Brenda is considering an investment in the ordinary shares of either Baker plc or Grant plc. Both companies operate in the same sector of industry and both prepare accounts to 30 September each year. Financial statements for the year to 30 September 2020 are shown below. 

The following information is also available: 

1. For both companies, all purchases and sales are made on credit terms. 

2. During the year to 30 September 2020, Baker plc paid dividends of £180,000 and Grant plc paid dividends of £600,000. 

3. Each company's issued share capital consists of 6 million ordinary shares of £1 each. At the close of business on 30 September 2020, the market price of an ordinary share in Baker plc was £1.65 and the market price of an ordinary share in Grant plc was £2.40.

Having examined the financial statements of the two companies, Brenda is inclined to invest in the shares of Baker plc. Her reasons for this view are that Baker plc has higher turnover, higher operating profit and greater assets than Grant plc. The shares of Baker plc are also cheaper.

(a) In so far as the information given permits, compute the following ratios for Baker plc and Grant plc: 

– Return on capital employed 

– Earnings per share – price earnings ratio 

– Current ratio – quick ratio (acid test) 

– Trade payables payment period 

– Capital gearing ratio 

– Dividend yield.  

(b) Ratios for the two companies based upon the financial statements for the previous year (i.e. the year to 30 September 2019) were as follows: 

Taking into account these ratios and those which you have calculated for the year to 30 September 2020, advise Brenda which of the two companies seems to be the better investment. Give reasons for your advice.

(c) Identify three types of further information which should be obtained before a final investment decision is made.

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Statements of comprehensive income for the year to 30 September 2020 Baker ple £000 15,160 10,720 Sales revenue Cost of sales Gross profit Operating expenses Operating profit before interest and taxation Interest payable Profit before taxation Taxation Profit after taxation 4,440 2,160 2,280 520 1,760 440 1,320 Grant ple £000 12,260 8,680 3,580 1,620 1,960 40 1,920 480 1,440