Lapeng Sports Bar (Pty) Ltd (henceforth Lapeng) was purchased by a consortium of four innovative entrepreneurs (henceforth the consortium) as a going concern.

Lapeng is located in a lower to middle LSM area. The previous owner of the business sold the business because the bar had run into financial problems due to factors that he could not outright identify. Because it was his first business, he made numerous mistakes however he recently managed to turn the business around and make a small profit in the year prior to the sale to the consortium.

As part of their research on taking over Lapeng, the consortium interviewed the existing staff members made up of the barmen, two waitresses and two chefs. An existing company of bouncers would also be used going forward that was used by the previous owner. The consortium asked the employees and the bouncer what they think had resulted in the demise of the pub under the previous owner. These were some of the comments that were heard:

The owner used to run out of stock and was forced to run to a nearby pub to buy more stock at retail prices, said one staff member.

After the daily close of the business, the owner used to come back in and drink all the alcohol with his friends on a tab that was not settled most of the time, said one of the bouncers.

The consortium implemented new procedures for serving customers which had a real positive impact on the business and resulted in a lot of repeat business. A loyalty program was also implemented where regular customers are given a free drink after every 10 drinks that are purchased. This way, loyalty will be built, and customer details recorded to send personalised marketing messages to the customers.

The consortium wanted advice on how they had performed in their first year of trading especially in light of the some of the changes they had implemented. The consortium gave you, a financial management graduate, the abridged financial statements for you to analyse:

Note 1

The consortium saw the opportunity to turn the business around through changing some of the business processes and changing suppliers of all stock purchases. When the consortium took over, they found that the existing stock suppliers were slightly expensive. Minimum stock levels were also established so that stock could be ordered in time as to avoid stock outs.

Note 2

The previous owner was also the manager of Lapeng. He paid himself a salary but would also withdraw cash from the business to cover his own personal expenses. The consortium has full time jobs, therefore do not require salaries from the business.

Note 3

The consortium invested significantly in marketing to attract a new and different crowd after purchasing the business. A consultant was hired that advised the consortium on how to improve the look and feel of the pub and what marketing techniques to use to meet the desired objectives.

Note 4

Finance costs result from some interest-bearing liabilities charged at the prime rate. The Consortium purchased the pub from their own capital, of which 60% is regarded as equity and 40% as an interest- bearing shareholders loan.

Additional information:

Use a 365-day year in your calculations.

The company tax rate is 28% and is expected to remain at this rate for the foreseeable future.

All interest-bearing liabilities are charged at the prime interest rate of 9%, except for the

overdraft facility.

The overdraft facility carries interest at a rate of prime plus 5%.

The consortium managed to declare a dividend in the current year.

Required :

a) Perform a financial review of Lapeng Sports Pub based on the financial information supplied and focus on the following ratios:

Profitability:

Gross Margin (4)

Net Margin (4)

Return on Assets (6)

Return on Equity (4)

Liquidity:

Current ratio (4)

Acid-test ratio (4)

Asset management:

Days inventory on hand (4)

Debtors collection period (4)

Creditors payment period (4)

Gearing:

Debt to Equity (4)

Interest Cover (4)

b) Discuss the limitations of ratio analysis

LAPENG SPOATS PUB STATEMENT OF COMPREMENSIVE INCOME FOR THE YEAR ENDED 30 JUNE \begin{tabular}{|c|c|c|c|} \hline \multicolumn{4}{|c|}{ FOR THE YEAR ENDED 30 JUNE } \\ \hline & & R & R \\ \hline & & 2014 & 2013 \\ \hline Sales & & 3,360,000 & 2,640,000 \\ \hline Cost of sales & N1 & 560,000 & 1,320,000 \\ \hline Gross Profit & & 2,800,000 & 1,320,000 \\ \hline \multicolumn{4}{|l|}{ Expenses } \\ \hline Salaries and Wages & N2 & 300,000 & 480,000 \\ \hline Marketing Expenses & N3 & 625,000 & 250,000 \\ \hline Consulting Fees & N3 & 125,000 & - \\ \hline Insurance cost & & 189,000 & = \\ \hline \multicolumn{2}{|c|}{ Traveling and vehicle costs } & 14,000 & 19,000 \\ \hline Rent & & 306,000 & 231,000 \\ \hline \multicolumn{2}{|c|}{ Entertainment and DJs } & 180.000 & 96,000 \\ \hline \multicolumn{2}{|c|}{ Operating Profit } & 1,061,000 & 244,000 \\ \hline Finance costs & N4 & 129.600 & 5.880 \\ \hline \multicolumn{2}{|c|}{ Net Profit before tax } & 931,400 & 238,120 \\ \hline Taxation & & 260.792 & 66.674 \\ \hline \multicolumn{2}{|c|}{ Net Profit after tax } & 670,608 & 171,446 \\ \hline \end{tabular} LAPENG SPORTS PUB STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE