Lucky Australia Pty Ltd has been a customer of Bank of Australia since 2001. The industrial operations of this designer furniture manufacturing company are based in Fyshwick Industrial Area, Canberra. Mark and Julie Cotter own Lucky. The structure is a standard two-dollar company, with the Cotters owning one share each. Mark is a qualified carpenter and Julie handles administration and sales. Both are aged in their early 50s. When they started the company in 2001, they made standard furniture for the household market. They initially faced hardship as the brand was not known. But over the years, the brand got well established and with the advent of e-business, they have expanded multi-fold supplying designer furniture throughout Australia. The business currently employees 15 staff. They have two sons. Simon helps in business and contributed equity equal to that of his father and father's wife while Peter (son of Mark and Julie) is studying at the university. The business produces a range of designer furniture that include, dining table, chairs, sofa, ensemble, and study desk. Given their reputation in the market place, they are considering expanding in the office furniture line. The financial statements of Lucky Australia Pty Ltd were as below:

 

You have been given the following additional information (a) all sales were made from the sales outlet specially created at the company's warehouse (b) the purchase prices have remained constant during the period under question (c) the inventory as of 01 January 2016 was A$20,000,000 (d) the private loan was obtained on 1 January 2016 and addition to non-current assets was made on the same date. Please note that the ratios relating to capital employed would be computed from the capital at the end of the year. Before making an onsite visit and setting up a meeting with Mark, your manager has asked you to (a) compute the relevant financial ratios that would help him understand the financial situation of the business and (b) prepare a note to your manager evaluating the changes in the ratios over the two- year period. Please also discuss the pros and cons of the changes in the ratios.

Income statement for the year ending Cash sales Credit sales Less Cost of goods sold Less: Expenses Warehousing Transport Administration Selling Interest on private loan Balance Sheet as at the end of Non-current assets Trade debtors Cash at bank Inventory Total current assets (TCA) Trade creditors Total current liabilities (TCL) Working Capital TCA-TCL Total assets Gross Profit Long-term private loan Share capital Reserves and Surplus Liabilities + Equity Lucky Australia Pty Ltd AS '000 Net Profit 2016 15000 135000 6500 3000 9500 5500 0 2016 25000 5000 30000 60000 25000 25000 150000 118000 32000 24500 7500 15000 35000 50000 0 37500 12500 50000 2017 1600 171000 7000 5000 9500 7000 1000 2017 41000 3500 47000 91500 38000 38000 135000 149000 38000 29500 8500 20000 50350 73500 15000 37500 21000 73500