- 15 Marks
FR – Nov 2018 – L2 – Q4 – Financial Statement Analysis
Assess the financial performance and position of Light Ltd and Favour Ltd for acquisition purposes based on profitability, liquidity, and gearing ratios.
Question
Salt Ltd is a Government Business Entity that would like to acquire 100% of a viable private company. It has obtained the following draft financial statements for two companies, Light Ltd and Favour Ltd. They operate in the same industry, and their managements have indicated they would be receptive to a takeover.
Statement of Profit or Loss for the year ended 31 December 2017:
| Description | Light Ltd (GH¢’000) | Favour Ltd (GH¢’000) |
|---|---|---|
| Revenue | 12,000 | 20,500 |
| Cost of sales | (10,500) | (18,000) |
| Gross profit | 1,500 | 2,500 |
| Operating expenses | (240) | (500) |
| Finance costs | (210) | (600) |
| Profit before tax | 1,050 | 1,400 |
| Income tax expense | (150) | (400) |
| Profit for the year | 900 | 1,000 |
| Dividends paid | 250 | 700 |
Statements of Financial Position as at 31 December 2017:
| Description | Light Ltd (GH¢’000) | Favour Ltd (GH¢’000) |
|---|---|---|
| Assets | ||
| Non-current assets: | ||
| Freehold factory | 4,400 | – |
| Owned plant | 5,000 | 2,200 |
| Leased plant | – | 5,300 |
| Total non-current assets | 9,400 | 7,500 |
| Current assets: | ||
| Inventory | 2,000 | 3,600 |
| Trade receivables | 2,400 | 3,700 |
| Bank | 600 | – |
| Total current assets | 5,000 | 7,300 |
| Total assets | 14,400 | 14,800 |
| Equity and Liabilities | ||
| Equity shares of GH¢1 each | 2,000 | 2,000 |
| Property revaluation reserve | 900 | – |
| Retained earnings | 2,600 | 800 |
| Total equity | 5,500 | 2,800 |
| Non-current liabilities | ||
| Finance lease obligations | – | 3,200 |
| 7% loan notes | 3,000 | – |
| 10% loan notes | – | 3,000 |
| Deferred tax | 600 | 100 |
| Government grants | 1,200 | – |
| Total non-current liabilities | 4,800 | 6,300 |
| Current liabilities | ||
| Bank overdraft | – | 1,200 |
| Trade payables | 3,100 | 3,800 |
| Government grants | 400 | – |
| Finance lease obligations | – | 500 |
| Taxation | 600 | 200 |
| Total current liabilities | 4,100 | 5,700 |
| Total equity and liabilities | 14,400 | 14,800 |
Notes:
i. Both companies operate from the same premises.
ii. Additional details of the two companies’ plant are:
| Description | Light Ltd (GH¢’000) | Favour Ltd (GH¢’000) |
|---|---|---|
| Owned plant – Historical cost | 8,000 | 10,000 |
| Leased plant – Original fair value | – | 7,500 |
There were no disposals of plant during the year by either company.
iii. The interest rate implicit within Favour Ltd’s finance leases is 7.5% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest-bearing borrowings.
Required:
Assess the relative financial performance and financial position of Light Ltd and Favour Ltd for the year ended 31 December 2017 to inform the directors of Salt Ltd in their acquisition decision. Your analysis should focus on profitability, liquidity, and gearing.
(15 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Acquisition Decision, Financial Performance, Gearing, Liquidity, Profitability, Ratio Analysis
- Level: Level 2, Level 3
- Topic: Financial Statement Analysis
- Series: NOV 2018