Pierrodel SpA (Pierrodel) is a long-established Italian company, selling high quality gearboxes to the automotive industry...

  

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Pierrodel SpA (Pierrodel) is a long-established Italian company, selling high quality gearboxes to the automotive industry throughout Europe. Revenue and profit growth have been strong over the past few years, and the board of directors has been investigating various plans for further sustainable growth. You bought shares in the company at €7.50 per share a year ago on the recommendation of a business colleague. In conversations with other colleagues you discover that many of them were delighted with their total shareholder returns in other companies over the last year. When looked at together, your colleagues' total shareholder returns averaged out at just over 5.5%. This is the first set of financial statements that you have seen since buying your shares and the price of the share on 31 May 2021 was €7.75. The price today has risen to €8.00. Pierrodel's Draft Statement of Financial Position at 31 May 2021 and its Draft Income Statement for the year ended 31 May 2021 are summarised below: Statement of Financial Position as at 31 May 2021 €m €m Non-current assets 44.0 Current assets: Inventory 22.0 Accounts receivable 9.0 Cash 5.0 36.0 80.0 Total assets Equity and liabilities Issued share capital (nominal value per share €0.10) Share premium Profit and loss reserve 4.0 4.0 36.0 44.0 Non-current liabilities: 10% bond (redeemable 2023) 12% 4-year bank loan – portion repayable 2023-2025 8.0 3.0 11.0 Current liabilities: Bank overdraft (3% interest) 12% 4-year bank loan – portion repayable 2022 Accounts payable 8.0 1.0 16.0 25.0 80.0 Total equity and liabilities Income Statement for the year ended 31 May 2021 €m Revenue 125.0 Cost of sales 75.0 50.0 Gross profit Depreciation Operating expenses Operating profit Interest Profit before tax 5.0 27.0 18.0 1.3 16.7 Tax (at 30%) Profit after tax 5.0 11.7 Dividends 4.7 Z.0 Retained earnings You have done some research and have discovered the following average statistics in Pierrodel's market sector over the last year: Revenue growth Gross margin Working capital cycle Financial gearing PE ratio 20% 39% 30 days 25%. 29 The CEO and her Board of Directors have proposed that the company expands into a new market for its existing gearboxes. The non-current asset investment is expected to cost $20m, of which $4m of this is to be financed by retained cash earnings. The other $16m is to be financed by a rights issue. The expansion is expected to increase sales by 30%, and the increased sales are expected to have the same gross margin as existing gearbox sales. Fixed operating costs are expected to increase by $4m and depreciation on the new investment would be $2m per annum. The Board of directors intend to maintain the dividend payout ratio. The Board of Directors has decided to hold a meeting of its shareholders to present the draft financial statements for the year to 31 May 2021 and to answer questions on these financial statements and the Board's proposed expansion plans. Required: 1. Based on the financial information available, evaluate Pierrodel's performance for the year ended 31 May 2021, using whatever financial analysis that you consider appropriate. Include in your evaluation a list of additional information (financial and non-financial) that you would require for a fuller evaluation. Show all workings. 2. Prepare a forecast income statement based on the Board of Directors' assumptions and critically comment on both your forecast and the Board's proposed the expansion plan. Show all workings. Pierrodel SpA (Pierrodel) is a long-established Italian company, selling high quality gearboxes to the automotive industry throughout Europe. Revenue and profit growth have been strong over the past few years, and the board of directors has been investigating various plans for further sustainable growth. You bought shares in the company at €7.50 per share a year ago on the recommendation of a business colleague. In conversations with other colleagues you discover that many of them were delighted with their total shareholder returns in other companies over the last year. When looked at together, your colleagues' total shareholder returns averaged out at just over 5.5%. This is the first set of financial statements that you have seen since buying your shares and the price of the share on 31 May 2021 was €7.75. The price today has risen to €8.00. Pierrodel's Draft Statement of Financial Position at 31 May 2021 and its Draft Income Statement for the year ended 31 May 2021 are summarised below: Statement of Financial Position as at 31 May 2021 €m €m Non-current assets 44.0 Current assets: Inventory 22.0 Accounts receivable 9.0 Cash 5.0 36.0 80.0 Total assets Equity and liabilities Issued share capital (nominal value per share €0.10) Share premium Profit and loss reserve 4.0 4.0 36.0 44.0 Non-current liabilities: 10% bond (redeemable 2023) 12% 4-year bank loan – portion repayable 2023-2025 8.0 3.0 11.0 Current liabilities: Bank overdraft (3% interest) 12% 4-year bank loan – portion repayable 2022 Accounts payable 8.0 1.0 16.0 25.0 80.0 Total equity and liabilities Income Statement for the year ended 31 May 2021 €m Revenue 125.0 Cost of sales 75.0 50.0 Gross profit Depreciation Operating expenses Operating profit Interest Profit before tax 5.0 27.0 18.0 1.3 16.7 Tax (at 30%) Profit after tax 5.0 11.7 Dividends 4.7 Z.0 Retained earnings You have done some research and have discovered the following average statistics in Pierrodel's market sector over the last year: Revenue growth Gross margin Working capital cycle Financial gearing PE ratio 20% 39% 30 days 25%. 29 The CEO and her Board of Directors have proposed that the company expands into a new market for its existing gearboxes. The non-current asset investment is expected to cost $20m, of which $4m of this is to be financed by retained cash earnings. The other $16m is to be financed by a rights issue. The expansion is expected to increase sales by 30%, and the increased sales are expected to have the same gross margin as existing gearbox sales. Fixed operating costs are expected to increase by $4m and depreciation on the new investment would be $2m per annum. The Board of directors intend to maintain the dividend payout ratio. The Board of Directors has decided to hold a meeting of its shareholders to present the draft financial statements for the year to 31 May 2021 and to answer questions on these financial statements and the Board's proposed expansion plans. Required: 1. Based on the financial information available, evaluate Pierrodel's performance for the year ended 31 May 2021, using whatever financial analysis that you consider appropriate. Include in your evaluation a list of additional information (financial and non-financial) that you would require for a fuller evaluation. Show all workings. 2. Prepare a forecast income statement based on the Board of Directors' assumptions and critically comment on both your forecast and the Board's proposed the expansion plan. Show all workings.

Answer rating: 100% (QA)

1 Evaluation of Pierrodels Performance Pierrodels financial performance for the year ended 31 May 2021 can be evaluated by analyzing its financial statements and by comparing the companys performance ... View the full answer