- 15 Marks
FM – Nov 2016 – L3 – SC – Q6 – Strategic Performance Measurement
Evaluate Osamco Limited’s financial performance compared to industry benchmarks and discuss reasons for considering stock exchange listing.
Question
Osamco Limited, manufacturer of wire and cables, was bought from its conglomerate parent company in a management buyout deal in August 2010. Six years later, the managers are considering the possibility of listing the company’s shares on the Nigerian Stock Exchange.
The following information is made available:
OSAMCO LIMITED
INCOME STATEMENT FOR THE YEAR ENDED JUNE 30, 2016
| N’million | Amount |
|---|---|
| Turnover | 91.25 |
| Cost of sales | (79.00) |
| Profit before interest and taxation | 12.25 |
| Interest | (3.25) |
| Profit before taxation | 9.00 |
| Taxation | (1.25) |
| Profit attributable to ordinary shareholders | 7.75 |
| Dividend | (0.75) |
| Retained profit | 7.00 |
STATEMENT OF FINANCIAL POSITION AS AT JUNE 30, 2016
| N’million | Amount |
|---|---|
| Non-current assets (at cost less accumulated depreciation) | |
| Land and buildings | 9.00 |
| Plant and machinery | 24.75 |
| Total non-current assets | 33.75 |
| Current assets | |
| Inventories | 11.00 |
| Accounts receivable | 11.75 |
| Cash at bank | 2.50 |
| Total current assets | 25.25 |
| Total assets | 59.00 |
| Equity | |
| Ordinary shares of N1 each | 6.75 |
| Reserves | 24.25 |
| Total equity | 31.00 |
| Non-current liabilities | |
| Accounts payable due after more than one year: 12% Debenture 2018 | 5.50 |
| Current liabilities | |
| Trade accounts payable | 17.50 |
| Bank overdraft | 5.00 |
| Total current liabilities | 22.50 |
| Total equity and liabilities | 59.00 |
Industry sector ratios:
| Metric | Industry Average |
|---|---|
| Return before interest and tax on long-term capital employed | 24% |
| Return after tax on equity | 16% |
| Operating profit as percentage of sales | 11% |
| Current ratio | 1.6:1 |
| Quick (acid test) ratio | 1.0:1 |
| Total debt: equity (gearing) | 24% |
| Dividend cover | 4.0 |
| Interest cover | 4.5 |
Required:
a. Evaluate the financial state and performance of Osamco Limited by comparing it with that of its industry sector. (10 Marks)
b. Discuss FOUR probable reasons why the management of Osamco Limited is considering Stock Exchange listing. (5 Marks)
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