To             : Chief Executive Officer
From        : Management accountant
Subject     : Performance Analysis of Konka Ltd from 2018 to 2020

Introduction
This performance report relates to the financial statements of Konka Ltd for the period 2018 to 2020. The report covers the profitability, operating efficiency, liquidity and solvency positions of Konka Ltd over the period under review. An appendix is attached to this report which shows the ratios calculated as part of the performance review.

Profitability
The gross profit margin has remained relatively static over the three years, although it rose by approximately 1% in 2018. ROCE, while improving very slightly in 2019 to 21.5%, has dropped dramatically in 2020 to 17.8%. The net profit margin has also fallen in 2020, despite the improvement in the gross profit margin. This marks a rise in expenses which suggests that they are not well controlled. The utilisation of assets compared to the turnover generated has also declined, reflecting the drop in trading activity between 2019 and 2020.

Operating Efficiency
It is apparent that there was a dramatic increase in trading activity between 2019 and 2020, but then a significant fall in 2020. As a result, revenue rose by 17% in 2019 but fell by 7% in 2020. The reasons for this fluctuation are unclear. It may be the effect of some kind of one-off event, or it may be the effect of a change in product mix. Whatever the reason, it appears that improved credit terms granted to customers (receivables payment period up from 46 to 64 days) have not stopped the drop in sales.

Liquidity
Both the current ratio and quick ratio demonstrate an adequate working capital situation, although the quick ratio showed a slight decline. This is because there has been an increased investment over the period in inventories and receivables, which has been only partly financed by longer payment periods to trade payables and a rise in other payables (mainly between 2019 and 2020).

Solvency
The level of gearing of the company increased when a further GH¢64 million was raised in long-term loans in 2020 to add to the GH¢74 million already in the statement of financial position. Although this does not seem to be a particularly high level of gearing, the debt/equity ratio rose from 18.5% to 32.0% in 2020. The interest charge has increased to GH¢19 million from GH¢6 million in 2019. The 2020 charge was GH¢15 million, suggesting that either the interest rate on loan is flexible or that the full interest charge was not incurred in 2020. The new long-term loan appears to have funded the expansion in both fixed and current assets in 2020.

Capital employed = shareholders’ funds plus payables falling due after one year and any long-term provision for liabilities and charges. It is possible to calculate ROCE using net profit after taxation and interest, but this admits variations and distortions into the ratios which are not affected by operational activity.

2 marks for the structure of the report = 2 marks
2 marks for analysis of performance x 4 areas covered = 8 marks
4 marks for Appendix (12 ratios computed: 4 ratios x 3 years) = 4 marks
1 mark for the orderly presentation of computation of ratios = 1 mark

i) Long-term loan: There is no indication of why this loan was raised and how it was used to finance the business. Further details are needed of interest rate(s), security is given and repayment dates.

ii) Trading activity: The level of sales has fluctuated in quite a strange way, requiring further investigation and explanation. Factors to consider would include pricing policies, product mix, market share and any unique occurrence which would affect sales.

iii) Further analysis: It would be useful to break down some of the information in the financial statements, perhaps into a management accounting format. Examples would include the following.

• Sales by segment, market or geographical area
• Cost of sales split into raw materials, labour and overheads
• Inventory broken down into raw materials, work in progress and finished goods
• Expenses analysed between administrative costs, sales and distribution costs.

iv) Accounting policies: Accounting policies may have a significant effect on certain items. In particular, it would be useful to know what the accounting policies are in relation to intangible assets (and what these assets consist of) and whether there has been any change in accounting policies.

v) Dividend policy: Konka Ltd has maintained the dividend payments to shareholders during the three years. Presumably, Konka Ltd would have been able to reduce the amount of long-term debt taken on if it had retained part or all of the dividend during this period. It would be interesting to examine the share price movement during the period and calculate the dividend cover.

Report

To:            Financial Director
From:       Accountant
Date:        1 November 2019
Subject:   Financial Performance and Position of Peace Ltd

Following the discussions on the above subject, I wish to submit this report for your study and consideration.

Financial Performance
The financial performance of the entity is measured in terms of its profitability in relation to resources deployed during the period. Over the two years, the profit level has declined, using return on capital as a measure. ROCE compares the returns earned for a period to the net assets or capital employed used in generating that returns. There was a decline in ROCE from 38.24% for 2017 to 17% in 2018. This shows that management was not able to utilize assets more efficiently to generate higher returns.
Assets turnover which is the revenue per cedi of long-term capital used declined marginally from 1.61 times in 2017 to 1.49 times in 2018. This means that management ability to regenerate revenue for every one cedi of capital used declined in 2018.

Financial Position
The financial position of the firm is measured in terms of the short-term liquidity and long-term solvency position of the firm. In terms of liquidity, there has been an improvement in the company’s ability to settle its current liabilities from its current assets from 3.68:1 (2017) to 4.02:1 (2018). Over the period the company has more equity than prior charged capital. But the proportion of capital to prior charged capital has increased from 31% (2017) to 47.47% (2018).

Conclusion
Generally, the company has experienced declining trends in its performance with the exception of liquidity.

Signed
Accountant

• Management knows investors rely on using EPS as a guidance for company performance so they’ll naturally want the EPS figure to appear as high as possible in the short term. They may make decisions to maximise the EPS figure in the short term, which may damage the entity’s prospects in the long term.
• EPS also doesn’t consider cash flow. Management may focus so much on increasing the earnings figure, they start selling to bad customers who don’t pay or sell at lower margins. If the company can’t earn cash to pay its bills, no matter how large the earnings are, it may be insolvent.
• EPS also ignores inflation, the price of goods and services generally may be increasing, so this could be contributing to the good EPS figure, but this growth might be misleading if the company can’t buy as many goods this year as it could last year.
• Also, each company has different accounting policies; this makes it harder to compare individual companies on a like for like basis.

(1 mark for each limitation well explained x 4 limitations = 4 marks)

Report to the Board of Directors

To: The Board
From: Financial Controller
Date: 1 November, 2019
Subject: Analysis of Adenta Limited’s financial performance compared to industry average for the year to 31 December, 2018.

Introduction
This report present an analysis of the financial performance of Adenta Ltd compared to the industry averages.

Profitability
The return on capital employed of Adenta is impressive being higher than the industry average. The company is employing its assets more efficiently and effectively in generating more revenue and hence income. However, gross profit margin and net profit margin of Adenta are comparatively lower than the industry averages. This implies that the company is incurring more costs in generating its revenue.

Liquidity
Adenta Ltd’s current and quick ratios are much worse than the industry average, and indeed far below expected norms. Current liquidity problems appear due to high levels of trade payables and a high bank overdraft. The high level of inventories constitutes to the poor acid test ratio and may be indicative of further obsolete inventories. The trade receivables’ collection figure is reasonable compared to the industry average.

Gearing
Adenta Ltd’s gearing is more than twice the level of the industry average. The company is making an overall return of 33.23% but only paying 8% interest on its loans notes. The gearing level may become a serious issue if Adenta becomes unable to maintain the finance costs. The company already has an overdraft and the ability to make further interest payments could be in doubt.

Investment Ratios
Despite reasonable profitability figures, Adenta’s dividend yield is poor compared to the sector average. From the extracts of the changes in equity it can be seen that total dividends are GH¢1.8 million out of available profit for the year of only GH¢1.92 million, hence the very low dividend cover, compared to the industry average.

Conclusion
The company compares favourably with the industry average figures for profitability, however, the company’s liquidity and gearing position is quite poor and gives cause for concern.

Signed
Financial Controller

(2 marks for the structure of the report = 2 marks)
(8 marks for analysis of performance = 8 marks)

• Although ratios are useful as a starting point in financial analysis, they are not an end in themselves. Ratios can be used as indicators of what to pursue in a more detailed analysis.
• Different companies often use different accounting methods (e.g. FIFO versus LIFO inventory valuation) and this can have an impact on the financial ratios that does not reflect real differences in the operations and financial health of the companies.
• Making comparisons across industries can be difficult. Companies in different industries tend to have different financial ratios.
• Since the ratios are based on accounting statements, they measure what has happened in the past and not necessarily what will happen in the future.
• Business conditions. You need to place ratio analysis in the context of the general business environment. For example, 60 days of sales outstanding for receivables might be considered poor in a period of rapidly growing sales, but might be excellent during an economic contraction when customers are in severe financial condition and unable to pay their bills.
• Interpretation. It can be quite difficult to ascertain the reason for the results of a ratio. For example, a current ratio of 2:1 might appear to be excellent, until you realize that the company just sold a large amount of its stock to bolster its cash position. A more detailed analysis might reveal that the current ratio will only temporarily be at that level, and will probably decline in the near future.
• Company strategy. It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing different strategies. For example, one company may be following a low-cost strategy, and so is willing to accept a lower gross margin in exchange for more market share. Conversely, a company in the same industry is focusing on a high customer service strategy where its prices are higher and gross margins are higher, but it will never attain the revenue levels of the first company.                                                                                                                                   (1 mark for each limitation)
  

Profitability
The gross profit margin has dropped by 2.5% from 2017 levels possibly due to the reduction in sale revenue by 28%. Although the cost of sales has also reduced by 20%, this is not proportionate to the sales figure resulting in lower gross margin. Similarly, the operating margin has also declined from 23.6% in 2017 to 13.06% in 2018 levels. This can be attributable to a marginal increased in distribution expenses the fallen gross margin. On the positive side, administrative expense appears to have been managed well. The return on capital employed which measures the efficiency and effectiveness of management utilizing capital contributed in generating operating profit was higher at 63.18 % but has deteriorated in 2018 to only 53.53%. This could be attributable to the overall decline in profit margins and fallen sales levels.
Recommendation: Management must work to increase sale levels as soon as practicable by increasing advertising campaigns and diversifying its product offerings in order to improve profit margins. (3 marks)
Gearing
Gearing measures, the proportion of a company’s capital in debts and the associated risks this brings to firms. In 2017, the gearing was high at 57%. However, this has been reduced to 31.8%. Management has paid half of the loan off by the end of 2018 which currently stands at GH¢4,000. Interest cover means the number of times that the operating profit can pay the finance off without challenges. The lower the ratio, the more the company is burdened by debt expense. In 2017, it was 4.79 times but in 2018 it has slightly reduced to about 1.90 times. The company’s ability to meet its finance costs may be questionable in 2018. The company at the moment does not appear to be highly geared. (3 marks)
Liquidity
Liquidity measures the ability of an entity to meet its short-term obligation as and when it falls due. In relation to Zangi Ltd, the current ratio appears to suggest that the company is liquid. However, the quick ratios suggest otherwise, that the company is not liquid as a significant proportion of the current assets are locked up in inventories. Although it’s not explicitly clear the industry in which the company is operating, the quick ratios are still not good enough and needs to be improved. Indeed, the improvement seems to have started already as the quick ratio was only 0.33: 1 in 2017 to its current levels of 0.51:1. This trends needs to continue in the next years to come as that is the surest way Zangi Ltd can sustain its operation in the foreseeable future.
(3 marks)

Assessment of the relative performance and financial position of Light Ltd and Favour Ltd Favour Ltd for the year ended 31 December 2017.

Introduction
This report is based on the draft financial statements supplied and the ratios shown in the appendix above. Although covering many aspects of performance and financial position, the report has been approached from the point of view of a prospective acquisition of the entire equity of one of the two companies.                             (1 mark)
Profitability
The ROCE of 20·9% of Favour Ltd is far superior to the 14·8% return achieved by Light Ltd. ROCE is traditionally seen as a measure of management’s overall efficiency in the use of the finance/assets at its disposal. More detailed analysis reveals that Favour Ltd’s superior performance is due to its efficiency in the use of its net assets; it achieved a net asset turnover of 2·3 times compared to only 1·2 times for Light Ltd. Put another way, Favour Ltd makes sales of GH¢2·30 per GH¢1 invested in net assets compared to sales of only GH¢1·20 per GH¢1 invested for Light Ltd.

The other element contributing to the ROCE is profit margins. In this area Favour Ltd’s overall performance is slightly inferior to that of Light Ltd, gross profit margins are almost identical, but Light Ltd’s operating profit margin is 10·5% compared to Favour Ltd’s 9·8%. In this situation, where one company’s ROCE is superior to another’s it is useful to look behind the figures and consider possible reasons for the superiority other than the obvious one of greater efficiency on Favour Ltd’s part. A major component of the ROCE is normally the carrying amount of the non-current assets. Consideration of these in this case reveals some interesting issues. Favour Ltd does not own its premises whereas Light Ltd does. Such a situation would not necessarily give a ROCE advantage to either company as the increase in capital employed of a company owning its factory would be compensated by a higher return due to not having a rental expense (and vice versa). If Favour Ltd’s rental cost, as a percentage of the value of the related factory, was less than its overall ROCE, then it would be contributing to its higher ROCE.

There is insufficient information to determine this. Another relevant point may be that Favour Ltd’s owned plant is nearing the end of its useful life (carrying amount is only 22% of its cost) and the company seems to be replacing owned plant with leased plant. Again this does not necessarily give Favour Ltd an advantage, but the finance cost of the leased assets at only 7·5% is much lower than the overall ROCE (of either company) and therefore this does help to improve Favour Ltd’s ROCE. The other important issue within the composition of the ROCE is the valuation basis of the companies’ non-current assets.
From the question, it appears that Light Ltd’s factory is at current value (there is a property revaluation reserve) and note (ii) of the question indicates the use of historical cost for plant. The use of current value for the factory (as opposed to historical cost) will be adversely impacting on Light Ltd’s ROCE. Favour Ltd does not suffer this deterioration as it does not own its factory.

The ROCE measures the overall efficiency of management; however, as Salt is considering buying the equity of one of the two companies, it would be useful to consider the return on equity (ROE) – as this is what Salt is buying. The ratios calculated are based on pre-tax profits; this takes into account finance costs, but does not cause taxation issues to distort the comparison. Clearly Favour Ltd’s ROE at 50% is far superior to Light Ltd’s 19·1%. Again the issue of the revaluation of Light Ltd’s factory is making this ratio appear comparatively worse (than it would be if there had not been a revaluation). In these circumstances it would be more meaningful if the ROE was calculated based on the asking price of each company (which has not been disclosed) as this would effectively be the carrying amount of the relevant equity for Salt Ltd.                                             (4 marks)
Gearing
From the gearing ratio it can be seen that 71% of Favour Ltd’s assets are financed by borrowings (39% is attributable to Favour Ltd’s policy of leasing its plant). This is very high in absolute terms and double Light Ltd’s level of gearing. The effect of gearing means that all of the profit after finance costs is attributable to the equity even though (in Favour Ltd’s case) the equity represents only 29% of the financing of the net assets. Whilst this may seem advantageous to the equity shareholders of Favour Ltd, it does not come without risk. The interest cover of Favour Ltd is only 3·3 times whereas that of Light Ltd is 6 times. Favour Ltd’s low interest cover is a direct consequence of its high gearing and it makes profits vulnerable to relatively small changes in operating activity. For example, small reductions in sales, profit margins or small increases in operating expenses could result in losses and mean that interest charges would not be covered.

Another observation is that Light Ltd has been able to take advantage of the receipt of government grants; Favour Ltd has not. This may be due to Light Ltd purchasing its plant (which may then be eligible for grants) whereas Favour Ltd leases its plant. It may be that the lessor has received any grants available on the purchase of the plant and passed some of this benefit on to Favour Ltd via lower lease finance costs (at 7·5% per annum, this is considerably lower than Favour Ltd has to pay on its 10% loan notes).
Liquidity
Both companies have relatively low liquid ratios of 1·2 and 1·3 for Light Ltd and Favour Ltd respectively, although at least Light Ltd has GH¢600,000 in the bank whereas Favour Ltd has a GH¢1·2 million overdraft. In this respect Favour Ltd’s policy of high dividend payouts (leading to a low dividend cover and low retained earnings) is very questionable. Looking in more depth, both companies have similar inventory days; Favour Ltd collects its receivables one week earlier than Light Ltd (perhaps its credit control procedures are more active due to its large overdraft), and of notable difference is that Light Ltd receives
(or takes) a lot longer credit period from its suppliers (108 days compared to 77 days). This may be a reflection of Light Ltd being able to negotiate better credit terms because it has a higher credit rating.                                            (4 marks)

Summary
Although both companies may operate in a similar industry and have similar profits after tax, they would represent very different purchases. Favour Ltd’s sales revenues are over 70% more than those of Light Ltd, it is financed by high levels of debt, it rents rather than owns property and it chooses to lease rather than buy its replacement plant. Also its remaining owned plant is nearing the end of its life. Its replacement will either require a cash injection if it is to be purchased (Favour Ltd’s overdraft of GH¢1·2 million already requires serious attention) or create even higher levels of gearing if it continues its policy of leasing. In short although Favour Ltd’s overall return seems more attractive than that of Light Ltd, it would represent a much more risky investment. Ultimately the investment decision may be determined by Salt’s attitude to risk, possible synergies with its existing business activities, and not least, by the asking price for each investment (which has not been disclosed to us).            (2 marks)

The workings are in GH₵’000 (unless otherwise stated) and are for Obiya’s ratios.
The dividend yield is calculated from a dividend per share figure of 15p (GH₵90,000/150,000 × 4) and a share price of GH₵6.00.
Thus the yield is 2.5% (15p/GH₵6.00 × 100%).

                                                        REPORT
To:
From:
Subject: Analysis of Obiya’s financial performance and financial position compared to sector average for the year to 30 September 2017.
Operation performance

• The return on capital employed of Obiya is impressive being more than 50% higher than the sector. The component of the return on capital employed are the asset turnover is much higher [nearly double] than the average, but the net profit margin after exceptionals are considerable below the sector average. However, if the exceptionals are treated as one off costs and excluded, Obiya’s margins are very similar to the sector average.
• This short analysis seems to imply that Obiya’s superior return on capital employed is due entirely to an efficient asset turnover i.e Obiya is making its assets work twice as efficiently as its competitors. A closer inspection of the underlying figures may explain why its asset turnover is so high. It can be seen from the note to the statement of financial position that Obiya’s non-current asset appear quite old .Their net book value is only 15% of their original cost. This has at least two implications; they will need replacing in the near future and the company is already struggling for funding; and their low net book value gives a high figure for asset turnover. Unless Obiya has underestimated the life of its asset in its depreciation calculation, its non-current asset will need replacing in the near future. When this occurs its asset turnover and return on capital employed figures will be much lower.
• This aspect of ratio analysis often causes problems and to counter this anomaly some companies calculate the asset turnover using the cost of non-current asset rather than their net book value as this gives a more reliable trend.it is also possible that Obiya is using asset that are not on its statement of financial position . It may be leasing asset that do not meet the definition of finance lease and thus the asset and corresponding obligation are not recognized on the statement of financial position.
• A further issue is which of the two calculation margin should be compared to the sector average (i.e. including or excluding the effect the exceptional losses). The gross profit margin of Obiyas is much lower than the sector average. If the exceptional losses were taken in at trading account level, which they should be as they relate to obsolete inventory, Obiya’s gross margin would be even worse. As Obiya’s net margin is similar to the sector average, it would appear that Obiya has better control over its operating cost .This is especially true as the other element of the net profit calculation is finance cost and as Obiya has much higher gearing than the sector average, one would except Obiya’s interest to be higher than the sector average.

Liquidity

• Here Obiya shows real cause for concern. Its current and quick ratio are much worse than the sector average, and indeed far below expected norms. Current liquidity problems appear due to high levels of accounts payable and a high bank overdraft .The high levels inventory contribute to the poor quick ratio and may be indicative of further obsolete inventory [the exceptional items is due to obsolete inventory]. The accounts receivable collection figure is reasonable, but at 68 days, Obiya takes longer to pay its accounts payable than do its competitors. Whilst this is a source of ‘free’ finance, its can damage relations with supplier and may lead to a curtailment of further credit.

Gearing

As referred to above, gearing [as measured by debt/equity] is more than twice the level of the sector average. Whilst this may be an uncomfortable level, it is currently beneficial for shareholders. The company is making an overall return of 34.6%, but only paying 8% interest on its .loan notes. The gearing level may become a serious issues if Obiya becomes unable to maintain the finance costs. The company already has an overdraft and the ability to make further interest payment could be in doubt.

Investment ratio
Despite reasonable profitability figures, Obiya’s dividend yield is poor compared to the sector average. From the extracts of the changes in equity it can be seen that total dividends are 90,000 out of available profit for the year of only 96,000 [hence the very low cover]. It is worthy of note that the interim dividend was 60,000 and the final dividend only 30,000. Perhaps this indicates a worsening performance during the year, as normally final dividends are higher than interim dividends. Considering these factors, it is surprising the company’s share price is holding up so well.

                                                             REPORT
To         : Chief Executive Officer
From     : Consultant
Date      : 31/03/2017
Subject  : Profitability and Working capital management of Fadama Ltd for the year ending March 2017.
As requested, I have analyzed the profitability and working capital management of Fadama Ltd. My analysis is based on the Statement of financial Position, and the additional information given. A number of key measures have been calculated and these are set out in the attached Appendix.
Profitability
Sales have increased by 21% and cost of sales has risen by 46%, resulting in a fall of 3% in the gross profit. This could be explained by a strategy of lowering sales prices to boost volumes. If so, it did not succeed, either in terms of gross profit amount, or gross margin. However, operating costs have increased by just GH¢44,000 or 6% – much less than the percentage increase in revenue. As a result, the ratio of expenses as a percentage of revenue has fallen from 12.75% to 11.1%.
Working capital management

• Cash, including the short term investments, has reduced by GH¢10,000, a fall of 10%. However this is not material in the context of the large sums invested in non-current assets and paid out as dividends. Operating cash flow is healthy.
• A big improvement is evident in the inventory day’s ratio from 2016 to 2017. However it would seem reasonable to expect further improvement, as 6 months is rather a long time to be carrying inventory. Efficient production services must be introduced with effective marketing, selling and distribution of products.
• Trade receivables and payables are reasonable consistent, with a significant improvement noteworthy in the case of the payables days.
• Current ratios seem rather weak, however a cessation of dividends would be a simple way to boost cash flow should an emergency present.

Conclusion
Fadama Ltd’s profit margins can be improved by deliberately reducing the operating expenses for the year, intensive sales and marketing strategies to boost sales revenue. There are no apparent short-term liquidity problems but Fadama Ltd should find solution to reducing inventory days as this will reduce cost of holding inventory. The firm should also consider cessation of payment of dividends to improve liquidity.

(6 marks spread evenly using ticks)

                                                         Report to the Managing Director
To                 : Managing Director
From             : Financial Controller
Subject          : Analysis of performance for the year 2015
This report should be read in conjunction with the appendix attached which shows the relevant ratios.        (1 mark)
Profitability
Profit margin is one of the key indicators used to evaluate a company’s performance as this margin calculates a company’s net income as a percentage of the company’s sales. Several factors directly contribute to the change in a company’s net profit margin. A high profit margin shows that a company can convert sales into profits. The net profit margin also considers all of the costs associated with the sale of the products. Profit margin was better than that of our competitor Diamond Ltd as well as the industry average. This suggest that if we increase sales, there will be more profits for the company.
Return on Capital Employed is very useful for companies that require large amounts of capital to facilitate production, otherwise known as capital-intensive industries. Return on capital employed was bit lower than that of Diamond just approximating the industry average .Options available to the company to improve on its return on capital employed (ROCE) ratio include reducing costs, increasing sales, and paying off debt or restructuring financing.
Return on equity (ROE) is a measure of profitability that calculates how many Ghana cedis of profit a company generates with each Ghana cedi of shareholders’ equity. ROE compared to the industry average of 20% was quite lower. This is bad even though it’s significantly higher than that of Diamond. Return on equity can be improved if asset turnover, financial leverage and profit margins are properly managed by the company.                                     (2 marks)
Liquidity
The current and quick ratios performed better than the industry and that of Diamond. The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities. This suggests that Shine has no short term liquidity challenges and should have no difficulty in paying short term debts as they fall due.                                                                                                              (2 marks)
Gearing
Gearing focuses on the capital structure of the business – that means the proportion of finance that is provided by debt relative to the finance provided by equity (or shareholders). However, it focuses on the long-term financial stability of a business. Our interest cover although slightly below the industry average it is marginally higher than that of Diamond. This also shows the company’s ability to adequately settle interest charges.
The debt to equity ratio compares favourably with Diamond and is significantly lower than industry average. The higher the level of borrowing (gearing) the higher are the risks to a business, since the payment of interest and repayment of debts are not “optional” in the same way as dividends. However, gearing can be a financially sound part of Shine’s capital structure particularly if the business has strong, predictable cash flows.                         (2 marks)
Efficiency
Average collection period is worse off than both Diamond’s and the industry average. Our longer credit days is yet to translate into higher sales for us compared to Diamond. More effort is required at the Credit Control Unit to reduce the collection period.
Although we collect from our debtors latter than Diamond and industry, we pay our suppliers earlier than both. We need to negotiate better credit terms form our suppliers to match the industry norm. The inventory days on hand is higher than industry and Diamond’s. There is the possibility of having some obsolete items in store. This high level of inventory has been financed by increased overdraft which may reduce if the inventory levels can be managed down.                    (2 marks)
Signed: Financial Controller.

APPENDIX
i) Current Ratio                           = Currents Assets/Current Liability
ii) Debt to Equity                        = Debt/Equity*100
iii) Gross Profit Margin              = Gross Profit/Sales * 100
iv) Net Profit Margin                  = Net Profit/Sales * 100
v) Return on Capital Employed  = Profit before Interest & Tax/Capital Employed*100

                                                                      REPORT
To                     : Chief Executive Officer
From                : Consultant
Date                 : 31/12/2015
Subject             : Financial Performance and Financial Position of Ashtown Ltd for the year ending 2015.
As requested, I have analyzed the financial performance and financial position of Ashtown Ltd. My analysis is based on the Statement of financial Position, summarised statement of changes in equity and the additional information given. A number of key measures have been calculated and these are set out in the attached Appendix.
Financial Performance
Financial performance is a quantitative measure of how well a firm can use assets from its primary mode of business and generate revenues using the financial statements. This can be measured using Gross Profit Margin, Net Profit Margin and Return on Capital Employed according to the Industry measures.

Gross profit margin measures Ashtown Ltd’s manufacturing and distribution efficiency during the production process. Gross profit margin has increased considerably (from 28.77% to 40%) during the year and this is great increment compared to the industry average of 32%. This High gross profit margin increment indicates that the company can make a reasonable profit, as long as it keeps the overhead cost in control. The company can improve this by cutting down cost of manufacturing and increasing sales.
Net profit margin measures company’s profitability or how much of each Ghana Cedi earned by the company is translated into net profits. Net profit margin is an indicator of how efficient a company is and how well it controls its costs. The higher the margin is, the more effective the company is in converting revenue into actual profit. The company did well in the previous year (26.94% compared to the industry average of 20%) doing better than the industry average. Although Ashtown Ltd’s Gross Profit margin increased considerably, there was a marginal fall in net profit margin in the current year (24.93%). The company should adopt cost reduction techniques to cut down the operational, administrative and selling expenses so as to increase profitability.
The Return on Capital Employed ratio helps assess how efficiently a company employs its available capital and is particularly helpful when comparing profitability across companies in the same business with similar amounts of working capital. From the ratios for every GHS1 employed, Ashtown gained GHS0.28 in 2015. Ashtown Ltd’s ROCE ratio is relatively high, (an improvement from 19.8% to 28.88%) that is commonly interpreted as an indication that the company is making more efficient use of its capital. The Company can improve the ROCE ratio in subsequent years by selling off of unprofitable or unnecessary assets this can be evidenced from disposing part of the available for sale instrument in the financial statements.

Financial Position
The status of the assets, liabilities, and owners’ equity (and their interrelationships) of an organization, as reflected in its financial statements is the financial position. The financial position helps users to understand the gearing, liquidity and value of the company. This can be measured using Debt to Equity ratio for gearing, and Current Ratio for liquidity looking at the industry averages given.
Gearing
The debt to equity ratio measures the ratio of a company’s interest bearing debt finance to its equity finance (shareholders’ funds). The Debt to Equity ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity. This decreased substantially from 43.9% to 19.2% and still lower than the industry ratio. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. Aggressive leveraging practices are often associated with high levels of risk. This may result in volatile earnings as a result of the additional interest expense. It can be evidenced that Ashtown Ltd is not highly geared and it can improve on this by retaining substantial portions of the earnings generated internally.

Liquidity

Liquidity ratios are a class of financial metrics used to determine a company’s ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. The current ratio is a liquidity ratio that measures whether or not a firm has enough resources to meet its short-term and long-term obligations. Ashtown Ltd has improved from (1.84:1 to 2.36:1) more than the industry average of 2:1. A high current ratio may not always be a green signal. Ashtown Ltd with high current ratio of 2.36 may not always be able to pay its current liabilities as they become due because of a large portion of its current assets consists of slow moving (available for sale instruments and inventories) or obsolete inventories.

Conclusion
Ashtown Ltd’s profit margins appear to be reasonable for a company in its industry sector. Although it’s net profit margin is below the industry average. It is possible at least some of this improvement can be achieved by deliberately reducing the operating expenses for the year. There are no apparent gearing or short-term liquidity problems but Ashtown Ltd should find solution of reducing its slow moving short term assets.

Ashtown Ltd (2015)
Non-Current Asset Ratio = Sales/Non-Current Assets
= GHS365,000/GHS240,000
= 1.52 times.
Krofrom Ltd= 1.3times                                          Ashtown Ltd =1.52 times
Reasons:

• The non-current assets of one entity could be nearing the end of their useful life and therefore be unrealistically low giving a higher non-current asset turnover figure.
• Alternatively, the non-current assets of one entity could have been revalued which would result in asset turnover being low but not necessarily because of low efficiency.