Bert's Bikes and Toby's Tyres are two small retail outlets operating in the Adelaide suburb of Baylands. Both were set up as small listed companies by two brothers 20 years ago, and have operated more or less successfully since. Recently, the brothers have both realised that the markets for bicycles and Tyres in their area have changed, for better and for worse.

The market for bicycles has been affected by technological changes in bike design and renewed interest from those who follow international bike races such as the Tour de France and Giro Italia. However, many sales are made online, and Bert wonders if the ability of a small suburban shop to keep up with trends and reach its potential market has declined.

The market for Tyres has similarly been impacted by technology, and is also facing increased competition as Tyres are increasingly available from discount outlets. A small suburban shop faces the challenge of keeping sufficient stock across the full range, without incurring disproportionate storage costs. Given growing environmental and climate concerns, Toby wonders if specialising in motor vehicle accessories has any long-term future.

 

All sales of the businesses are made electronically, and both businesses expect accounts to be settled via the relevant banks within 45 days.

 

 

Required:

1. Evaluate the profitability, operational management, financial management and investment management of the two companies using the information provided in Figures 1, 2 and 3.

 

1. Based on your answer in (1) above, write a report that shows a comparative analysis of the performance of the two companies.

 

1. Assume that the directors of Bert's Bikes intend to recommend a dividend of $87 000, and the directors of Toby's Tyres intend to recommend a dividend of $241 500. Comment on the directors' intention.

 

1. Assume that Toby's Tyres values its land and buildings at fair value and made an upwards fair value adjustment of $300 000 last year. Bert's Bikes values its land and buildings at historic cost. What is the effect of such varying treatment of plant assets on the overall performance of each of the companies. Support your answer with examples.

 

Additional information (figure 1-3)

 

Figure 1. Bert's Bikes and Toby's Tyres basic comparison

	Bert's Bikes	Toby's Tyres
Par value of shares	$1	$2
Share price	$2.23	$4.50
EPS	29 cents	98.6 cents

 

 

Figure 2. Bert's Bikes and Toby's Tyres balance sheets

	Bert's Bikes		Toby's Tyres
	$000	%	$000	%
Current assets
Cash and cash equivalents	140	5.6	90	2.26
Accounts receivable	460	18.4	1220	30.5
Inventories	680	27.2	1250	31.25
Total current assets	1280	51.2	2560	64.0
Non-current assets
Plant, property and equipment	990	39.6	1090	27.25
Intangible assets	50	2.0	200	5.0
Other financial assets	180	7.2	150	3.75
Total non-current assets	1220	48.8	1440	36.0
Total Assets	2500	100.0	4000	100.0
Current liabilities
Accounts payable	350	14.0	700	17.5
Line of credit	50	2.0	200	5.0
Short term loans	200	8.0	250	6.25
Other financial liabilities	50	2.0	50	1.25
Total current liabilities	650	26.0	1200	30.0
Non current liabilities
Borrowings	500	20.0	1250	31.25
Provisions	100	4.0	50	1.25
Total non-current liabilities	600	24.0	1300	32.5
Total liabilities	1250	50.0	2500	62.5
Net Assets	1250	50.0	1500	37.5
Equity
Contributed equity	600	24.0	700	17.5
Reserves	-	-	400	10.0
Retained earnings	650	26.0	400	10.0
Total equity	1250	50.0	1500	37.5

 

 

Figure 3. Bert's Bikes and Toby's Tyres Income statement

	Bert's Bikes		Toby's Tyres
	$000	%	$000	%
Revenue from sales	5000	100.0	7500	100.0
Cost of sales	4050	81.0	5900	78.7
Gross profit	950	19.0	1600	21.3
Less expenses
Selling	400	8.0	700	9.3
General and administration	200	4.0	200	2.7
Total expenses	600	12.0	900	12.0
Earnings before interest and tax	350	7.0	700	9.3
Less interest	60	1.2	125	1.6
Profit before income tax	290	5.8	575	7.7
Less tax at 40%	116	2.3	230	7.7
Profit for the period	174	3.5	345	4.6