Case study:

Berts Bikes and Tobys Tyres Berts Bikes and Tobys 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: Evaluate the profitability, operational management, financial management and investment management of the two companies using the information provided in Figures 1, 2 and 3. Based on your answer in (1) above, write a report that shows a comparative analysis of the performance of the two companies. Assume that the directors of Berts Bikes intend to recommend a dividend of $87 000, and the directors of Tobys Tyres intend to recommend a dividend of $241 500. Comment on the directors intention. Assume that Tobys Tyres values its land and buildings at fair value and made an upwards fair value adjustment of $300 000 last year. Berts 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.Berts Bikes and Tobys Tyres basic comparison Berts Bikes Tobys Tyres Par value of shares $1 $2 Share price $2.23 $4.50 EPS 29 cents 98.6 cents Figure 2. Berts Bikes and Tobys Tyres balance sheets Berts Bikes Tobys 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. Berts Bikes and Tobys Tyres Income statement Berts Bikes Tobys 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