Self-test The following information is available for two companies engaged in a similar type of business for the year ended 31 October 2008.

Gray plc Brew plc

£ £

Turnover 900,000 1,200,000 Gross profit 360,000 540,000 Expenses 260,000 275,000 Profit before interest and taxation 100,000 265,000 Interest payable 10,000 25,000 Net profit before tax 90,000 240,000 Net profit after tax 72,000 192,000 Total capital employed 640,000 700,000

£1 ordinary shares 400,000 100,000

£1 5% debentures 200,000 500,000

£1 8% preference shares 40,000 100,000 Market price per ordinary share 1.50 2.00 Ordinary dividend 20,000 50,000 The preference share dividend is paid on time by both companies.

% %

Gross profit as a % of sales 40 45 Net profit as a % of sales 10 20 Return on capital employed 14 34 Required:

(a) Assess the relative profitability of Gray plc and Brew plc.

(b) Calculate for Brew plc: (where appropriate calculations should be made to two decimal places)
(i) earnings per share;
(ii) dividend yield;
(iii) interest cover.

(c) Assess the significance of the earnings per share for the shareholders of Brew plc.

(d) Assess two limitations of ratio analysis.
(OCR Accounting (F004) Jan 2009)