UK manufacturer of garden furniture

McCrea plc is a UK manufacturer of garden furniture. The company has provided the following financial statements:

 

Statement of Financial Position as at 31 December 2019:

	£’000
Assets
Non-current assets
Property	1,050
Plant and equipment	850
Current assets
Inventory	640
Trade receivables	1,230
Cash	80
Current liabilities
Trade payables	850
Taxation	40
Bank overdraft	125
Interest payable	30
Non-current liabilities and equity
Long term loans	700
£1 ordinary shares	750
Reserves	1,355

 

Income Statement for the year ended 31 December 2019:

	£’000
Sales revenue	12,100
Cost of goods sold	(9,590)
Gross profit	2,510
Operating expenses	(1,935)
Operating profit	575
Interest expense	(50)
Net profit before tax	525
Taxation	(115)
Net profit for the year	410

 

 

 

Required:

(a) Calculate the following ratios for McCrea plc in 2019.

• Return on Capital Employed (ROCE)
• Operating profit margin
• Inventories’ turnover period
• Settlement period for trade receivables
• Current ratio
• Acid test ratio
• Gearing ratio
• Interest cover ratio
• Earnings Per Share (EPS)

 

All calculations (including the ratio formulas) must be clearly shown.

   (9 marks)

 

(b) The ratios set out in the table below are those calculated for McCrea plc based on its published financial statements for the previous year (2018)

 

Return on Capital Employed (ROCE)	15.01%
Operating profit margin	4.9%
Inventories turnover period	19 days
Settlement period for trade receivables	41 days
Current ratio	1.63
Acid test ratio	1.35
Gearing ratio	37.44%
Interest cover ratio	8.7 times
Earnings Per Share (EPS)	22.8p

 

Using the ratios you calculated (in part a) for McCrea plc in 2019 and the above ratios for 2018, comment on the company’s performance and financial position for the two years.

ANSWER

McCrea plc is a UK manufacturer of garden furniture. The company has provided the following financial statements:

 

Statement of Financial Position as at 31 December 2019:

	£’000
Assets
Non-current assets
Property	1,050
Plant and equipment	850
Current assets
Inventory	640
Trade receivables	1,230
Cash	80
Current liabilities
Trade payables	850
Taxation	40
Bank overdraft	125
Interest payable	30
Non-current liabilities and equity
Long term loans	700
£1 ordinary shares	750
Reserves	1,355

 

Income Statement for the year ended 31 December 2019:

	£’000
Sales revenue	12,100
Cost of goods sold	(9,590)
Gross profit	2,510
Operating expenses	(1,935)
Operating profit	575
Interest expense	(50)
Net profit before tax	525
Taxation	(115)
Net profit for the year	410

 

 

 

Required:

(a) Calculate the following ratios for McCrea plc in 2019.

• Return on Capital Employed (ROCE)

=Net profit/Total Assets-Liabilities
=410,000/ (3850000-1045000)

=410000/28505000

=0.15

=15%

• Operating profit margin

=Operating income/Revenue

=575,000/12,100,000

=0.0475

=4.75%

• Inventories’ turnover period

=Cost of goods sold/ Average inventory

=9590000/640000

=14.98 Times

• Settlement period for trade receivables

= (Trade Receivables/Credit sales) ×365

= (850/12100) ×365

=25.64 days

• Current ratio

=Current Assets/Current Liabilities

= (640+1230+80)/ (840+40+125+30)

=1950/1045

=1.87

• Acid test ratio

= (current assets – inventory) / current

Liabilities

= (1950-640)/1045

=1310/1045

=1.25

• Gearing ratio

= (Long-term Debt+ Short-term Debt+ Bank overdraft) / Total Assets

= (700+125)/3850

=825/3850

=0.214

=21.4%

 

• Interest cover ratio

=EBIT/Interest Expense

=575/50

=11.5

• Earnings Per Share (EPS)

=Net income/Number of shares outstanding

=410/750

=0.54

 

All calculations (including the ratio formulas) must be clearly shown.

   (9 marks)

 

(b) The ratios set out in the table below are those calculated for McCrea plc based on its published financial statements for the previous year (2018)

 

Return on Capital Employed (ROCE)	15.01%
Operating profit margin	4.9%
Inventories turnover period	19 days
Settlement period for trade receivables	41 days
Current ratio	1.63
Acid test ratio	1.35
Gearing ratio	37.44%
Interest cover ratio	8.7 times
Earnings Per Share (EPS)	22.8p

 

Using the ratios you calculated (in part a) for McCrea plc in 2019 and the above ratios for 2018, comment on the company’s performance and financial position for the two years.

15. Return on Capital Employed of 15% in 2019 is similar to year 2018 of 15.01% an indication that the company is able to use its capital resource efficiently.
16. Operating profit margin decreased slightly from 4.9% in 2018 to 4.75% in 2019.this is an indication there is a slight decrease in profitability and operation efficiency.

• Inventory turnover period decreased from 19 days in 2018 to 14.98 times in 2019.This an indication that stock is moving at a lower rate compared to 2018.

1. Settlement period for trade decreased from 41 days in 2018 to 24 days in 2019 an indication that the company is able to collect its debts faster and therefore it is able to meet its obligations.
2. Current ratio increased from 1.63 in 2018 to 1.87 in 2019.This is an indication that the company has the ability to meet its short-term obligations.
3. Acid test ratio decreased from 1.35 in 2018 to 1.25 in 2019.This is an indication that the company might have problems when paying debt.

• Gearing ratio decreased from 37.4% in 2018 to 21.4% in 2019 an indication that the company is low risk.
• Interest cover ratio increased from 8.7 in 2018 to 11.5 in 2019.The is an indication that the company is able to cover debt expense.

22. Earnings Per Share decreased from 22.8 in 2018 to 0.54 in 2019 an indication that the company shares are losing value.

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