Brenda is considering an investment in the ordinary shares of either Baker plc or Grant plc. Both companies operate in the same sector of industry and both prepare accounts to 30 September each year. Financial statements for the year to 30 September 2018 are shown below.

Statements of comprehensive income for the year to 30 September 2018.

Statements of financial position as at 30 September 2018.

The following information is also available:

1. For both companies, all purchases and sales are made on credit terms.

2. During the year to 30 September 2018, Baker plc paid dividends of £180,000 and Grant plc paid dividends of £600,000.

3. Each company's issued share capital consists of 6 million ordinary shares of £1 each. At the close of business on 30 September 2018, the market price of an ordinary share in Baker plc was £1.65 and the market price of an ordinary share in Grant plc was £2.40.

Having examined the financial statements of the two companies, Brenda is inclined to invest in the shares of Baker plc. Her reasons for this view are that Baker plc has higher turnover, higher operating profit and greater assets than Grant plc. The shares of Baker plc are also cheaper.

Required:

(a) In so far as the information given permits, compute the following ratios for Baker plc and Grant plc:

• Return on capital employed.
• Earnings per share.
• Price earnings ratio.
• Current ratio.
• Quick ratio (acid test).
• Trade payables payment period.
• Capital gearing ratio.
• Dividend yield.

(b) Ratios for the two companies based upon the financial statements for the previous year (i.e. the year to 30 September 2017) were as follows:

Taking into account these ratios and those which you have calculated for the year to 30 September 2018, advise Brenda which of the two companies seems to be the better investment. Give reasons for your advice.

(c) Identify three types of further information which should be obtained before a final investment decision is made. 

(CIPFA)

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Baker plc Grant plc £000 12,260 8,680 £000 Sales revenue 15,160 10,720 Cost of sales 3,580 1,620 Gross profit Operating expenses 4,440 2,160 Operating profit before interest and taxation Interest payable 1,960 2,280 520 40 Profit before taxation 1,760 440 1,920 480 Тахation Profit after taxation 1,320 1,440 Baker plc Grant pic £000 £000 Assets Non-current assets 13,120 8,480 Current assets 1,260 1,360 280 2,900 Inventories 1,580 1,720 Trade receivables Bank balance 3,300 16,420 11,380 Equity Share capital Retained earnings 6,000 3,880 6,000 3,440 9,880 9,440 Liabilities Non-current liabilities 3,500 Long-term loans Current liabilities 500 Trade payables 1,920 960 Тахation 440 480 Bank balance 680 3,040 1,440 16,420 11,380