Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2007 and 2008 are as follows:

Income statements for the year ended 30 June 2007 2008 £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 Tax (80) (48)
Profit for the year 154 111 Statements of financial position (balance sheets) as at 30 June 2007 2008 £000 £000 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 Ordinary share capital of £1 (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 Tax due 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 2007 and 2008, respectively.
Required:

(a) Calculate the following financial ratios for both 2007 and 2008 (using year-end figures for balance sheet items):
(i) return on capital employed (ii) operating profit margin (iii) gross profit margin (iv) current ratio (v) acid test ratio (vi) settlement period for trade receivables (vii) settlement period for trade payables (viii) 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.

The financial statements for Harridges Ltd are given below for the two years ended 30 June 2007 and 2008. Harridges Limited operates a department store in the centre of a small town.
Income statement for the years ended 30 June 2007 2008 £000 £000 Sales revenue 2,600 3,500 Cost of sales (1,560) (2,350)
Gross profit 1,040 1,150 Wages and salaries (320) (350)
Overheads (260) (200)
Depreciation (150) (250)
Operating profit 310 350 Interest payable (50) (50)
Profit before taxation 260 300 Tax (105) (125)
Profit for the year 155 175 Statement of financial position (balance sheet) as at 30 June 2007 2008 £000 £000 Non-current assets Property, plant and equipment 1,265 1,525 Current assets Inventories 250 400 Trade receivables 105 145 Cash at bank 380 115 735 660 Total assets 2,000 2,185 Equity Share capital: £1 shares fully paid 490 490 Share premium 260 260 Retained earnings 350 450 1,100 1,200 Non-current liabilities Borrowings – 10% loan notes 500 500 Current liabilities Trade payables 300 375 Other payables 100 110 400 485 Total equity and liabilities 2,000 2,185 Dividends were paid on ordinary shares of £65,000 and £75,000 in respect of 2007 and 2008, respectively.

Required:

(a) Choose and calculate eight ratios that would be helpful in assessing the performance of Harridges Ltd. Use end-of-year values and calculate ratios for both 2007 and 2008.

(b) Using the ratios calculated in

(a) and any others you consider helpful, comment on the business’s performance from the viewpoint of a prospective purchaser of a majority of shares.