Amekom Plc is a public company that would like to acquire (100% of) a suitable private company. It has obtained the following draft financial statements for two companies, Bordiem Plc and Apim Plc. They operate in the same industry and their managements have indicated that they would be receptive to a takeover.

Statements of Profit or Loss for the year ended 31st December, 2020

Bordiem Plc Apim Plc

GH000

GH000

Revenue

12,000

20,500

Cost of sales

(10,500)

(18,000)

Gross profit

1,500

2,500

Operating expenses

(240)

(500)

Finance costs loan

(210)

(300)

overdraft

nil

(10)

lease

nil

(290)

Profit before tax

1,050

1,400

Income tax expense

(150)

(400)

Profit for the year

900

1,000

Note: dividends paid during the year

250

700

Statements of financial position as at 31st December, 2020

Assets

Non-current assets

Freehold factory (note (i))

4,400

nil

Owned plant (note (ii))

5,000

2,200

Leased plant (note (ii))

nil

5,300

Current assets

9,400

7,500

Inventory

2,000

3,600

Trade receivables

2,400

3,700

Bank

600

nil

----------

----------

5,000

7,300

Total assets

14,400

14,800

Equity and liabilities

Equity shares of GH1 each

2,000

2,000

Property revaluation reserve

900

nil

Retained earnings

2,600

800

Non-current liabilities

5,500

2,800

Finance lease obligations (note (iii))

nil

3,200

7% loan notes

3,000

nil

10% loan notes

nil

3,000

Deferred tax

600

100

Government grants

1,200

nil

--------

----------

4,800

6,300

Current liabilities

--------

---------

Bank overdraft

nil

1,200

Trade payables

3,100

3,800

Government grants

400

nil

Finance lease obligations (note (iii))

nil

500

Taxation

600

200

4,100

5,700

------------

----------

Total equity and liabilities 14,400 14,800

Notes

(i) Both companies operate from similar premises. (ii) Additional details of the two companies plant are:

Bordiem Plc Apim Plc

GH000 GH000

Owned plant cost 8,000 10,000

Leased plant original fair value nil 7,500

There were no disposals of plant during the year by either company.

The interest rate implicit within ABC Plcs finance leases is 75% per annum. For the purpose of calculating ROCE and gearing, all finance lease obligations are treated as long-term interest-bearing borrowings:

The following ratios have been calculated for Bordiem Plc and can be taken to be correct:

Return on year end capital employed (ROCE) 148%

(capital employed taken as shareholders funds

plus long-term interest bearing borrowings see note (iii) above)

Pre-tax return on equity (ROE)

191%

Net asset (total assets less current liabilities) turnover

12 times

Gross profit margin

125%

Operating profit margin

105%

Current ratio

12:1

Closing inventory holding period

70 days

Trade receivables collection period

73 days

Trade payables payment period (using cost of sales)

108 days

Gearing (see note (iii) above)

353%

Interest cover

6 times

Dividend cover

36 times

You are required to:

Calculate for Apim Plc the ratios equivalent to all those given for Bordiem Plc above.

Assess the relative performance and financial position of Bordiem Plc and Apim Plc for the

year ended 30 September 2020 to inform the directors of Amekom Plc in their acquisition decision.

Explain the limitations of ratio analysis and any further information that may be useful to the

directors of Amekom Plc when making an acquisition decision.