8.3 The statements of financial position of Dorrington Ltd and Rowton Ltd at 31 May 2014 were as follows:

Dorrington Rowton £000 £000 Non-current assets 125 204 Current assets:
Inventory 85 120 Trade receivables 26 18 Cash and cash equivalents 12 39 123 177 Less Current liabilities (135) (168)
Net current assets (liabilities) (12) 9 113 213 Less Non-current liabilities 6% bonds − (100)
Total net assets 113 113 Equity Share capital 50 100 Reserves 63 13 Total equity 113 113 Notes:
1 The profits of Dorrington Limited are expected to continue at £40,000 p.a. The profits of Rowton Limited have averaged £40,000 before bond interest.
2 Statements of financial position at 31 May 2013 for both companies showed broadly similar figures to those for 2014.

(a) From the statement of financial position as at 31 May 2014, calculate the following ratios for both companies, and give a brief explanation of their significance:
(i) Gearing ratio; (ii) Current ratio; (iii) Acid test ratio; (iv) Return on capital employed.

(b) Assume that you had been asked for advice by a cautious potential investor who has £20,000 available. Explain which of the two companies appears to represent the better choice of investment on the basis of the evidence provided.

(c) If the audit report on Dorrington’s accounts had stated that the business was not a going concern, how would that affect your views on the company, and in particular the advice given to the potential investor in

(b) above?