The sales director of Kangaroo plc is an expert at selling the company’s products, but at directors’ meetings, he is often confused by many of the terms that the finance director uses. In brief, at a recent board meeting, he heard comments about three customers: that

‘company A (a relatively new business) is over-trading, company B has a high gearing ratio, and company C has a high p/e ratio despite a low return on capital employed’.

(a) The sales director is concerned that future sales to these companies might be risky, and has asked for your advice.

(b) Explain to the sales director the significance of the comments made by the finance director.

Use the data contained within the following financial statements to answer questions 8.6–8.8 below.

Tibberton plc (summarised)

income statement for the year ended 30 September 2014 2014 2013

£000s £000s Revenue 620 540 Less Cost of sales (240) (280)

Gross profit 380 260 Distribution costs (40) (35)

Administrative expenses (60) (50)

Other operating income and expenditure (20) (10)

2014 2013 £000s £000s Operating profit 300 185 Finance income (15) (40)
Finance costs (35) (10)
Net profit before taxation 280 215 Taxation (80) (50)
Profit for the financial year 200 165 Dividends paid (see note) (50) (35)
Profit retained for the financial year 150 130 Note: Dividends per share 2014: 7.14p, 2013: 5.83p Tibberton plc Statement of financial position as at 30 September 2014 2013 £000s £000s Non-current assets Intangible assets 120 125 Tangible assets 1,620 1,285 1,740 1,410 Current assets Inventory 80 70 Trade receivables (see note 1) 165 89 Cash and cash equivalents 30 1 275 160 Current liabilities (see note 2) (190) (210)
Net current assets (2013: liabilities) 85 -50 Total assets less current liabilities 1,825 1,360 Non-current liabilities (445) (220)
Total net assets 1,380 1,140 Capital and reserves Share capital (50p nominal value) 350 300 Share premium 190 150 2014 2013 £000s £000s Retained profits 840 690 Total equity 1,380 1,140 Notes:
1 Of which trade receivables: 135 85 2 Of which trade payables: 60 90 3 Long-term debt (for gearing calculation) 580 409 4 No. of equity shares issued at year-end (’000) 700 600 5 Assume stock market price (p) 135 100 Tibberton plc Cash flow statement for the year to 30 September 2014 2013 £000s £000s Cash flows from operating activities 174 118 Interest received 13 35 Interest paid (32) (12)
(19) 23 Taxation paid (50) (35)
Net cash from operating activities 105 106 Cash flows from investing activities Purchase of non-current assets (368) (200)
Proceeds from sale of non-current assets (24) (80)
Net cash used in investing activities (344) (120)
Cash flows from financing activities Issue of equity share capital 90 20 New long-term loans 300 50 Repayments of long-term loans (80) (20)
Equity dividends paid (42) (30)
Net cash from financing activities 268 20 Net increase in cash and cash equivalents 29 6