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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)

Required:

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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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