Topic 8: Seminar Tasks and Exercises

8.1
Wallisdown plc
Income Statement
For the year ended 31 July 2012
Revenue
Cost of sales
Gross Profit
Expenses
Operating Profit
Interest payable
Corporation Tax
Net Profit

2011 (000)

2012 (000)

1,270
-626
644
-512
132
-12
-60
60

1,480
-720
760
-584
176
-12
-80
84

Wallisdown plc
Statement of Financial Position
As at 31 July 2012
2011 (000)
Non-current Assets
Freehold property
Fixtures & Fittings
Motor Vehicles
Current Assets
Inventory
Receivables
Cash
Current Liabilities
Payables
Accruals
Non-current Liabilities
10% Debentures
Total Net Assets
Equity
Issued and fully paid (1 Shares)
Share Premium Account
Retained Earnings

2012 (000)

60
184
36
280

210
230
30
470

90
130
136
356

164
188
24
376

70
16
86

142
40
182

120
430

120
544

150
0
280
430

200
20
324
544

Note: The cash from operating activities for 2011 and 2012 was 32,000 and 78,000,
respectively. Attempt to calculate the following ratios for Wallisdown plc:

8.2 Some businesses operate on a low net profit margin (for example, a supermarket chain).
Does this mean that the return on capital employed from the business will also be low?

Answer: Yes but it does not mean that this businesses will have low return on capital employed because its not
likely such businesses invest heavily on long-term assets as well. This is the only way their capital employed
could outweigh their profit which could lead to low return on capital employed

8.3 What potential problems arise for the external analyst from the use of Statement of
Financial Position figures in the calculation of financial ratios?
Answer: The financial ratios are base on the accounting policy. It probably differs in different business or type
of company. Furthermore, the financial data may make the investors confuse when the information looks
because some financial information is complicate.

8.4 Two businesses operate in the same industry. One has an inventories turnover period that
is higher than the industry average. The other has an inventories turnover period that is lower
than the industry average. Give three possible explanations for each businesss inventories
turnover period ratio.
Answer

May be they apply the different accounting method in order to record the inventory
The lower company should have the ineffective inventory policy.
And the different production line of company should have different results.

8.5 This exercise is formally assessed

Analyse Marks and Spencer Group Plc in terms of profitability, efficiency, liquidity, and
gearing. You should calculate ratios for both financial years, 2014/15 and 2013/14.
Profitability
Deteriorating
Return on equity
This is a measure of how well the company is investing the money invested in it. A high retur
n on equityindicates that the company is spending wisely and is likely profitable; a low return
on equity indicates the opposite. A 3.6% decrease in ROE from 2014 indicates that the firm is
more likely to be unprofitable.
Net profit margin
A low net profit margin means that the business spends a large amount of money on cost of
good sold, overhead or both. However, Marks and Spencer Group Plc actually reported
a decrease in net profit margin but not much so if we consider only this, we cannot know
exactly whether profitability of the firm is deteriorating.

Improving

Gross Profit Margin is higher so it indicates that it indicates the company can better manage
labor and supplies in the production process. However, Marks and Spencer Group Plc
actually reported an increase in net profit margin but not much so if we consider only this, we
cannot know exactly whether profitability of the firm is improving.
Activity ratio
Improving
A reduction in collection period would lead to a reduction in the investment in the
receivables. A decrease in this ratio would cause a fall in bad debt expenses.
Negative in working capital cycle in 2015 indicates the huge Customer demand for its
products or a very Strong Brand.
A high ratio in average payment period indicates that there is a relatively short time period
when purchasing inventory or materials and paying for them.
Liquidity ratio
A higher current ratio from 0.58 to 0.69 indicates that a company is able to meet its shortterm obligations.
Gearing ratio
The company reported a decrease in debt ratio, debt to equity ratio and basic gearing ratio,
meaning the company. A lower ration indicates conservative financing with an opportunity to
borrow in the future at no significant risk.
A higher interest coverage ratio from 4.69 to 5.73 indicates that a company can pay for its
interest expense several times over. However, Marks and Spencer Group Plc actually
reported an increase in interest coverage ratio but not much so if we consider only this, we
cannot know exactly whether debt of the firm is improving.
Cash coverage ratio is higher, meaning the company can use cash to pay for a
borrower's interest expense,