Adenta Ltd (Adenta) assembles telecommunication equipment and sells to wholesalers and retailers. The following ratios relate to the average figures for Adenta’s industry for the year ended 31 December, 2018: Return on capital employed 20.10% Gross profit margin 32% Net profit (before tax) margin 12.50% Current ratio 1.6:1Acid-test ratio 0.9:1Inventory turnover period 46 days Trade receivable collection period 45 days Debt-to-equity ratio 40%Dividen yield 6% Dividendcover 3 times Adenta’s financial statements for the year to 31 December, 2018 are set out below: Statement of Profit or Loss for the year ended 31 December, 2018 Sales48,500Cost of sales(37,400)Gross profit11,100Operating expenses(6,880)Operating profit4,220Finance cost(500)Profit before taxation3,720Taxation(1,800)Profit after taxation 1,920 Extracts of Statement of Changes in Equity for the year ended 31 December, 2018GH¢’000Retained earnings as at 1 January 20183,580Net profit after tax1,920 5,500Dividends(1,800)Retained earnings as at 31 December 20183,700 Statement of Financial Position as at 31 December 2018 Non-current assets GH¢’000Property, plant and equipment10,800Current AssetsInventories 5,500Trade receivables6,400 11,900Total assets22,700 EquityStated capital (Ordinary shares issued @ GH¢0.25 per share) 3,000Retained earnings3,700 6,700Non-current Liabilities8% Debenture 6,000 Current liabilitiesBank overdraft 1,300Trade payables7,000Taxation1,700 10,000Total equity and liabilities22,700 (Note: The market price of Adenta’s shares throughout the year averaged GH¢6.00 each.) Required:Calculate the ratios for Adenta Ltd equivalent to the industry averages and as the Financial Controller of Adenta Ltd, write a report to the Board of Directors analysing the financial performance of Adenta Ltd based on a comparison with the industry averages.

Number of Shareholders' = Share Capital / Per Share Price = GH¢ 3000,000/ GH¢ 0.25 = 12,000,000

Answered: Calculate the ratios for Adenta Ltd…

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Chapter15: Financial Statement Analysis

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Adenta Ltd (Adenta) assembles telecommunication equipment and sells to wholesalers and retailers. The following ratios relate to the average figures for Adenta’s industry for the year ended 31 December, 2018:

Return on capital employed 20.10% Gross profit margin 32% Net profit (before tax) margin 12.50% Current ratio 1.6:1

Acid-test ratio 0.9:1

Inventory turnover period 46 days Trade receivable collection period 45 days Debt-to-equity ratio 40%

Dividen yield 6% Dividendcover 3 times

Adenta’s financial statements for the year to 31 December, 2018 are set out below:

Statement of Profit or Loss for the year ended 31 December, 2018

Sales	48,500
Cost of sales	(37,400)
Gross profit	11,100
Operating expenses	(6,880)
Operating profit	4,220
Finance cost	(500)
Profit before taxation	3,720
Taxation	(1,800)
Profit after taxation	1,920

Extracts of Statement of Changes in Equity for the year ended 31 December, 2018

GH¢’000

Retained earnings as at 1 January 2018	3,580
Net profit after tax	1,920
	5,500
Dividends	(1,800)
Retained earnings as at 31 December 2018	3,700

Statement of Financial Position as at 31 December 2018 Non-current assets	GH¢’000
Property, plant and equipment	10,800
Current Assets Inventories	5,500
Trade receivables	6,400
	11,900
Total assets	22,700
Equity Stated capital (Ordinary shares issued @ GH¢0.25 per share)	3,000
Retained earnings	3,700
	6,700
Non-current Liabilities 8% Debenture	6,000
Current liabilities Bank overdraft	1,300
Trade payables	7,000
Taxation	1,700
	10,000
Total equity and liabilities	22,700

(Note: The market price of Adenta’s shares throughout the year averaged GH¢6.00 each.)

Required:

Calculate the ratios for Adenta Ltd equivalent to the industry averages and as the Financial Controller of Adenta Ltd, write a report to the Board of Directors analysing the financial performance of Adenta Ltd based on a comparison with the industry averages.

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