Electron Ltd is a company listed in the New York Stock Exchange that assembles electronic gadget for
Question:
Electron Ltd is a company listed in the New York Stock Exchange that assembles electronic gadget for children which it then sells to both wholesale and retail customers.
The financial result for the year ended 30 June 2017 had deteriorated as compared to previous year. On 01 August 2017, in a board meeting, the directors recommended to take the following actions in an attempt to improve performance for the year ended 30 June 2018:
- To undertake more advertisement on radio and television.
- To introduce a bulk purchase discount for all wholesale customers.
- To close production lines that are incurring loss. This will enable the company to dispose surplus plant. Electron Ltd’s financial statements for the year ended 30 June 2018 are as follows:
Statement of profit or loss for the year ended 30June 2018
| $000 | |
| Revenue (25% Cash Sales) | 7000 |
| Cost of sales | (6038) |
| Gross Profit | 962 |
| Profit on disposal of plant | 70 |
| 1032 | |
| Operating Expenses | (648) |
| Finance Costs | (35) |
| Profit before Tax | 349 |
| Income tax Expense | (88) |
| Profit for the period | 261 |
Statement of financial position as at 30June 2018
| $000 | |
| Non-current assets | |
| Property, plant and Equipment | 963 |
| Current Assets | |
| Inventory | 438 |
| Trade Receivables | 630 |
| Bank | - |
| 1068 | |
| Total assets | 2031 |
| Equity and Liabilities | |
| Equity | |
| Ordinary Shares of $0.25 each | 175 |
| Retained earnings | 665 |
| 840 | |
| Non current liabilities | |
| 10% Loan Notes | 350 |
| Current Liabilities | |
| Bank overdraft | 18 |
| Trade Payables | 753 |
| Tax Payable | 70 |
| 841 | |
| Total Equity and liabilities | 2031 |
Below are ratios calculated for the company of Electron Ltd for the year ended 30 June 2017:
Ratios
| Return on year end capital employed (PBIT over capital employed) | 28.1% |
| Net asset (capital employed) turnover | 4 Times |
| Gross profit margin | 17% |
| Net profit (before tax) margin | 6.3% |
| Current ratio | 1.6:1 |
| Closing inventory holding period | 46 days |
| Trade receivables’ collection period | 45 days |
| Trade payables’ payment period | 55 days |
| Dividend yield | 3.75% |
| Dividend Cover | 2 times |
(i) The plant disposed had a carrying amount of $ 140,000 at the disposal date.
(ii) The company has paid a dividend of $ 158,000 for the year ended 30 June 2018 similar to last financial year.
(iii) The average share price of the company on the New York Stock exchange was $ 3.75.
(iv) There was no movement in ordinary share capital during the year.
REQUIRED
(a) Calculate ratios for the year ended 30 June 2018 for Electron Ltd, equivalent to those provided. Show all your workings.
(b) Analyse the financial performance and position of Electron Ltd for the year ended 30 June 2018 compared to the previous year.
(c) List three limitations of using ratio analysis.
Expert Answer:
ii Return on capital employed shows if company is earning profits out of capital employed by it which when compared to previous year shows that compan... View the full answer
