Task 4 [1000 words]

Smart Eletro plc, a public listed company, is a major supplier of electrical components to the automotive industry. Companys key accounting ratios are set out in the following table, together with industry averages:

Smart Electro plc.

Industry Averages

Return on capital employed 21.4%

16.1%

Gross profit margin 11.5%

13.0%

Net profit margin 9.8%

11.0%

Current ratio 1.6

1.4

Inventories turnover 12

6

Trade receivables collection period 61 days

65 days

Trade payables payment period 43 days

105 days

Gearing 68.4%

37.2%

Questions:

1. You are working in this company and the Finance Director asked you to write a report to the Board of Directors. Write a brief report to the board of directors of Smart Eletro plc. comparing the ratios for the company with the industry averages. Identify any areas in which you think they could make improvements.

2. Smart Eletro plc. has operations in the United Kingdom, Europe and the United States. The company has been looking for some time to expand its operations into the Far East and has now formulated plans for the building of two major new factories in China. Explain in detail the best possible internal and external financing options available to the company to expand its operations taking into account the companys gearing and profitability position.

TOTAL 25 MARKS