1. It is often argued that historical cash flow is more useful in appraising a company than historical profit, particularly because cash flows are factual and do not involve the exercise of judgement.

Required:

Explain FOUR arguments against this view.

2. SQM Ltd and SanTee Ltd are two companies in the Textile Industry. The following are financial ratios computed by the financial analysts as part of analyzing companies’ performance industry by industry.

Ratios of companies for the year ended 31 December 2020

SQM Ltd SanTee Ltd

Return on capital employed 24.10% 30%

Net assets turnover 1.9 times 2.5 times

Gross profit margin 35% 20%

Net profit (before tax) margin 10.50% 38%

Current ratio 1.0:1 2.0:1

Quick ratio 0.8:1 1:01

Inventory holding period 60 days 90 days

Receivables collection period 58 days 60 days

Payables payment period 50 days 50 days

Debt to equity 50% 30%

Dividend yield 3% 2%

Dividend cover 2 times 1.5 times

Required:

Explain THREE problems that are inherent when ratios are used to compare the performance

of two companies even in the same industry.

c) Write a report analyzing and comparing the financial performance of SQM Ltd and SanTee Ltd. The report should cover the Operating Performance, Liquidity, Gearing

and Investment Ratios.