Question 1

ABD Plc. is a wholesale distributor of security cameras for the large industrial complexes. The company is considering expanding its business and comparing between two potential opportunities for investment in either Watch Ltd or Keep Ltd. You as Finance Director of ABD Plc. have asked your assistant to prepare a report that summarises the financial aspects of the two potential investees for the last year. Your assistant has managed to obtain a number of financial ratios that can assist in the identification and interpretation of trends for each. The following ratios have been calculated for the year ended 31st December 2022 for each company:

Required Write a report to the Board of Directors of ABD Plc. that analyses the performance of Watch Ltd and Keep Ltd and give recommendations as to which of the two investment opportunities offers the better opportunity. Your report should include comments on performance areas which the data allows. Your report should also include comments upon any additional information you consider should be obtained prior to a final decision being made.

Ratio		Watch Ltd	Keep Ltd
Current ratio		2.0	5.0
Acid-test ratio		0.75	1.0
Accounts receivable days		30	30
Inventory turnover (times)		6.0	12.80
Accounts payable days		40	30
Percent of total debt to total assets		40%	80%
Gross profit percentage		24.6%	12.5%
Operating profit percentage		14%	5%
Return on capital employed		16%	4%
Gearing		20%	80%
Interest cover (times)		2	1
Dividends in pence		7.20	10.20