FINANCIAL DECISION MAKING

Case Study 1

Pierrodel SpA (Pierrodel) is a long-established Italian company, selling high quality gearboxes to the automotive industry throughout Europe. Revenue and profit growth have been strong over the past few years, and the board of directors has been investigating various plans for further sustainable growth.

Youu bought shares in the company at ? 7.50 per share a year ago on the recommendation of a business colleague. In conversations with other colleagues you discover that many of them were delighted with their total shareholder returns in other companies over the last year. When looked at together, your colleagues' total shareholder returns averaged out at just over 5.5%.

This is the first set of financial statements that you have seen since buying your shares and the price of the share on 31 May 2021 was ?7.75. The price today has risen to ?8.00.

Pierrodel's Draft Statement of Financial Position at 31 May 2021 and its Draft Income Statement for the year ended 31 May 2021 are summarized below:

Statement of Financial Position as at 31 May 2021 Em Em Non-current assets 44.0 Current assets: Inventory 22.0 Accounts receivable 9.0 Cash 5.0 36.0 Total assets 80.0 Equity and liabilities Issued share capital (nominal value per share 0.10) 4.0 Share premium 4.0 Profit and loss reserve 36.0 44.0 Non-current liabilities: 10% bond (redeemable 2023) 8.0 12% 4-year bank loan - portion repayable 2023-2025 3.0 11.0 Current liabilities: Bank overdraft (3% interest) 8.0 12% 4-year bank loan - portion repayable 2022 1.0 Accounts payable 16.0 25.0 Total equity and liabilities 80.0Inventory days Inventory Cost of sales - X 365 Debtors days Trade receivables -x 365 Revenue Trade debtors x 365 Revenue Creditors days Trade payables - x 365 Purchases Trade creditors x 365 Purchases If 'Purchases' figure not available, use 'Cost of sales'. Financial gearing (%) Long-term debt Long-term debt + Shareholders equity - x 100 Interest cover (times) Operating profit Interest charges Earnings per share (EPS) Profit after taxation Number of ordinary shares in issue Price / earnings ratio (PIE) Share price Earnings per share Earnings yield Earnings per share Share price Dividend per share (DPS) Total dividends for the period Number of ordinary shares in issue Dividend cover Profit after taxation Total dividends for the period Dividend payout (%) Total dividends for the period . x 100 Profit after taxation or DPS EPS - x 100 Dividend yield Dividend per share Share priceFormula Sheet for Financial Decision Making Financial ratios Gross margin (%) Gross profit x 100 Revenue Operating margin (%) Operating profit x 100 Revenue Return on capital employed (%) Operating profit - x 100 Shareholders equity + Long-term debt Return on equity (%) Profit after taxation - x 100 Shareholders equity Return on total assets (%) Profit after taxation -x 100 Total assets Asset turnover Revenue Total assets Current ratio Current assets Current liabilities Quick test (acid ratio) Current assets - Inventory Current liabilities Working capital turnover Revenue Net working capital Inventory turnover Cost of sales InventoryIncome Statement for the year ended 31 May 2021 Em Revenue 125.0 Cost of sales 75.0 Gross profit 50.0 Depreciation 5.0 Operating expenses 27.0 Operating profit 18.0 Interest 1.3 Profit before tax 16.7 Tax (at 30%) 5.0 Profit after tax 11.7 Dividends 4.7 Retained earnings 7.0Revenue growth 20% Gross margin 39% Working capital cycle 30 days Financial gearing 25%. PE ratio 29