Voest ltd is a manufacturer and distributer of mine drilling equipment. All of its customers are in the extraction industry. The technology in the extraction industries has been changing rapidly in recent years. As a result of this rapid change, Voest ltd has been investing significantly in research and development in order to keep pace with the changes in the industry. The company is focused on becoming the market leader in the existing product offering. The company has patented many of its existing products. This was obviously done to protect the company’s intellectual property. Voest ltd has a wide range of products that it manufactures. It manufactures products developed in house and it also manufactures products that have been designed by market leaders. In 2016 Voest entered into an agreement with Steglich ltd. Steglich ltd is based in Munich Germany and it is a global leader in the manufacturing of specialized high carbon content mine drills. Voest ltd obtained the right to manufacture and sell the high carbon content mine drills. The specialized high carbon content mine drills will be distributed in Southern Africa. Voest ltd pays a fixed royalty in Euros for each unit of specialized high carbon content mine drills manufactured and sold. The royalties are paid quarterly in arrears. The specialized high carbon content mine drills have proved to be very successful in South Africa because of the relatively complex geological structure of the Southern African region. The total revenue from the high carbon content specialized drills represents 30% of the total annual revenue of Voest ltd. Voest ltd’s focus has been primarily on South African customers. However, Voest ltd has also supported the subsidiaries of South African customers that are located in the rest of Africa and the Middle East. The revenues from these foreign subsidiaries constitute about 10% of the total annual revenue. These subsidiaries are also invoiced in Euros. The mining industry in South Africa has been under a lot of pressure during the past few years. This was caused by the Covid 19 pandemic which caused a muted global economic growth. Consequently, Voest has struggled to grow its revenue over the past three years. A special type of steel is used in the manufacture of specialized high carbon mine drilling equipment. The steel prices have also been very volatile over the past few years, due to the Covid 19 pandemic. Thus, this has also added to the pressure on the company’s profit margins. For Voest working capital management has become very crucial in order to stay afloat. This was as caused by a number of factors. Initially, a significant number of customers have been placing orders at the last moment. This caused Voest to hold larger volumes of inventory in order to meet the unexpected demand from these customers. It is important to note that all Voest ltd’s sales are on credit. Voest ltd allows its customers 60 days to pay from the invoicing date. A lot of customers have been delaying payments due to cash flow problems. As a result of this Voest ltd’s bank overdraft has been increasing over the years, such that it has become a permanent source of finance. The interest on overdraft is 10% per annum, compounded monthly. Voest ltd has had no other debt since 2019. Bankers are currently not very willing to grant Voest ltd long term finance. This is due to concerns about the company’s cash flow generation ability and the negative outlook in the mining industry in general. In order to improve the cash flows; the following two options have been proposed by the management: 1) The company proposes to offer a 10% settlement discount to all customers that pay within 30 days. This is expected to increase revenue by 5%. The company expects 20% of all customers (by revenue value) to make use of the settlement discount. The introduction of the settlement discount is expected to reduce bad debts by 5%.

 Extracts from the income statement for the year ended 31 December

                  2021  2021   2020 

 Sales     248 230 000 241 000 000 

Cost of sales (157 580 000) (144 400 000)

 Gross Profit 190 650 000 96 600 000

 Bad Debts (5 100 000) (4 500 000)

 Depreciation (19 800 000) (20 100 000) 

Research and development (10 200 000) (11 100 000) 

Other operating costs (28 750 000) (26 700 000) 

Operating profit 26 800 000 34 200 000

 Finance charges (12 750 000) (10 800 000) 

Profit before tax 14 050 000 23 400 000 

Extracts from the Balance Sheet as at 31 December 2021 2021 2020 

 Trade receivables 51 000 000 42 900 000

 Total assets 279 900 000 264 900 000

 Shareholder’s equity 152 200 000 142 100 000 

Bank overdraft 127 500 000 102 800 000 

The inventory balance as at 31 December 2021 is R28 060 000 

Required:

1. Calculate the value of inventory for the 2020 financial year (show All calculations) 

2. Evaluate the liquidity ratios for the years 2020 and 2021 

3. Evaluate the Efficiency ratios for the years 2020 and 2021

Answer rating: 100% (QA)

1 To calculate the value of inventory for the 2020 financial year you can use the following formula Inventory 2020 Inventory 2021 Purchases 2021 Cost of Goods Sold 2021 Inventory 2020 R28060000 Sales ... View the full answer