Awen Ltd is a manufacturer of machine tools and is at present contemplating an issue of GH2,000,000 10% debenture stock (2020) in order to assist the remodelling of its present production facilities. Some shareholders are reluctant to approve additional long-term debt due to the fact that the machine tools industry is subject to wide-ranging fluctuations in sales and profits.
A group of shareholders have approached you and asked you to comment on the performance of Awen Ltd as compared with industrial averages and to make recommendations as to whether they should approve the proposed additional long-term debt.
Abbreviated financial statements and typical ratios for firms in the machine tools industry are as follows:
Awen Ltd
Statement of Comprehensive Income for the year ended 31/12
2005 2004
GH000GH000
Sales23,50020,500
Cost of Sales16,00014,000
Gross profit 7,500 6,500
Selling expenses(2,000)(1,900)
Administrative expenses(3,000)(2,600)
Operating profit 2,500 2,000
Interest cost (500) (300)
Profit before tax 2,000 1,700
Taxation(1,200)(1,020)
Profit after tax 800 680
Income surplus a/c 6,365 6,090
Awen Ltd
Statement of Financial Position as at 31/12
20052004
GH000GH000
Non Current assets tangible6,3155,600
Intangible 800 750
7,1156,350
Current assets:
Stock5,1003,200
Debtors2,9001,900
Prepaid expenses 100 100
Cash & Bank 600 590
8,7005,790
Total Assets 15,815 12,140
Capital & Liabilities:
Stated capital 350 350
Income surplus6,3656,090
8% Debenture stock (2006)5,5003,300
12,2159,740
Current Liabilities3,6002,400
15,815 12,140
Typical industrial ratios for 2005 are
Gross profit margin34%
Current ratio2.5:1
Quick ratio1.2:1
Average age of debtors30 days
Stock turnover5 times
Interest earned8 times
Debt/Equity ratio0.7:1
Net profit before tax to net assets19.5%
You are required:
(a) Compute the above ratios for Awen Ltd for both 2004 and 2005, taking into account the stock valuation at 31/12/2003 of GH 2,500,000 and Debtors balance on the same date of GH 1,700,000. [10 marks]
(b) In a report format, comment on the performance of Awen Ltd and recommend a course of action to the group of shareholders. [15 marks]
