Limetree Limited was founded by Cindy and Eugene Lemmon in 2010. The company manufactures and distributes luxury soft furnishings to the retail trade in Ireland. In common with many start-ups, the company encountered some financial difficulty in the early years. However, with the support of its bank it has managed to grow and prosper.

Its revenue and profitability levels have increased each year since 2011, helped by the demand for new houses. The company prepares its accounts to 30 June each year.

Operating results and statements of financial position to 30 June 2017 and 2018 are shown in Appendix 1. The year to 30 June 2018 was the first year since start-up that the company experienced a fall in demand, caused by the slump in demand for houses during the year.

The company’s bank manager has been receiving the monthly accounts since December 2017, when the overdraft limit of €400,000 was breached. He has asked to see the year’s accounts to 30 June 2018 by the end of July in order to assess the overall financial position of the company.

You are given the following financial indicators for companies operating in the same industry as Limetree Limited:
¢ Operating gearing 7.5 (the percentage of fixed costs relative to total costs)
* Debt/Equity 65%
¢ Return on Equity 14% (Profit after tax/Equity)
¢ Dividend Cover 2 (Profit after tax/Dividends)
¢ Interest Cover 3 (Operating profit/interest)
Requirement

(a) Calculate, in respect of Limetree Limited, the same indicators as are set out above for the industry for the years to 30 June 2017 and 2018.

(b) Using the results of your answer at (a), and from a review of the information available in Appendix I:
(i) identify matters that may be of concern to the bank manager, giving reasons for your answer;
(ii) outline the points you would make to the bank manager in support of the company’s financial performance and position.

During the years ended 30 June 2017 and 2018, €60,000 and €10,000 respectively was debited to equity in respect of dividends.

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APPENDIX I Limetree Limited SUMMARISED OPERATING RESULTS 30 June 2018 30 June 2017 000 000 Revenue Cost of sales Materials Labour Overheads Gross Profit Selling and Distribution Administration Operating Profit 7,640 8,000 (1,240) (1,380) (2,530) (2,550) (990) (950) (4,760) (4,880) 2,880 3,120 (685) (640) (1,880) (1,910) 315 570 Interest (134) (94) Profit before tax Income tax expense @ 40% 181 (72) 476 (190) Profit after tax 109 286