Saddam Ltd is considering the possibility of diversifying its operations and has identified three firms in the same industrial sector as potential takeover targets. The following information in respect of the companies has been extracted from their most recent financial statements.

Ali Ltd Baba Ltd Camel Ltd ROCE before tax % 22.1 23.7 25.0 Net profit % 12.0 12.5 3.75 Asset turnover ratio 1.45 1.16 3.73 Gross profit % 20.0 25.0 10.0 Sales/non-current assets 4.8 2.2 11.6 Sales/current assets 2.1 5.2 5.5 Current ratio 3.75 1.4 1.5 Acid test ratio 2.25 0.4 0.9 Average number of weeks’

receivables outstanding 5.6 6.0 4.8 Average number of weeks’ inventor y held 12.0 19.2 4.0 Ordinar y dividend % 10.0 15.0 30.0 Dividend cover 4.3 5.0 1.0 Required:

(a) Prepare a report for the directors of Saddam Ltd, assessing the performance of the three companies from the information provided and identifying areas which you consider require further investigation before a final decision is made.

(b) Discuss briefly why a firm’s balance sheet is unlikely to show the true market value of the business.
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