Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2011 and 2012 are as follows:

Income statements for the year ended 30 June 2011 2012

£000 £000 Revenue 1,180 1,200 Cost of sales (680) (750)

Gross profit 500 450 Operating expenses (200) (208)

Depreciation (66) (75)

Operating profit 234 167 Interest (–) (8)

Profit before taxation 234 159 Taxation (80) (48)

Profit for the year 154 111 CHAPTER 7 A nalysing and interpreti ng 296 fi nanci al statements Statements of financial position as at 30 June 2011 2012

£000 £000 ASSETS Non-current assets Property, plant and equipment 702 687 Current assets Inventories 148 236 Trade receivables 102 156 Cash 3 4 253 396 Total assets 955 1,083 EQUITY AND LIABILITIES Equity Ordinary share capital (£1 shares, fully paid) 500 500 Retained earnings 256 295 756 795 Non-current liabilities Borrowings – Bank loan – 50 Current liabilities Trade payables 60 76 Other payables and accruals 18 16 Taxation 40 24 Short-term borrowings (all bank overdraft) 81 122 199 238 Total equity and liabilities 955 1,083 Dividends were paid on ordinary shares of £70,000 and £72,000 in respect of 2011 and 2012, respectively.

Required:

(a) Calculate the following financial ratios for both 2011 and 2012 (using year-end figures for statement of financial position items):

1 return on capital employed 2 operating profit margin 3 gross profit margin 4 current ratio 5 acid test ratio 6 settlement period for trade receivables 7 settlement period for trade payables 8 inventories turnover period.

(b) Comment on the performance of Threads Limited from the viewpoint of a business considering supplying a substantial amount of goods to Threads Limited on usual trade credit terms.

AppendixLO1