Sally Gorden seeks your assistance to decide whether she should invest in Ruby plc or Sapphire plc.

Both companies are quoted on the London Stock Exchange. Their shares were listed on 20 June 20X4 as Ruby 475p and Sapphire 480p.

The per formance of these two companies during the year ended 30 June 20X4 is summarised as follows:

698 • Interpretation Ruby plc Sapphire plc

£000 £000 Operating profit 588 445 Interest and similar charges (144) (60)

444 385 Taxation (164) (145)

Profit after taxation 280 240 Interim dividend paid (30) (40)

Preference dividend proposed (90) —

Ordinar y dividend proposed (60) (120)

Retained profit for the year 100 80 Ruby plc Sapphire plc

£000 £000 Ordinar y shares of 50p each 1,000 1,500 15% preference shares of £1 each ,600 —

Share premium account , 60 —

Profit and loss account balance ,250 ,450 17% debentures ,800 —

12% debentures — ,500 2,710 2,450 The companies have been financed on 30 June 20X4 as follows:

On 1 October 20X3 Ruby plc issued 500,000 ordinar y shares of 50p each at a premium of 20%. On 1 April 20X4 Sapphire plc made a 1 for 2 bonus issue. Apar t from these, there has been no change in the issued capital of either company during the year.

Required:

(a) Calculate the earnings per share (EPS) of each company.

(b) Determine the price/earnings ratio (PE) of each company.

(c) Based on the PE ratio alone, which company’s shares would you recommend to Sally?

(d) On the basis of appropriate accounting ratios (which should be calculated), identify three other matters Sally should take account of before she makes her choice.

(e) Describe the advantages and disadvantages of gearing.