Session 2

You will compare the position and performance of the two companies, A Ltd and B Ltd, on the basis of information in their financial statements. Both businesses are wholesale clothiers. Income Statement for the year ended 30 September A Ltd 000 000 #00 300 *0 !0 !0 00 00 20 Balance Sheet as at 30 September A Ltd 000 Fixed assets Buildin's 34uipment Current assets Stoc5 /ebtors Ban5 Current liabilities "reditors Ban5 o7d /i)idend .et current assets 8i9ed assets plus net current assets Loans :at 0;< .et Assets Shareholders funds Share capital 1eser)es 20 30 #0 !00 +0 0 $00 *0 6 00 20 300 $30 !00 330 !30 00 330 B Ltd 000 !000 $00 $00 !+3 !0# # !00 00 00 B Ltd 000 !!0 *0 300 300 300 6 000 !00 20 00 200 !00 $00 #0 230 *0 !$0 230

Sales "ost of sales %ross profit &a'es ( o)erhead ,peratin' -rofit Interest .et -rofit /i)idend 1etained -rofit

Your analysis will be based on the followin' calculations= "ompany "urrent ratio A B

$00= 20 000=200 3.$#= .$0= A has )ery clear co)era'e here, but you should consider whether this mi'ht be wasteful. B>s co)era'e is more mar'inal, but is this sufficient? Li4uidity ratio 300= 20 300=200 !. 2= 0.#$= @his re)eals little more than the current ratio, and the same comments apply. "ollection of debts7debtors days +07 000 930$ #0 days 3007!000 930$ $$ days

B is 4uic5er to collect, which su''ests it is more acti)e. Aowe)er, there is room for impro)ement for both companies here. "redit ta5en7 creditor days *07#00 930$ 2! days !007 $00 930$ 02 days

In this calculation, you were not able to use the fi'ures for purchases, because they were not pro)ided in the statements. @he cost of sales can be used, if we assume that there are no stoc5 mo)ements. B ta5es lon'er, and if suppliers are content with this, B is bein' more efficient. Stoc5 turno)er !007#00 B 30$ 02 days 3007 $00 B 30$ #3 days

B is more acti)e, and more efficient with stoc5 holdin'. ,peratin' costs 7 Sales *07 000 9 00 *; !+37!000 9 00 2.#;

@he lower fi'ure the better for this ratio, so this confirms our impression that company B is operatin' more efficiently. @hus the initial uncertainty after the first two ratios is now dispelled. %earin' !007!00C330 B 00 #07#0C230 B 00 3#.#; 2;

@his means that A has 3#.#p of loaned capital for e)ery of total capital, whilst B has only 2p. A is in a ris5ier position. Interest co)era'e !0 !0 09 !0# # !+9

B has plenty of co)era'e, althou'h A is probably ,.D. 1eturn on capital employed :Shareholders> 8unds< 007330 9 00 !007230 9 00 30; 20; @hese are both rather hi'h in today>s business climate and so both sets of shareholders will be happyE You would need to research Fnormal> returns for the business sector. Asset turno)er 0007: #0 C $00< !0007:300C000<

B is showin' better utilisation of assets here. 3arnin's per share :assume shares< /i)idend per share 007!30 22pence 007!30 !0 pence !007 *0 . 007 *0 $$pence

In summary, company B wins in each comparison, with a picture emer'in' of better mana'ement of resources G particularly Asset turno)er and "ontrol of net current assets. Lon' term security once a'ain fa)ours B as shown by %earin' ( Interest co)er. Shareholders of both or'anisations will be relati)ely happy, as e)idenced by 1,"3 and 3-S, althou'h B is once a'ain performin' better. An in)estor who had to choose between these two companies would be li5ely to fa)our company B.