You have been asked by a client to advice on the financial position of two companies in a similar trade sector. You have been supplied with the following financial statements.
Income Statement for the year ended 31 March 2016
Nixon Ltd Zip Ltd
Notes £000 £000Revenue 638 493
Cost of sales (331) (297)
–––––– ––––––
Gross profit 307 196
Distribution costs (36) (29)
Administrative expenses 1 (99) (46)
–––––– ––––––
Profit before taxation 172 121
Taxation (21) (22)
–––––– ––––––
Profit for the year 151 99
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Statement of financial position as at 31 March 2016
Notes Nixon Ltd Zip Ltd
Non‐current assets (NBV): £000 £000 £000 £000 £000 £000
Property, plant and equipment 1 198 111
Current assets:
Inventory 60 58
Trade and other receivables 35 43
Cash and cash equivalents 2 –
–––– 97 –––– 101
–––– ––––
Total assets 295 212
Equity and liabilities: ==== ====
Share capital (£1 share each) 50 30
Retained earnings 161 66
–––– ––––
Non‐current liabilities: 211 96
Borrowings – 20
Current liabilities:
Trade and other payables 2 74 74
Current tax payable 10 12
Bank overdraft – 10
–––– 84 –––– 96
–––– 84 –––– 116
–––– ––––
Total equity and liabilities 295 212
==== ====
Notes to the financial statements:
- The non‐current assets held by the companies are as follows: Nixon Ltd Zip Ltd
£000 £000
Land and buildings 97 43
Fixtures and fittings 28 17
Motor vehicles 73 51
–––– ––––
198 111 –––– –––– - Trade and other payables for both companies include a proposed dividend. Nixon Ltd has proposed a dividend of £50,000 and Zip Ltd a dividend of £40,000.
Required:
a. Calculate all the appropriate ratios (at least 2 from each group) and critically appraise the current financial position of each of the two companies. (40 marks)
b. Define working capital cycle and calculate the working capital cycle of both companies and discuss how a company can improve the working capital cycle? (30 marks)
c. What are the limitations of ratio analysis technique? Discuss in details. (30 marks)