On 3 July 2016, Marvin, the founder of Machiq Limited (see previous case studies), was sorting through the morning’s correspondence. After reading one particular letter, he immediately summoned his fellow directors, Chiquita and Trixie, to an emergency meeting.

He passed the letter round and awaited their comments. The letter read as follows:

Dear Marvin I have not written to you since 30 June 2014, when I demanded compensation for the cruel way you sacked me and my family back in 2012. However, I realised that you would not pay me the £10m I demanded, so I devoted my energies to building a rival business. I rejoined my old employer, Kaboosh Limited, and worked so hard that I was appointed managing director. When my close friend and company chairman, Cardew Kaboosh, died two months ago, he left all his shares to me, so I now own 95% of the company.

My company’s performance has been so impressive that I now want to take over your company. I am enclosing a copy of the most recent income statement and statement of financial position of Kaboosh Limited for information.

Yours sincerely, Esmeralda After reading the letter, it was agreed that Trixie would analyse the financial summaries of Kaboosh Limited and compare them with those of Machiq Limited. She compiled the following summary:

Income statements for the year ended 30 June 2016 Machiq Kaboosh

£ £

Revenue 705,600 1,102,500 Less Cost of sales (529,200) (661,500)

Gross profit 176,400 441,000 Less Expenses (58,600) (175,000)

Operating profit for the year 117,800 266,000 Less Finance costs (1,800) (12,000)

Profit for the year, before tax 116,000 254,000 Less Tax (26,950) (47,000)

Profit for the year, after tax 89,050 207,000 Machiq Kaboosh £ £
Less Dividends (32,000) (55,000)
Retained profit for the year 57,050 152,000 Retained profit brought forward 42,100 645,000 Retained profit carried forward 99,150 797,000 Statement of financial position as at 30 June 2016 Machiq Limited Kaboosh Limited £ £ £ £
Non-current assets 165,980 950,000 Current assets:
Inventory 32,650 251,300 Trade receivables 30,950 142,500 Cash and cash equivalents – 36,200 63,600 430,000 Less Current liabilities:
Trade payables 14,080 108,000 Tax 26,950 47,000 Dividends approved but unpaid 32,000 55,000 Bank overdraft 2,400 –
(75,430) (210,000)
Net current assets/(liabilities) (11,830) 220,000 154,150 1,170,000 Less Non-current liabilities:
6% bonds (200,000)
Total net assets 154,150 970,000 Equity Share capital (5p shares) 24,000 100,000 Share premium 31,000 73,000 Retained profits 99,150 797,000 Total equity 154,150 970,000 Additional information:
Inventory figures represent average values.

Price/earnings ratios for companies in the manufacturing sector average 15 times earnings.
Required

(a) Analyse each company’s results into the following five groups of ratios, and comment on the relative performance of each company:
(i) Profitability (ii) Efficiency (iii) Short-term solvency and liquidity (iv) Long-term solvency and liquidity (v) Investment ratios.

(b) Advise the directors of Machiq Limited as to whether they should agree to the company being taken over by Kaboosh Limited. State four additional items of information which they might need before they come to a final decision.