Question 1 Alpha Corporation and Omega Limited are manufacturers of high-end digital audio players (DAP) and in-ear monitors (IEM). They are head-to-head competitors in the industry. Your company is a venture capital (VC) firm and planning to acquire one amongst these two targets. As member of the Bravo Hunting Team of your firm, your boss asked you and your team to study the financial statements of these two companies and prepare a written report to him. The income statements and balance sheets of the two target companies are shown as follows: 2016 Alpha Corporation Income Statement ($ thousands) Year ended 31 December 2015 2017 Sales $5,561.49 $5,558.30 $5,821.91 Cost of goods sold 3,329.55 3,367.89 3,602.75 Gross Profit $2,231.94 $2,190.41 $2,219.16 Selling & administrative expensive 1,597.67 1,703.12 1,707.91 Depreciation 55.92 63.91 68.7 Operating profit $578.35 S423.38 $442.55 Interest Expense 41.54 67.1 102.25 Non-operating income (-) / expense -15.98 -23.97 -7.99 Special Items 115.03 0 92.66 Earnings before taxe $437.76 $380.25 $255.63 Income Taxes 175.54 150.18 30.35 Net income $260.42 $230.07 $225.28 2018 $5,152.49 3,188.95 $1,963.54 1,666.37 71.9 $225.27 97.46 12.78 55.92 $59.11 41.71 $17.40 2019 $4,633.25 2,789.53 $1,843.72 1,552.94 68.7 S222.08 79.88 -1.6 99.06 $44.74 36.47 $8.27 2018 2019 Balance Sheet($ thousands) 31 December 2015 2016 2017 Assets Cash and equivalents $127.81 $369.86 $335.51 Account receivables 810.02 943.42 897.89 Inventories 1,014.52 870.73 901.09 Other current assets 193.32 153.38 207.7 Total current assets $2,145.67 $2,337.39 $2,342.19 Gross plant, property and equipment 536.82 565.58 less: Accumulated depreciation 230.06 274.8 314.74 Net plant, property and equipment $306.76 $295.57 $250.84 Other assets 193.32 220.48 214.07 Total assets $2,645.75 $2,853.44 $2.807.10 $287.58 827.59 854.75 206.1 $2,176.02 637.47 361.07 $276.40 327.53 $2,779.95 $450.54 666.23 663.03 206.1 $1,985.90 674.22 389.83 $284.39 228.47 $2,498.76 570.37 $139.00 Liabilities Current portion of long-term debt Notes payable Accounts payable Taxes payable Other current liabilities 76.69 $1.60 106.25 264.41 76.69 241 25 $84.68 52.72 313.14 105.45 27001 $193.32 65.5 306.75 6.39 349 89 324.33 132.61 30675 $295.57 44.73 246.04 12.78 397 82 Liabilities Current portion of long-term debt Notes payable Accounts payable Taxes payable Other current liabilities Total current liabilities Long-term debt Other liabilities Total Liabilities Equity Common stock Retained earnings less: treasury stock Common equity Total liabilities & equity $1.60 106.25 264.41 76.69 241.25 $690.20 405.81 57.52 $1,153.53 $84.68 52.72 313.14 105.45 270.01 $826.00 1,364.41 54.32 $2,244.73 $193.32 65.5 306.75 6.39 349.89 $921.85 1,020.91 51.13 $1,993.89 $139.00 76.69 324.33 132.61 306.75 $979.38 885.11 51.13 $1,915.62 $295.57 44.73 246.04 12.78 397.82 $996.94 591.14 65.5 $1,653.58 $63.91 2,391.71 963.40 $1,492.22 $2,645.75 $1.60 1,594.48 987.37 $608.71 $2,853.44 $1.60 1,795.78 984.17 $813.21 $2,807.10 $28.76 1,822.94 987.37 5864.33 $2,779.95 $1.60 1,830.94 987.36 $845.18 $2,498.76 1 Omega Limited: Income Statement ($ thousands) Year ended 31 December 2015 2016 2017 Sales $6,815.15 $9,263.91 $13,152.15 Cost of goods sold 4,016.22 5,475.89 7,680.56 Gross Profit $2,798.93 $3,788.02 $5,471.59 Selling & administrative expensive 1,732.24 2,275.39 3,298.42 Depreciation 120.25 170.36 226.19 Operating profit $946.44 $1,342.27 $1,946.98 Interest Expense 34.36 57.26 78.74 Non-operating income (-) / expense -34.36 -1.43 -11.45 Special Items 15.75 0 25.77 Earnings before taxes $930.69 $1,286.44 $1,853.92 Income Taxes 357.9 495.34 714.37 Net income $572.79 $791.10 $1,139.55 2018 $13,676.12 8,419.27 $5,256.85 3,756.53 292.05 $1,208.27 95.92 -7.16 186.11 $933.40 362.2 $571.20 2019 $12,565.20 7,580.35 $4,984.85 3,474.50 312.09 $1,198.26 73.01 14.32 42.95 $1,067.98 422.32 $645.66 Balance Sheet (S thousands) 31 December 2015 2016 2017 2018 2019 Assets Cash and equivalents Account receivables Inventories $309.23 1,507.48 901.91 $375.08 1,926.94 1,332.82 $637.06 2,511.03 1,916.92 $156.04 2,396.51 1,999.95 $283.46 2,227.58 1,716.49 2015 2016 2017 2018 2019 Assets Cash and equivalents Account receivables Inventories Prepaid expenses Other current assets Total current assets Gross plant, property and equipment less: Accumulated depreciation Net plant, property and equipment Intangibles - patents Other assets Total assets $309.23 1,507.48 901.91 105.94 104.51 $2,929.07 1,275.56 481.02 $794.54 710.08 65.85 $4,499.54 $375.08 1,926.94 1,332.82 134.57 133.14 $3,902.55 1,500.32 578.37 $921.95 680.02 151.75 $5,656.27 $637.06 2,511.03 1,916.92 224.76 194.7 $5,484.47 2,041.47 720.1 $1,321.37 664.27 206.15 $7,676.26 $156.04 2,396.51 1,999.95 280.59 224.76 $5,057.85 2,605.52 954.88 $1,650.64 624.19 395.12 $7,727.80 $283.46 2,227.58 1,716.49 273.44 173.22 $4,674.19 2,864.64 1,053.66 $1,810.98 611.29 415.17 $7,511.63 Liabilities Current portion of long-term debt Notes payable Accounts payable Taxes payable Accrued expenses Total current liabilities Long-term debt Deferred taxes Other liabilities Total Liabilities Equity Common stock Capital surplus Retained earnings Common equity Total liabilities & equity $45.81 568.35 426.62 51.54 493.9 $1,586.22 15.75 25.77 60.13 $1,687.86 $10.02 637.06 651.38 113.1 687.17 $2,098.73 14.32 2.86 58.7 $2,174.61 $2.86 791.68 983.51 77.31 817.45 $2,672.81 423.76 7.16 52.97 $3,156.69 $2.86 687.17 837.49 41.52 871.85 $2,440.89 542.58 0 74.44 $3,057.91 $1.43 599.84 533.99 0 936.27 $2,071.53 552.6 0 114.53 $2,738.66 $4.29 174.67 2,632.72 $2,811.68 $4,499.54 $4.29 221.9 3,255.47 $3,481.66 $5,656.27 $4.29 302.07 4,213.21 $4,519.57 $7,676.26 $4.29 376.51 4,289.09 $4,669.89 $7,727.80 $4.29 478.16 4,290.52 $4,772.97 $7,511.63 2. (48 marks) Writing report - In the written report, your team should include the followings: (a) Comment the performance of the two companies during 2015 to 2019 from four perspectives (liquidity, profitability, finance and return on shareholders' investment) based on the calculation of the following financial ratios: 1. Current ratio 2. Acid-test ratio 3. Average collection period 2 4. Account receivable turnover 5. Inventory turnover 6. Operating income return on investment 7. Gross profit margin 8. Operating profit margin 9. Total asset turnover 10. Fixed asset turnover 11. Total debt ratio 12. Times interest earned 13. Return on equity (28 marks) (b) Point out the differences and similarities of their financial performance from the four perspectives stated. (24 marks) (c) Based on your finding in part (a) and (b), explain which company your team would recommend to your boss. Question 1 Alpha Corporation and Omega Limited are manufacturers of high-end digital audio players (DAP) and in-ear monitors (IEM). They are head-to-head competitors in the industry. Your company is a venture capital (VC) firm and planning to acquire one amongst these two targets. As member of the Bravo Hunting Team of your firm, your boss asked you and your team to study the financial statements of these two companies and prepare a written report to him. The income statements and balance sheets of the two target companies are shown as follows: 2016 Alpha Corporation Income Statement ($ thousands) Year ended 31 December 2015 2017 Sales $5,561.49 $5,558.30 $5,821.91 Cost of goods sold 3,329.55 3,367.89 3,602.75 Gross Profit $2,231.94 $2,190.41 $2,219.16 Selling & administrative expensive 1,597.67 1,703.12 1,707.91 Depreciation 55.92 63.91 68.7 Operating profit $578.35 S423.38 $442.55 Interest Expense 41.54 67.1 102.25 Non-operating income (-) / expense -15.98 -23.97 -7.99 Special Items 115.03 0 92.66 Earnings before taxe $437.76 $380.25 $255.63 Income Taxes 175.54 150.18 30.35 Net income $260.42 $230.07 $225.28 2018 $5,152.49 3,188.95 $1,963.54 1,666.37 71.9 $225.27 97.46 12.78 55.92 $59.11 41.71 $17.40 2019 $4,633.25 2,789.53 $1,843.72 1,552.94 68.7 S222.08 79.88 -1.6 99.06 $44.74 36.47 $8.27 2018 2019 Balance Sheet($ thousands) 31 December 2015 2016 2017 Assets Cash and equivalents $127.81 $369.86 $335.51 Account receivables 810.02 943.42 897.89 Inventories 1,014.52 870.73 901.09 Other current assets 193.32 153.38 207.7 Total current assets $2,145.67 $2,337.39 $2,342.19 Gross plant, property and equipment 536.82 565.58 less: Accumulated depreciation 230.06 274.8 314.74 Net plant, property and equipment $306.76 $295.57 $250.84 Other assets 193.32 220.48 214.07 Total assets $2,645.75 $2,853.44 $2.807.10 $287.58 827.59 854.75 206.1 $2,176.02 637.47 361.07 $276.40 327.53 $2,779.95 $450.54 666.23 663.03 206.1 $1,985.90 674.22 389.83 $284.39 228.47 $2,498.76 570.37 $139.00 Liabilities Current portion of long-term debt Notes payable Accounts payable Taxes payable Other current liabilities 76.69 $1.60 106.25 264.41 76.69 241 25 $84.68 52.72 313.14 105.45 27001 $193.32 65.5 306.75 6.39 349 89 324.33 132.61 30675 $295.57 44.73 246.04 12.78 397 82 Liabilities Current portion of long-term debt Notes payable Accounts payable Taxes payable Other current liabilities Total current liabilities Long-term debt Other liabilities Total Liabilities Equity Common stock Retained earnings less: treasury stock Common equity Total liabilities & equity $1.60 106.25 264.41 76.69 241.25 $690.20 405.81 57.52 $1,153.53 $84.68 52.72 313.14 105.45 270.01 $826.00 1,364.41 54.32 $2,244.73 $193.32 65.5 306.75 6.39 349.89 $921.85 1,020.91 51.13 $1,993.89 $139.00 76.69 324.33 132.61 306.75 $979.38 885.11 51.13 $1,915.62 $295.57 44.73 246.04 12.78 397.82 $996.94 591.14 65.5 $1,653.58 $63.91 2,391.71 963.40 $1,492.22 $2,645.75 $1.60 1,594.48 987.37 $608.71 $2,853.44 $1.60 1,795.78 984.17 $813.21 $2,807.10 $28.76 1,822.94 987.37 5864.33 $2,779.95 $1.60 1,830.94 987.36 $845.18 $2,498.76 1 Omega Limited: Income Statement ($ thousands) Year ended 31 December 2015 2016 2017 Sales $6,815.15 $9,263.91 $13,152.15 Cost of goods sold 4,016.22 5,475.89 7,680.56 Gross Profit $2,798.93 $3,788.02 $5,471.59 Selling & administrative expensive 1,732.24 2,275.39 3,298.42 Depreciation 120.25 170.36 226.19 Operating profit $946.44 $1,342.27 $1,946.98 Interest Expense 34.36 57.26 78.74 Non-operating income (-) / expense -34.36 -1.43 -11.45 Special Items 15.75 0 25.77 Earnings before taxes $930.69 $1,286.44 $1,853.92 Income Taxes 357.9 495.34 714.37 Net income $572.79 $791.10 $1,139.55 2018 $13,676.12 8,419.27 $5,256.85 3,756.53 292.05 $1,208.27 95.92 -7.16 186.11 $933.40 362.2 $571.20 2019 $12,565.20 7,580.35 $4,984.85 3,474.50 312.09 $1,198.26 73.01 14.32 42.95 $1,067.98 422.32 $645.66 Balance Sheet (S thousands) 31 December 2015 2016 2017 2018 2019 Assets Cash and equivalents Account receivables Inventories $309.23 1,507.48 901.91 $375.08 1,926.94 1,332.82 $637.06 2,511.03 1,916.92 $156.04 2,396.51 1,999.95 $283.46 2,227.58 1,716.49 2015 2016 2017 2018 2019 Assets Cash and equivalents Account receivables Inventories Prepaid expenses Other current assets Total current assets Gross plant, property and equipment less: Accumulated depreciation Net plant, property and equipment Intangibles - patents Other assets Total assets $309.23 1,507.48 901.91 105.94 104.51 $2,929.07 1,275.56 481.02 $794.54 710.08 65.85 $4,499.54 $375.08 1,926.94 1,332.82 134.57 133.14 $3,902.55 1,500.32 578.37 $921.95 680.02 151.75 $5,656.27 $637.06 2,511.03 1,916.92 224.76 194.7 $5,484.47 2,041.47 720.1 $1,321.37 664.27 206.15 $7,676.26 $156.04 2,396.51 1,999.95 280.59 224.76 $5,057.85 2,605.52 954.88 $1,650.64 624.19 395.12 $7,727.80 $283.46 2,227.58 1,716.49 273.44 173.22 $4,674.19 2,864.64 1,053.66 $1,810.98 611.29 415.17 $7,511.63 Liabilities Current portion of long-term debt Notes payable Accounts payable Taxes payable Accrued expenses Total current liabilities Long-term debt Deferred taxes Other liabilities Total Liabilities Equity Common stock Capital surplus Retained earnings Common equity Total liabilities & equity $45.81 568.35 426.62 51.54 493.9 $1,586.22 15.75 25.77 60.13 $1,687.86 $10.02 637.06 651.38 113.1 687.17 $2,098.73 14.32 2.86 58.7 $2,174.61 $2.86 791.68 983.51 77.31 817.45 $2,672.81 423.76 7.16 52.97 $3,156.69 $2.86 687.17 837.49 41.52 871.85 $2,440.89 542.58 0 74.44 $3,057.91 $1.43 599.84 533.99 0 936.27 $2,071.53 552.6 0 114.53 $2,738.66 $4.29 174.67 2,632.72 $2,811.68 $4,499.54 $4.29 221.9 3,255.47 $3,481.66 $5,656.27 $4.29 302.07 4,213.21 $4,519.57 $7,676.26 $4.29 376.51 4,289.09 $4,669.89 $7,727.80 $4.29 478.16 4,290.52 $4,772.97 $7,511.63 2. (48 marks) Writing report - In the written report, your team should include the followings: (a) Comment the performance of the two companies during 2015 to 2019 from four perspectives (liquidity, profitability, finance and return on shareholders' investment) based on the calculation of the following financial ratios: 1. Current ratio 2. Acid-test ratio 3. Average collection period 2 4. Account receivable turnover 5. Inventory turnover 6. Operating income return on investment 7. Gross profit margin 8. Operating profit margin 9. Total asset turnover 10. Fixed asset turnover 11. Total debt ratio 12. Times interest earned 13. Return on equity (28 marks) (b) Point out the differences and similarities of their financial performance from the four perspectives stated. (24 marks) (c) Based on your finding in part (a) and (b), explain which company your team would recommend to your boss