QUESTION 1

Read the following passage and answer the question that follows. You are an independent investment analyst. One of your clients, Mr. Watson recently approached you about a potential investment in Make A Lot Manufacturing corporation (hereafter Make A Lot) . He is an auditor and does not know how to read financial statements. Make A Lot is the parent company of a group of business engaged in the manufacturing of heavy duty machinery and value added service to heavy duty machine operators which command leadership positions in their respective markets. Mr. Watson completed analysis of the year ended 31 March 2016 and 2017. He also obtained industry ratios from a local university which keeps track of the industry. He summarized the information and presented as below.

	2017
	make a lot	industry
return on equity	16.23%	17%
return on asset	5.89%	12%
net profit margin	12.84%	12%
total asset turnover	0.46 times	1 time
*financial leverage multiplier	75 times	1.42 times

	2016
	make a lot	industry
Return on equity	9.48%	15%
return on asset	3.7%	10%
net profit margin	8.79%	10%
total asset turnover	0.44 times	1 time
*financial leverage multiplier	50 times	2.45 times

*Financial Leverage Multiplier = Total Assets / Total Equity Financial Leverage multiplier uses the ratio between the companys total assets to its stockholders equity to measure a companys financial leverage. It is an indication of a companys gearing, ie. How much debt is being used in the capital structure.

Required: Comment on the Make A Lot financial information and recommend to Mr. Watson whether he should invest in the company or not. (25 marks)