning.

Great Britan.GOV.UK. Department for Business, Innovation & Skills.Understanding the


Enterprise Finance Guarantee (2014).London. Available from:
https://www.gov.uk/guidance/understanding-the-enterprise-finance-guarantee [Accessed 28
October 2016].

Hornok, Jonathan R. (2015) The Alternative Investment Market: Helping Small Enterprises Grow
Public.Ohio State Entrepreneurial Business Law Journal, Vol. 9, Issue 2, pp. 323-378. Available
from: file:///C:/Users/Erikas/Desktop/Sources%20of%20external%20finance%20Q%203/AIM.pdf
[Accessed 18 October 2016].

Mason, Colin M.; Harrison, Richard T. (2008) Measuring business angel investment activity in the
United Kingdom: a review of potential data sources. Venture Capital., Vol. 10 Issue 4, p309-330.
22p. Available from: file:///C:/Users/Erikas/Desktop/untitled%20111111.pdf [Accessed 18 October
2016].

Office for National Statistic. Profitability of UK Companies: Q1 (Jan to Mar) 2015. Available
from:http://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/profitabilityofu
kcompanies/2015-07-08 [Accessed 11 October 2016].

Ramadani, Veland. (2009) Business angels: who they really are. Strategic Change., Vol. 18 Issue
7/8, pp249-258. 10p. Available from: file:///C:/Users/Erikas/Desktop/Sources%20of%20external
%20finance%20Q%203/Business%20Angels%203.pdf [Accessed 18 October 2016].

Seal, W. (2011), Management Accounting for Business Decisions. Berkshire: McGrow Hill
Education.

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Singh, Pradeep. (2008) Inventory and Working Capital Management: An Empirical Analysis.
ICFAI Journal of Accounting Research., Vol. 7 Issue 2, p53-73. 21p. Available from:
file:///C:/Users/Erikas/Desktop/Working%20Capital/untitled9.pdf [Accessed 18 October 2016].

Stringham, Edward Peter; Chen, Ivan. (2012) The Alternative of Private Regulation: The London
Stock Exchanges Alternative Investment Market as a Model. Economic Affairs, Vol. 32 Issue 3,
p37-43,7p. Available from: file:///C:/Users/Erikas/Desktop/Sources%20of%20external%20finance
%20Q%203/AIM%201.pdf [Accessed 18 October 2016].

Temtime, Zelealem Tadesse. (2016) Relationship between Working Capital Management, Policies,
and Profitability of Small Manufacturing Firm. Walden Dissertations and Doctoral Studies.
Available from: file:///C:/Users/Erikas/Desktop/Accauntancy%20%20assignment%201/untitled
%2012.pdf [Accessed 18 October 2016].

Wood, F., Sangster, A. (2012) Business Accounting 2, 12th ed. Parson Education Limited.

10. Appendix
Table 1. Calculations of Ratios
Profitability

2015 2014
Gross Profit Margin

Gross profit 2972 2800


* 100 % *100 % = 56.89 *100 % = 60.60
Sales Revenue 5224 4620

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Operating Profit Margin

Operating profit 855 861


* 100 % *100 % = 16.94 *100 % = 18.63
Sales Revenue 5224 4620

ROSF

484 513
*100 % = 19.99 *100 % = 23.13
2421 2217
Net profit per year
Ordinary Shares Capital+ Reserves *

100 %
ROCE

885 861
*100 % = 16.32 *100 % = 20.43
2421 +300 2217 + 200
Operating profit
Share Capital+ Reserves+ NonCurrent Liabilities

* 100 %
Efficiency

2015 2014
Average Inventories turnover
216 176
period * 365 days = 35.01 *365 days = 35.2
2252 1820
Average Inventory
Cost of Sales * 365

days
Average Settlement period for 214 138
* 365 days = 33.9 * 365 days = 27.19
2.300 1.852
trade payables

Trade payables
365 days
Credit Purchase

Average Settlement period for 1.082 608


*365 days = 75.5 * 365 days = 48.03
5.224 4.620
trade receivables

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Trade Receivables
Credit Sales Revenue * 365

days
Net Asset Turnover

Sales Revenue 5.224 4.620


= 0.96 = 1.09
Share Capital+ Reserves+ NonCurrent
660Liabilities
+ 1.761 + 3000 600 + 1.617 + 2000

2015 2014

Current Ratio

Current Assets 1.334 1.325


=2.3 =5.96
Current Liabilities 572 222
Liquidity

Acid test Ratio

Current Assets ( Excluding Inventories ) 1.082+12 608+ 525


=1.91 =5.103
Current Liabilities 572 222

Gering Ratio

3000 2000
100 =55.3 100 =4
660+ 1.761+3000 600+ 1.617+2000
NonCurrent Liabilities
Share Capital+ Reserves+ NonCurrent Liabilities
Gearing

* 100%

Internal Cover Ratio

Operating Profit 885 861


=3.672 =5.97 9
Interest Payable 241 144

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