CAPE U1 Ratio Question
CAPE U1 Ratio Question
CAPE U1 Ratio Question
Consider the following financial information for Patterdale limited, a manufacturer of sauces for the food
industry, as at 31 December 2014 (with comparatives).
Patterdale Limited Statement of Financial Position as at 31 December
2014 2013
$'000 $'000
Non-Current Assets
Property, Plant & equipment 230,000 180,000
Total non-Current Assets 230,000 180,000
Current Assets
Inventories 19,500 15,200
Trade receivables 14,200 14,700
Cash & Cash equivalents 8,240 12,400
Total Current Assets 41,940 42,300
TOTAL ASSETS 271,940 222,300
Equity & Liabilities
Equity
Share Capital 80,000 50,000
Share Premium 10,000 5,000
Retained earnings 65,290 63,500
Total equity 155,290 118,500
Non-Current Liabilities
Long-term Loan 100,000 90,000
Total non-Current liabilities 100,000 90,000
Current liabilities
Trade Payables 15,900 13,300
Current Tax Payable 750 500
Total Current liabilities 16,650 13,800
TOTAL EQUITY & LIABILITIES 271,940 222,300
Other Relevant Information
Revenue 86,400 81,100
Cost of sales 68,990 67,074
Administrative expenses 2,460 2,146
Distribution Costs 4,750 4,080
Finance Costs 5,300 4,600
Income Tax 710 400
Profit after tax 4,190 2,800
Dividends Paid 2,400 1,700
REQUIREMENT:
Using the above information:
(a) Calculate six appropriate ratios in order to comment on, and assess, the liquidity, profitability and
gearing of Patterdale limited. (12 marks)
(b) Review the above financial statements and identify any additional long-term funding raised by
Patterdale limited in 2014. Indicate where this funding was spent. (4 marks)
(c) Identify and explain the main limitations of ratio analysis as a means of assessing the financial
performance of a business.
Question Redona Limited operates a hotel in Dublin and the following is its results for the last three years
with its year end being 31 december.
2013 2014 2015
Revenue increase / (decrease) (5%) 4% 12%
Non-Current Assets increase / (decrease) 40% 10% 2%
Gross Profit 60% 61% 66%
Net Profit 23% 25% 21%
Return on Capital employed 12% 15% 10%
Current ratio 1.4:1 1.6:1 1.8:1
Acid ratio 0.6:1 1.0:1 0.9:1
Debt to equity ratio 50% 44% 43%
Dividend Cover 4 times 8 times 10 times
REQUIREMENT:
(a) Using all of the above information, comment on the performance of redona limited from 2013 to 2015.
(12 marks)
(b) Identify and explain the main advantages of ratio analysis as a means of assessing the financial
performance of a business. (5 marks)
(c) Comment on the use of the Gross Profit ratio to the service industry. (3 marks)
[Total: 20 Marks]
Question Shacarn Limited is a company which supplies meat to the retail trade. The following are their
results for the last two years.
Shacarn Limited Statement of Profit or Loss and Other Comprehensive Income Statement for the Year-
ended 31 December 2018
Shacarn Limited Statement of Financial Position for the Year-ended 31 December 2018
2018 2018 2017 2017
$’000 $’000 $’000 $’000
Non-Current Assets 13,200 11,000
Current Assets
Inventory 1,400 1,800
Trade Receivables 2,000 1,200
Cash and Cash Equivalents 1,200 400
Total Current Assets 4,600 3,400
Total Assets 17,800 14,400
Equity & Liabilities
Equity
Ordinary Share Capital ($1) 2,000 2,000
Retained Earnings 4,767 760
Total Equity 6,767 2,760
Non-Current Liabilities
Long-term Debt 9,000 10,000
Total Non-Current Liabilities 9,000 10,000
Current Liabilities
Trade Payables 1,400 1,200
Bank Overdraft 240 60
Taxation 120 180
Accruals 273 200
Total Current Liabilities 2,033 1,640
Total Equity and Liabilities 17,800 14,400
Notes:
(i) The Opening Inventory for 2017 was $2,000,000.
(ii) The number of ordinary shares in issue is 2,000,000 for both years.
31/12/2018 31/12/2017
(iii) Current Share Price per Ordinary Share $26.00 $15.00
REQUIREMENT:
(a) Calculate for the following ratios for both years in relation to Shacarn Limited.
(1) Gross Profit Percentage
(2) Net Profit Percentage
(3) Quick Ratio
(4) Trade Receivable Days
(5) Trade Payable Days
(6) Interest Cover
(7) Earnings Per Share
(8) Price Earnings Ratio (8 Marks)
(b) Draft a report to the Board of Directors of Shacarn Limited in which you provide a commentary on
the company’s position and performance. Use the ratios calculated at (a) above as the basis for your
commentary. (10 Marks)
5. Bohermaw Limited is a company which is involved in the retail trade. The following are their results for
the last two years.
Bohermaw Limited
Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2016
2016 2015
$’000 $’000
Sales 5,800 3,990
Cost of Sales (4,123) (2,863)
Gross Profit 1,677 1,127
Distribution Costs (193) (177)
Administration Costs (218) (126)
Profit before Interest & Tax 1,266 824
Interest (188) (194)
Taxation (108) (120)
Profit for the Year 970 510
Bohermaw Limited Statement of Financial Position for the year ended 31 December 2016
2016 2016 2015 2015
$’000 $’000 $’000 $’000
Non-Current Assets 3,610 3,225
Current Assets
Inventory 580 460
Trade Receivables 460 280
Cash & Cash Equivalents 200 160
Total Current Assets 1,240 900
Total Assets 4,850 4,125
Equity & Liabilities
Equity
Share Capital 1,000 1,000
Retained Earnings 1,525 555
Total Equity 2,525 1,555
Non-Current Liabilities
Long-term Debt 1,700 2,000
Total Non-Current Liabilities 1,700 2,000
Current Liabilities
Trade Payables 400 320
Bank Overdraft 147 30
Taxation 108 120
Accruals 47 100
Total Current Liabilities 702 570
Total Equity & Liabilities 4,927 4,125
Notes:
(i) The Opening Inventory for 2015 was €500,000.
(ii) The number of shares in issue is 1,000,000 for both years.
2016 2015
(iii) Market price per share at year-end $12.00 $6.20
REQUIREMENT:
(a) Calculate for both years the following ratios in relation to Bohermaw Limited. (8 marks)
1) Gross Profit Percentage
2) Net Profit Percentage
3) Current Ratio
4) Trade Receivable Days
5) Trade Payable Days
6) Return on Capital Employed
7) Earnings Per Share
8) Price Earnings Ratio.
(b) Draft a report to the Board of Directors of Bohermaw Limited in which you provide a commentary on
the company’s position and performance. Use the ratios calculated at (a) above as the basis for your
commentary. (10 Marks)
(c) Discuss whether or not you would recommend to the Directors to sell the company for €15m as offered
by a third party. (2 marks)
[Total: 20 Marks]
SOLUTION 5 2015
Please note that different variations of ratio formulae will be accepted provided that they are correct.
(a) Calculation of Six Relevant Ratios
Patterdale Limited Possible Ratios in relation to its liquidity, profitability and gearing
2014 2013
Current 2 .52:1 3 .07:1
Quick 1 .35:1 1 .96:1
T. Receivable 6 0 days 6.6 days
T. Payable 8.4 days 7 2 days
Inventory 1 03 days 8 3 days
ROCE 4.00% 3.74%
Gross Profit 20.15% 17.29%
Net Profit 4.85% 3.45%
Gearing 39.17% 43.17%
Interest Cover 1.92 times 1.70 times
Debt to Equity 64.40% 75.95%
Commentary
The current and quick ratio is good. However, the company is carrying too much inventory unless the
company is stockpiling for future sales. Inventory days are too high and have increased by over 24% year
on year which is worrying and management need to investigate the reasons for this increase in case there
will be losses from obsolete inventory. Trade receivable days have decreased by size 6 days year on year
and Trade Payable days have increased by 12 days year on year which is pleasing. both ratios appear to be
high for the industry. It appears as if management have focused on getting in trade receivables quicker and
held off payment to trade payables so as to manage the working capital and pay for the increase in
inventory and property, plant and equipment. gross and net Profit are strong but the return on capital
employed is low highlighting that the return on the sizeable amount of assets is poor. Interest cover is low
especially considering the amount of profit versus the interest repayments on the loan. The gearing and debt
to equity ratio have improved year on year which is pleasing, the gearing ratio is acceptable but one would
like to see the debt to equity ratio continue to decline for the company. overall, the ratio analysis shows
some positive indications when comparing 2014 to 2013 but a lot of work is needed to manage the working
capital and liquidity of the company as well as earning a stronger return on its investment which reducing
debt levels. (12 marks)
(b) The external funds raised were an increase in long term loans of $10 million as well as the issuance of
new shares which generated funds of $35 million. This funding was used to finance the purchase of
new property, plant and equipment. (4 marks)
(b) Comparison
Financial ratios provide a standardised method with which to compare companies and industries. ratios can
put all companies on a relatively equal playing field in the eyes of analysts; companies are judged on their
performance rather than their size, sales volume or market share.
Industry Analysis
Ratios can reveal trends in particular industries, creating benchmarks against which the performance of all
industry players can be measured thus providing valuable information to users, shareholders, trade
payables, banks.
Stock Valuation
Ratios help investors and analysts to evaluate the strengths and weaknesses of individual companies or
industries and allow them to highlight companies to invest in or to avoid investing in.
Planning and Performance
Ratios can provide guidance to entrepreneurs when creating business plans or preparing presentations for
lenders and investors. Ratios can also serve as an impetus for strategic change within an organisation,
providing management with relevant guidance and feedback as ratio valuations shift in response to
organisational changes. Ratios help to ensure managers perform by revealing financial weaknesses and
opportunities.
Simplicity
It highlights important information in simple formats. A user can judge a company by just looking at a
small amount of numbers instead of reading the whole financial statements.
(5 marks)
(c) It depends on the service industry. for example, an accountancy practice will usually not have any cost
of sales and therefore, the gross profit ratio is meaningless as all its costs are under expenses. however, a
hotel while providing a service will have a cost of sales for its food and beverage operations and therefore,
the gross profit ratio is relevant.
(3 marks)
Quick Ratio
This ratio has increased from 0.98:1 to 1.57:1 this year which is an improvement of over 60% year on year
percentage wise. The main reason for the increase is the fact that Current Assets minus Inventory increased
by 100% driven mainly by the increase in Bank which increased by 200% and Trade Receivables
increasing by $800,000 or over 66% year on year. Current Liabilities increased by under 24% driven
mainly by the increase in the Bank Overdraft of $180,000. This was a good result overall as the company
have increased their revenue significantly which can put some strain on working capital. Yet the quick ratio
has increased this year and the company have also purchased some extra Non-Current Assets and paid off
some of Non-Current Debt (decreased by 10%). Some of this decrease in debt may have been funded
through the Bank Overdraft so Shacarn Limited should ensure that their source of funding is appropriate
from a time point of view. Shacarn Limited should reduce some of their cash and cash equivalents in
Current Assets in order to reduce the Bank Overdraft and ultimately save even more on bank interest costs.