- 20 Marks
FR – May 2016 – L2 – Q4 – Business Combinations (IFRS 3)
Calculate and assess Quintet Plc's performance against industry averages using ratio analysis.
Question
Quintet Plc sells provisions through its stores located in various retail shopping centers in the major cities in Nigeria. It has recently been experiencing declining profitability, and the board is concerned whether this issue is specific to the company or related to the sector as a whole. Additionally, concerns regarding the company’s solvency have been raised. To address these, the company has engaged a consulting firm specializing in corporate report analysis to provide average ratios across the business sector to rate performance.
Below are the ratios provided by the consulting firm for Quintet Plc’s business sector based on the year ending June 30, 2015:
- Debt to equity: 38%
- Gross profit margin: 35%
- Operating profit margin: 12%
- Return on year-end capital employed (ROCE): 16.8%
- Net asset turnover: 1.4 times
- Current ratio: 1.25:1
- Average inventory turnover: 3 times
- Trade payables’ payment period: 64 days
The financial statements of Quintet Plc for the year ending September 30, 2015, are as follows:
Income Statement
| Item | Amount (N’000) |
|---|---|
| Revenue | 224,000 |
| Opening Inventory | 33,200 |
| Purchases | 175,600 |
| Closing Inventory | (40,800) |
| Gross Profit | 56,000 |
| Operating Costs | (39,200) |
| Finance Costs | (3,200) |
| Profit Before Tax | 13,600 |
| Income Tax Expense | (4,000) |
| Profit for the Year | 9,000 |
Statement of Financial Position
| Item | Amount (N’000) |
|---|---|
| Assets | |
| Non-current assets | |
| Property and shop fittings | 102,400 |
| Deferred development expenditure | 20,000 |
| Total Non-current assets | 122,400 |
| Current Assets | |
| Inventory | 40,800 |
| Bank | 4,000 |
| Total Current Assets | 44,800 |
| Total Assets | 167,200 |
| Equity and Liabilities | |
| Equity | |
| Equity shares of N1 each | 60,000 |
| Property revaluation reserve | 12,000 |
| Retained earnings | 34,400 |
| Total Equity | 106,400 |
| Non-current Liabilities | |
| 10% loan notes | 32,000 |
| Current Liabilities | |
| Trade payables | 21,600 |
| Current tax payable | 7,200 |
| Total Current Liabilities | 28,800 |
| Total Equity and Liabilities | 167,200 |
Note:
- Net asset is defined by the consulting firm as total assets less current liabilities.
- The deferred development expenditure relates to a one-off payment for a franchise as a sole distributor of a particular product under negotiation but not concluded as of September 30, 2015, although payment has been made.
Required:
a) Compute the equivalent ratios for Quintet Plc provided by the consulting firm for the business sector.
(9 Marks)
b) Write a report to the board assessing the profitability and solvency performance of Quintet Plc compared to its business sector averages. For clarity, solvency measures both liquidity and gearing.
(11 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Financial Reporting, Profitability, Ratio Analysis, Sector Comparison, Solvency
- Level: Level 2