Question
Beige Ltd and Magenta Ltd are both furniture retailers in New Zealand. Beige Ltd imports furniture and then sells the furniture online via its website
Beige Ltd and Magenta Ltd are both furniture retailers in New Zealand.
Beige Ltd imports furniture and then sells the furniture online via its website and other websites such as TradeMe. It has distribution centres in Auckland and Christchurch. It has been operating for eight years with revenue growing much faster than the industry average.
Magenta Ltd was established over forty years ago. It also imports furniture, but it sells the furniture in its retail stores throughout New Zealand. Its retail stores account for over ninety percent of its sales. While online sales are growing rapidly, Magneta Ltds revenue has declined by 10% over last four years.
Selected financial data for the financial year ended 30 June 2021 from the two companies is presented below:
Selected financial data | Beige Ltd | Magenta Ltd |
(in thousands) | (in thousands) | |
Income statement |
|
|
Sales revenue | $39,176 | $217,799 |
Cost of sales | 27,246 | 171,799 |
Other income | 712 | 2,013 |
Selling and administrative expenses | 9,962 | 36,173 |
Interest expense | 464 | 1,326 |
Income tax expense | 842 | 3,897 |
Net profit after interest and taxation | $1,374 | $ 6,854 |
Statement of financial position as at 30 June 2021 (end of the period) | ||
Current assets | $ 9,648 | $ 28,246 |
Non-current assets | 14,506 | 55,205 |
Total assets | $24,154 | $ 83,451 |
Current liabilities | 7,054 | 27,282 |
Non-current liabilities (long-term debt) | 9,240 | 21,067 |
Total equity (shareholder capital, retained earnings and reserves) | 7,860 | 35,102 |
Total liabilities and equity | $24,154 | $ 83,451 |
Selected balances as at 1 July 2020 (start of the period) | ||
Total assets | $19,490 | $ 78,130 |
Total equity | 6,519 | 31,343 |
Current liabilities | 6,301 | 29,949 |
Total liabilities | 12,971 | 46,787 |
Other data for 2021 |
|
|
Average debtors (net) | $ 1,916 | $ 1,884 |
Average creditors (net) | 6,627 | 28,115 |
Average inventory | 4,349 | 22,028 |
Credit purchases | $27,899 | $167,132 |
Net cash from operating activities | 1,992 | 10,260 |
Number of employees | 63 | 512 |
Financial ratios for 2021 |
|
|
Gross profit margin | 30.45% | (i) |
Operating profit margin | 6.84% | 5.55% |
Return on equity | 19.11% | (ii) |
Return on capital employed | 17.70% | 22.69% |
Average inventory turnover (days) | 58.26 days | (iii) |
Average debtors settlement (days) | 51.00 days | 31.57 days |
Average creditors settlement (days) | 86.70 days | (iv) |
Sales revenue to capital employed | 2.29x | 3.88x |
Sales revenue per employee | $621,841.27 | (v) |
Current ratio | 1.37 to 1 | (vi) |
Acid test (or quick) ratio | 0.82 to 1 | 0.26 to 1 |
Gearing ratio | 54.04% | (vii) |
Interest cover (or times interest earned) ratio | 5.76x | (viii) |
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(b) Compare and contrast the financial performance of the two companies: Beige Ltd and Magenta Ltd. Be sure to comment on profitability, efficiency, liquidity and gearing. Hint: Write no more than two (2) paragraphs.
(8 marks)
(c) Imagine you are the Chief Executive of Magenta Ltd and you wish to improve the companys performance. Identify two (2) pieces of additional information that can be easily collected and, you believe, would be very useful in undertaking a complete analysis of the two companies. For each piece of additional information, briefly explain why it is useful for decision-making. Hint: A brief explanation means one or two sentences
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