2. XYZ Ltd is looking for long-term funding and has submitted an application to a bank requesting a loan of $50 million. You work for the bank and have been asked to perform a review on the financial statements of XYZ. You have also been asked to provide an initial recommendation as to whether or not this application should proceed further.

The statement of financial position as at 30 June 2020 and its comparative is shown below:

2020 2019

$m $m

ASSETS

Non-current assets

Property, plant and equipment 96 83

Investment in associate 27 -

Available for sale investment 30 25

153 108

Current assets

Inventories 29 13

Receivables 49 27

Cash and cash equivalents - 5

78 45

Total assets 231 153

EQUITY AND LIABILITIES

Equity

Share capital ($1 shares) 15 15

Share premium 5 5

Revaluation reserve 10 -

Other reserves 12 8

Retained earnings 80 68

Total equity 122 96

Non-current liabilities

Long-term borrowings 70 40

Deferred tax 6 2

76 42

Current liabilities

Trade and other payables 20 15

Short-term borrowings (overdraft) 3 -

33 15

Total liabilities 109 57

Total equity and liabilities 231 153

The statement of comprehensive income for the year ended 30 June 2020 is shown below together with its comparative:

2020 2019

$m $m

Revenue 290 201

Cost of sales (210) (141)

Gross profit 80 60

Administrative expenses (16) (14)

Distribution costs (32) (18)

Finance costs (13) (7)

Share of profit of associate 5 -

Profit before tax 24 21

Income tax expense (7) (6)

Profit for the year 17 15

Other comprehensive income:

Revaluation gain on Property, plant and equipment 13 -

Gains on Available for sale investment 5 3

Tax effects of other comprehensive income (4) (1)

Other comprehensive income for the year, net of tax 2 14

Total comprehensive income for the year 31 17

In addition to obtaining extracts from the financial statements, below is a highlighted section of the annual report where the newly appointed Chief Executive Officer of XYZ made the following comment:

We commenced the planned expansion in the second quarter of the financial period with much success. Revenue has increased 44% in the last 12 months and profitability continues to improve with post-tax profits of $17 million in this year. During the year we acquired a strategic 35% investment in AB (Pvt) Ltd, our main supplier, and now have representation on its board. We have also invested in other non-current assets and this will ensure the expansion continues as planned.

Required

Prepare a report that analyses the financial performance and financial position of XYZ Ltd and make a recommendation, based on your analysis, as to whether the application should proceed further. (16 marks)

Briefly outline the potential limitations of performing analysis while relying on:

the financial information of XYZ Ltd from one year to another (4 marks)