Case study: Smart Shoes Ltd Smart Shoes Ltd is a well-established, listed South African fashion retail chain store. Smart Shoes Ltd sells a variety of affordable fashionable shoes aimed at the young professional market. Smart Shoes Ltd also exports shoes all over the globe and mostly their clients pay for the goods in US Dollars. The companys financial statements for the current year ended 30 June 2023 have just been finalized, a gruelling process involving a large finance function and the group auditors. It has been a challenging year for Smart Shoes Ltd. In March 2020, the country entered a national lockdown due to the COVID-19 international pandemic and many companies' operations were negatively impacted, with some even closing down. Smart Shoes Ltd also closed its doors during the lockdown period and experienced financial struggles as a result. They also couldnt make any exports since their suppliers couldnt supply any shoes as manufacturing had come to a halt. Now that the financial statements had been finalized, the next step was for Mrs. Peter (CFO of Smart Shoes Ltd) to make sense of the information for users of the financial statements, including shareholders. Mostly, Mrs. Peter was looking to make sense of the numbers for herself. She wanted to better understand the companys financial health, particularly its profitability, efficiency, and liquidity, given the significant events that had transpired. Despite those events, she believed that Smart Shoes Ltd was still a financially sound company. However, she needed more analysis to understand if this is still the case. You have recently been employed within the finance function of Smart Shoes Ltd as a strategic financial analyst. Mrs. Peter has heard of your ability to not just read the numbers but interpret them and communicate their message. She has also heard that you recently completed your PGDip at the JBS, where you successfully completed an accounting & financial management module which emphasized the language of accounting. Smart Shoes Ltd financial indicators 2023 2022 Solvency ratio 3.0 : 1 3.2 : 1 Current ratio 3.8 : 1 3.0 : 1 Acid-test ratio 0.6 : 1 0.6 : 1 Rate of stock turnover 3.0 4.1 Trading stock deficit as a % of cost of sales 3% 1% Stock holding period 120 days 90 days Credit terms granted by creditors 60 days 60 days Debtors average collection period 28 days 35 days Return on shareholders equity: after tax 16% 18% Return on shareholders equity: before tax 22% 26% Earnings per share 51 cents 63 cents Dividends per share 12 cents 5 cents Change in total sales 17% decrease 10% increase Gross profit on cost of sales 75% 67% Gross profit on sales 42% 40% Net profit after tax on sales 11% 14% Operating expenses on sales 37% 30% Operating profit on sales 15% 20% Return on total capital employed 26% 30% Debt/equity ratio 0.6 : 1 0.3 : 1 Interest rate on long-term loans 14% 12% Net asset value per share 310 cents 380 cents Market price per share 330 cents 390 cents Sales R3 154 000 R3 800 000

You are provided with the financial indicators calculated from the financial statements of Smart Shoes Ltd for the past two years ended 30 June 2023. The business uses the perpetual inventory system to value stock and a gross profit markup of 75% on cost. REQUIRED:

Explain the answers to each of the following questions and quote the actual ratios / percentages from the above list to support your answers.

1.1 Should the directors be satisfied with the liquidity of the business and the control of stock?

1.2 Should the directors be satisfied with operating activities as reflected on the Income statement?

1.3 Should the shareholders be satisfied with the returns, earnings, dividends and share price?

1.4 Mrs Peter wants to better understand the companys financial health, particularly its profitability, efficiency, and liquidity, given the significant events that have transpired. Despite those events, she believes that Smart Shoes Ltd is still a financially sound company. After you have done the analysis, comment on Mrs Peter`s belief about the soundness of the financial statements.