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- 20 Marks
Question
Partey Ltd is a company engaged in continuous casting and cold rolling of aluminum products in Ghana. The company has been in operation for several decades, and its operations did not change in the year ended 31 December 2021.
Below are financial statements for the years 2021 and 2020:
Statement of Profit or Loss and Other Comprehensive Income
| 2021 (GH¢000) | 2020 (GH¢000) | |
|---|---|---|
| Revenue | 389,507 | 445,963 |
| Cost of sales | (240,731) | (237,345) |
| Gross profit | 148,776 | 208,618 |
| Other income | 19,315 | 10,983 |
| Distribution costs | (76,366) | (108,137) |
| Administrative expenses | (74,520) | (46,216) |
| Operating profit | 17,205 | 65,248 |
| Finance cost | (21,287) | (21,537) |
| Profit before tax | (4,082) | 43,711 |
| Tax expense | – | (16,521) |
| Profit for the year | (4,082) | 27,190 |
Statement of Financial Position
| 2021 (GH¢000) | 2020 (GH¢000) | |
|---|---|---|
| Non-current assets: | ||
| Property, plant and equipment | 196,784 | 183,190 |
| Investment securities | 137 | 348 |
| Total non-current assets | 196,921 | 183,538 |
| Current assets: | ||
| Inventories | 50,400 | 66,351 |
| Trade receivables | 23,769 | 27,688 |
| Other receivables | 9,343 | 1,833 |
| Cash and cash equivalents | 45,969 | 20,699 |
| Total current assets | 129,481 | 116,571 |
| Total assets | 326,402 | 300,109 |
| Equity and Liabilities: | ||
| Stated capital | 10,000 | 10,000 |
| Retained earnings | 124,575 | 111,676 |
| Total equity | 134,575 | 121,676 |
| Non-current liabilities: | ||
| 15% Loan notes | 8,580 | 10,247 |
| 20% Loan notes (NGIC Pension Fund) | 100,000 | 100,000 |
| Total non-current liabilities | 108,580 | 110,247 |
| Current liabilities: | ||
| Trade payables | 80,182 | 65,082 |
| Current tax | – | 3,104 |
| Accrued expenses | 3,065 | – |
| Total current liabilities | 83,247 | 68,186 |
| Total equity and liabilities | 326,402 | 300,109 |
Required:
a) As the Finance Manager of Partey Ltd, you have been tasked by the Board of Directors to produce a report. Assess the performance of the company over time based on profitability, liquidity, efficiency, and gearing.
(Note: Your report should include TWO (2) ratios each of profitability, liquidity, efficiency, and gearing).
(16 marks)
b) Management of the company wants to achieve improvement in technology and production processes to stimulate growth. However, this will require further injection of funds and less strain on operating cash flows. To achieve this, the Board of Directors of the company has resolved to convince the company’s largest debtholder, NGIC Pension Fund, to exercise the conversion right attached to the debt. The total value of the debt included in the financial statements for both financial years is GH¢100 million. The debt was issued at a coupon rate of 20% per annum. The annual coupon payments are also included in the financial statements above for both financial years. NGIC Pension Fund is also the second-largest shareholder of the company.
The estimated tax expense on the company’s profit for the year ended 31 December 2021, if the debt owed to NGIC Pension Fund is converted, is GH¢3.172 million. Current tax liability at 31 December 2021 is expected to increase by the same amount.
Required:
Assess the performance of the company for the year ended 31 December 2021 upon conversion of the debt owed to NGIC Pension Fund on 1 January 2021 at its carrying amount.
(4 marks)
Answer
a) Performance Evaluation of Partey Ltd
- Profitability Ratios:
- Gross profit margin = (148,776 / 389,507) x 100 = 38.2% (2021); 46.78% (2020)
- Return on equity = (Profit after tax / Equity) x 100 = (-4,082 / 134,575) x 100 = -3.03% (2021); 22.35% (2020)
- Liquidity Ratios:
- Current ratio = Current assets / Current liabilities = 129,481 / 83,247 = 1.56:1 (2021); 1.71:1 (2020)
- Acid-test ratio = (Current assets – Inventories) / Current liabilities = (129,481 – 50,400) / 83,247 = 0.95:1 (2021); 0.73:1 (2020)
- Efficiency Ratios:
- Trade receivable days = (Trade receivables / Revenue) x 365 = (23,769 / 389,507) x 365 = 22.28 days (2021); 22.63 days (2020)
- Inventory turnover = Cost of sales / Inventories = 240,731 / 50,400 = 4.77 times (2021); 3.58 times (2020)
- Gearing Ratios:
- Debt to equity ratio = (Long-term debt / Equity) x 100 = (108,580 / 134,575) x 100 = 80.68% (2021); 90.61% (2020)
- Interest cover ratio = Operating profit / Interest expense = 17,205 / 21,287 = 0.81 times (2021); 3.03 times (2020)
(16 marks)
b) Performance upon conversion of debt:
Upon conversion of the GH¢100 million convertible debt:
- Profit after tax: GH¢(-4,082,000 + 20,000,000 – 3,172,000) = GH¢12,746,000
- Return on equity: (12,746 / 134,575) x 100 = 9.47%
- Current ratio: 129,481 / (83,247 + 3,172) = 1.50:1
- Debt to equity ratio: (8,580 / 234,575) x 100 = 3.66%
- Interest cover ratio: 17,205 / (21,287 – 20,000) = 13.37 times
The company’s ability to cover its remaining interest payments is now much stronger, with an interest cover ratio of 13.37 times.
(4 marks)
- Tags: Efficiency, Financial Ratios, Gearing, Liquidity, Performance Evaluation, Profitability
- Level: Level 3
- Topic: Analysis and Interpretation of Financial Statements
- Series: DEC 2022
- Uploader: Dotse