Electrolux Ltd is an importer and wholesaler of mobile phone accessories and related goods. Its summarized financial statements for the year ended 31 March 2020 (and 2019 comparatives) are as follows:

Statements of Profit or Loss and Other Comprehensive Income for the years ended 31 March:

	2020	2019
	Rs million	Rs million
Revenue	275	150
Cost of Revenue	(100)	(30)
Gross profit	175	120
Operating costs	(50)	(30)
Investment income	12	12
Finance costs	(50)	(15)
Profit (loss) before taxation	87	87
Income tax expense	(10)	(10)
Profit for the year	77	77
Other comprehensive income: (amounts that will not be reclassified to profit or loss)
Fair value gains on equity investments	30	5
Revaluation losses on property plant & equipment	(45)	-
Total comprehensive income (loss) for the year	62	82

Statements of Financial Position as at 31 March:

	2020	2019
	Rs million	Rs million
Assets
Non-current assets
Property, plant and equipment	1,198	677
Intangible asset franchise	20	-
Equity investments designated fair value through OCI	170	140
	1,388	817
Current assets
Inventory	40	19
Trade receivables	52	28
Bank	40	10
	132	57
Total assets	1,520	874
Equity and liabilities
Equity:
Equity shares of Rs 1 each	180	120
Share premium	60	--
Other components of equity	40	55
Retained earnings	400	350
	680	525
Non-current liabilities:
Bank loan	750	300
Current liabilities:
Trade payables	30	9
Other accruals	50	30
Current tax payable	10	10
	90	49
Total equity and liabilities	1,520	874

On 1 April 2019, the directors of Electrolux Ltd decided to expand the business by purchasing a franchise to import and distribute additional lines of products. The franchise cost Rs 25 million and had a five-year life. However, it can be renewed at an additional fee, subject to satisfactory performance.

The new business required significant investment in warehouses and distribution vehicles. To finance this expansion, additional shares were issued and the existing bank loan was replaced by a bigger one. The bank charged a higher interest rate on the new loan due to the higher gearing ratio that resulted from the increased debt level. The new capital was raised on 1 April 2019, and the loan is repayable on 31 March 2028.

During a board meeting held to review the years performance, some of the directors expressed dissatisfaction with the financial results, noting that despite significantly increased revenue, profit for the year posted zero growth, and total comprehensive income decreased by Rs 20 million.

The finance director agreed that there was a disappointing outcome for the year ended March 2020. He presented some information that he felt might be helpful in analysing the cause of the poor results and likely trends in the future performance of the business. He also made the following points:

• In the year ended 31 March 2020 the pre-existing product lines (which excluded the expansion) reported revenue of Rs 175 million, cost of Revenue of Rs 33 million and operating expenses of Rs 28 million. (175 33 28)

• There had been production problems with the manufacturer of some of the new products, leading to a shortage of supply. Leonard Plc had to source product from another supplier at a higher cost to meet contractually agreed deliveries. This added Rs 22 million to cost of Revenue in the period. These problems have now been resolved and are not expected to recur.(to add 22 in the cost of sales)

• Dividends of Rs 0.15 per share were paid on 31 March 2020, in accordance with a previous board decision. This was the same amount per share as the previous year.

REQUIRED:

Produce a report to review the concerns of the dissatisfied directors using appropriate ratios and the information above.

Your report should make recommendations, where appropriate, to address these concerns.

It should also include a discussion on the advantages and disadvantages of ratio analysis