You have been asked by a client to advice on the financial position of two companies in a similar trade sector. You have been supplied with the following financial statements.

Income Statement for the year ended 31 March 2016

		Nixon Ltd	Zip Ltd
	Notes	£000	£000
Revenue		638	493
Cost of sales		(331)	(297)
		––––––	––––––
Gross profit		307	196
Distribution costs		(36)	(29)
Administrative expenses	1	(99)	(46)
		––––––	––––––
Profit before taxation		172	121
Taxation		(21)	(22)
		––––––	––––––
Profit for the year		151	99
		======	======

Statement of financial position as at 31 March 2016
	Notes		Nixon Ltd			Zip Ltd
Non‐current assets (NBV):		£000	£000	£000	£000	£000	£000
Property, plant and equipment	1			198			111
Current assets:
Inventory			60			58
Trade and other receivables			35			43
Cash and cash equivalents			2			–
			––––	97		––––	101
				––––			––––
Total assets				295			212
Equity and liabilities:				====			====
Share capital (£1 share each)				50			30
Retained earnings				161			66
				––––			––––
Non‐current liabilities:				211			96
Borrowings			–			20
Current liabilities:
Trade and other payables	2	74			74
Current tax payable		10			12
Bank overdraft		–			10
		––––	84		––––	96
			––––	84		––––	116
				––––			––––
Total equity and liabilities				295			212
				====			====

Notes to the financial statements:

The non‐current assets held by the companies are as follows:

	Nixon Ltd	Zip Ltd
	£000	£000
Land and buildings	97	43
Fixtures and fittings	28	17
Motor vehicles	73	51
	––––	––––
	198	111
	––––	––––

Trade and other payables for both companies include a proposed dividend. Nixon Ltd has proposed a dividend of £50,000 and Zip Ltd a dividend of £40,000.

Required:

• Calculate all the appropriate ratios (at least 2 from each group) and critically appraise the current financial position of each of the two companies.                                    
• Define working capital cycle and calculate the working capital cycle of both companies and discuss how a company can improve the working capital cycle?                                                                             
• What are the limitations of ratio analysis technique, discuss in details?            

Answer rating: 100% (QA)

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