Awen Ltd is a manufacturer of machine tools and is at present contemplating an issue of GH2,000,000 10% debenture stock (2020) in order to assist the remodelling of its present production facilities. Some shareholders are reluctant to approve additional long-term debt due to the fact that the machine tools industry is subject to wide-ranging fluctuations in sales and profits.

A group of shareholders have approached you and asked you to comment on the performance of Awen Ltd as compared with industrial averages and to make recommendations as to whether they should approve the proposed additional long-term debt.

Abbreviated financial statements and typical ratios for firms in the machine tools industry are as follows:

Awen Ltd

Statement of Comprehensive Income for the year ended 31/12

2005 2004

GH000GH000

Sales23,50020,500

Cost of Sales16,00014,000

Gross profit 7,500 6,500

Selling expenses(2,000)(1,900)

Administrative expenses(3,000)(2,600)

Operating profit 2,500 2,000

Interest cost (500) (300)

Profit before tax 2,000 1,700

Taxation(1,200)(1,020)

Profit after tax 800 680

Income surplus a/c 6,365 6,090

Awen Ltd

Statement of Financial Position as at 31/12

20052004

GH000GH000

Non Current assets tangible6,3155,600

Intangible 800 750

7,1156,350

Current assets:

Stock5,1003,200

Debtors2,9001,900

Prepaid expenses 100 100

Cash & Bank 600 590

8,7005,790

Total Assets 15,815 12,140

Capital & Liabilities:

Stated capital 350 350

Income surplus6,3656,090

8% Debenture stock (2006)5,5003,300

12,2159,740

Current Liabilities3,6002,400

15,815 12,140

Typical industrial ratios for 2005 are

Gross profit margin34%

Current ratio2.5:1

Quick ratio1.2:1

Average age of debtors30 days

Stock turnover5 times

Interest earned8 times

Debt/Equity ratio0.7:1

Net profit before tax to net assets19.5%

You are required:

(a) Compute the above ratios for Awen Ltd for both 2004 and 2005, taking into account the stock valuation at 31/12/2003 of GH 2,500,000 and Debtors balance on the same date of GH 1,700,000. [10 marks]

(b) In a report format, comment on the performance of Awen Ltd and recommend a course of action to the group of shareholders. [15 marks]