Case study 1- Financial Statement Analysis

Township Limited was founded in the beginning of 2020 and currently operates one brewery in Johannesburg. Township has a portfolio of three beer brands and one fruit alcoholic beverage.

You recently read that beer now represents almost 60% of the total liquor market in South Africa, up from about 38% in 1980. The Fruit Alcoholic Beverage section is small as a percentage of the total liquor market (about 5%) but it is growing at about 13% per annum. T ownship brands are represented as follow in the alcoholic market:

Category Township Brand Competitors

Category	Township Brand	Competitors
Mainstream Segment	Mahafhe	Castle Lager, Carling Black Label
Fast Growing Worthmore Segment (Premium Segment)	Tshibuku	Pilsner Urquell, Heineken
Light Beer Segment	Mkomboti	Sterling Light, Windhoek Light
Fruit Alcoholic Beverages Section	Mukumbi (Amarula)	Brutal Fruit, Bacardi Breezer

A close friend recently informed you that a guy who studies with him reckons that Township Limited is growing at a rapid pace and he thinks that it is a very good time to invest in this company. He guarantees that you can double your money in four years with this share. Your close friend comes from a rich family and he has some extra cash. He wants to take advantage of this opportunity and approached you for some financial advice.

Township Limited

Statement of Financial Position as at 31 December

			2020	2021
Non-current assets			9,500,000	12,350,000
Plant & Equipment as Cost			10,000,000	13,000,000
Less: Accumulated depreciation			(500,000)	(650,000)
Total Current Assets			3,000,000	3,200,000
Inventory			1,450,000	2,200,000
Accounts Receivable			700,000	1,000,000
Cash & Cash Equivalents			850,000	0
Total Assets			12,500,000	15,550,000
Total equity			5,735,000	8,050,000
Share Capital			5,000,000	7,000,000
Retained Earnings			735,000	1,050,000
Non-Current Liabilities			4,360,000	4,850,000
Long Term Debt (10%)			4,360,000	4,850,000
Current Liabilities			2,405,000	2,650,000
Accounts Payable			2,065,000	1,250,000
Bank Overdraft (15%)			0	980,000
Current Portion of long term debt			340,000	420,000
Total Equity & Liabilities			12,500,000	15,550,000

Statement of Financial Performance For the years ended 31 December

		2020	2021
Revenue		14,900,000	18,300,000
Cost of Goods Sold		8,940,000	11,400,000
Gross Profit		5,960,000	6,900,000
Operating Expenses		3,920,000	5,240,000
Depreciation		500,000	650,000
Profit before financing costs and tax		1,540,000	1,010,000
Financing Costs		490,000	560,000
Profit before Taxes		1,050,000	450,000
Income Tax Expenses		315,000	135,000
Profit for the period		735,000	315,000

Gross profit margin	27.0%
Profit margin	8.4%
Return on Equity	14.0%
Debtors Collection Period	35
Days Payables (Credit Purchases)	42
Inventory Days	52
Times Financing Costs Earned	4.0
Current Ratio	2.0
Acid-Test Ratio	1.0

Notes:

All ratios are based on year-end (rather than average) figures. Ignore all VAT implications.

Assume a Tax Rate of 30%

Net Assets=Total assets minus non-interest-bearing current liabilities

All purchases and sales are on credit.

Assume 365 days in a year.

1.1 Calculate the financial ratios for the year ended 2020 by using the financial statements of Township Limited (Use the same financial ratios as given in the industry table above).(9 marks)

1.2 For each ratio calculated under question 1 above, briefly explain what it is intended to measure in your own words. (9 marks)

1.3 In your own words, what is the motive behind the financial statement analysis which you have done under 1 and 2 above. (2 marks)