- 20 Marks
CR – July 2024 – L3 – Q5 – Analysis and Interpretation of Financial Statements
Analyze Towobo Ltd’s financial health and provide advice on whether ABC Mutual Funds should invest.
Question
Presented below are the common-sized financial statements of Towobo Ltd over the last five years:
Vertical Common-Sized Statements of Profit or Loss for the Years Ended 31 December
| % | 2022 | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|---|
| Revenue | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| Cost of sales | (88.58) | (85.45) | (84.92) | (87.36) | (92.70) |
| Gross profit | 11.42 | 14.55 | 15.08 | 12.64 | 7.30 |
| Distribution & marketing costs | (1.00) | (0.86) | (0.83) | (1.15) | (0.87) |
| Administrative expenses | (0.74) | (0.79) | (0.88) | (0.85) | (0.73) |
| Other operating income | 2.06 | 1.78 | 0.77 | 0.58 | 0.69 |
| Other operating expenses | (1.36) | (0.86) | (1.21) | (1.20) | (0.94) |
| Profit from operations | 10.38 | 13.82 | 12.93 | 10.02 | 5.45 |
| Finance cost | (0.02) | (0.04) | (0.02) | (0.05) | (0.10) |
| Profit before tax | 10.36 | 13.78 | 12.92 | 9.97 | 5.35 |
| Tax | (3.25) | (3.98) | (4.05) | (3.25) | (2.61) |
| Profit after tax | 7.11 | 9.80 | 8.86 | 6.72 | 2.74 |
Vertical Common-Sized Statements of Financial Position as at 31 December
| % | 2022 | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|---|
| Non-current assets | |||||
| Property, plant & equipment | 8.49 | 8.55 | 15.50 | 20.27 | 23.33 |
| Intangible assets | 0.52 | 0.72 | 0.44 | 0.51 | 0.70 |
| Capital work-in-progress | 0.13 | 0.39 | 7.39 | 0.28 | 0.66 |
| Long-term loans & advances | 0.33 | 0.22 | 0.52 | 3.20 | 3.65 |
| Total non-current assets | 9.47 | 9.88 | 23.85 | 24.26 | 28.31 |
| Current assets | |||||
| Inventories | 14.20 | 13.19 | 25.51 | 40.61 | 32.25 |
| Receivables | 0.16 | 0.09 | 0.53 | 0.32 | – |
| Prepayments, advances, & other receivables | 22.33 | 17.65 | 6.21 | 10.69 | 20.33 |
| Short-term investments | 35.15 | 40.67 | 7.10 | – | – |
| Cash and bank balances | 18.69 | 18.52 | 36.80 | 24.12 | 19.11 |
| Total current assets | 90.53 | 90.12 | 76.15 | 75.74 | 71.69 |
| Total assets | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
| Equity | |||||
| Issued, subscribed & paid-up capital | 2.43 | 2.77 | 8.81 | 10.25 | 11.59 |
| Retained earnings | 16.50 | 10.69 | 18.24 | 3.78 | 0.62 |
| Other reserves | 10.10 | 11.91 | 21.95 | 22.74 | 7.20 |
| Total equity | 29.03 | 25.37 | 49.00 | 36.77 | 19.41 |
| Non-current liabilities | |||||
| Pensions liabilities | 0.16 | 0.12 | 0.51 | 0.38 | 0.36 |
| Deferred tax | 0.74 | 0.71 | 0.83 | – | – |
| Deferred revenue | 0.02 | 0.02 | 0.06 | 0.08 | 0.10 |
| Total non-current liabilities | 0.92 | 0.85 | 1.40 | 0.46 | 0.46 |
| Current liabilities | |||||
| Trade, dividend & other payables | 70.04 | 73.15 | 49.60 | 62.73 | 80.02 |
| Current portion of deferred revenue | 0.01 | 0.01 | 0.04 | 0.03 | – |
| Income tax | – | 0.62 | – | 0.01 | 0.11 |
| Total current liabilities | 70.05 | 73.78 | 49.60 | 62.77 | 80.13 |
| Total equity & liabilities | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
Required:
As the Financial Advisor to ABC Mutual Funds, report on the financial health or otherwise of Towobo Ltd based on the vertically analysed financial statements and advise ABC Mutual Funds on whether to invest in Towobo Ltd. Your report should focus on the profitability and cost control analysis, asset structure, capital structure, and working capital structure.
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