Question $2$: Evaluating Financial Condition and Performance $(25$ marks$)$

South Coast Company Ltd is a manufacturer and distributor of soft drinks. The following financial

statements and historical ratios pertain to the company$$s operations and therefore performance

for $2018$ together with the industry averages.

South Coast Company

Income Statement

For the Year Ended December $31,2018$

N$

Sales Revenue $10,000,000$

Less: Cost of goods sold $7,500,000$

Gross Profits $2,500,000$

Less: Operating Expenses

Selling expense $300,000$

General and Administration Expenses $650,000$

$4$

Lease expense $50,000$

Depreciation expense $200,000$

Total Operating Expenses $1,200,000$

Operating Profits $1,300,000$

Less: Interest Expenses $200,000$

Net Profits before taxes $1,100,000$

Less: Taxes $($rate $=40\%)440,000$

Net Profits after taxes $660,000$

Less: Preferred Stock Dividends $50,000$

Earnings Available for Ordinary Stockholders $610,000$

Earnings per share $($EPS$.)$ N$ $3\mathrm{.}05$

South Coast Company Ltd

Statement of Financial Position

As at December $31,2018$

Assets N$

Liabilities and Shareholders$$

Equity N$

Cash $200,000$ Accounts Payableb $900,000$

Marketable Securities $50,000$ Notes payable $200,000$

Accounts Receivables $800,000$ Accruals $100,000$

Inventories $950,000$

Total Current Assets $2,000,000$ Total Current Liabilities $1,200,000$

Gross Non$-$Current Assets $($at

cost$)$a $12,000,000$

long Term Debt $($Includes financial

lease$)$c $3,000,000$

Less: Accum. Deprec. $3,000,000$

Preferred Equity $(25,000$ shares,

$$2\mathrm{.}00$ Dividends @ share$)1,000,000$

Net Non$-$current Assets $9,000,000$

Ordinary Shares $(200,000$ @ $

$3\mathrm{.}00$ par value$)$

d $600,000$

Other Assets $1,000,000$

Paid in Capital in Excess of Par

value $5,200,000$

Retained Earnings $1,000,000$

Total Shareholders$$ Equity $7,800,000$

Total Assets $12,000,000$

Total Liabilities & Shareholders$$

Equity $12,000,000$

a The firm has an $8-$year financial lease requiring annual beginning$-$of$-$year payments of N$$50,000.$ The five

years of the lease period is yet to run.

b Annual credit purchases of N$$6,200,000$ were made during the year.

c The annual principal payment on the long$-$term debt is N$$100,000.$

dOn December $31,2018,$ the firm$$s ordinary shares closed at N$$39\mathrm{.}50$ per share.

$5$

Historical and Industry Average Ratios

For Sterling Company Ltd

Ratio Category

Actual

$2016$ Actual $2017$

Industry

Average,

$2018$

Liquidity Current ratio $1\mathrm{.}401\mathrm{.}551\mathrm{.}85$

Quick ratio $1\mathrm{.}000\mathrm{.}921\mathrm{.}05$

Activity$/$Efficiency

Inventory Turnover $9\mathrm{.}529\mathrm{.}218\mathrm{.}60$

Average Collection Period $45\mathrm{.}6$ days $36\mathrm{.}9$ days $35\mathrm{.}5$ days

Average Payment period $59\mathrm{.}3$ days $61\mathrm{.}6$ days $46\mathrm{.}4$ days

Total Asset Turnover $0\mathrm{.}740\mathrm{.}80\mathrm{.}74$

Leverage & Solvency

Debt ratio $0\mathrm{.}20\mathrm{.}20\mathrm{.}2$

Times Interest Earned ratio $8\mathrm{.}27\mathrm{.}38\mathrm{.}0$

Fixed Payment Coverage ratio $4\mathrm{.}54\mathrm{.}24\mathrm{.}2$

Profitability

Gross Profit Margin $0\mathrm{.}30\mathrm{.}270\mathrm{.}25$

Operating Profit Margin $0\mathrm{.}120\mathrm{.}120\mathrm{.}1$

Net Profit Margin $0\mathrm{.}0620\mathrm{.}0620\mathrm{.}053$

Return on Total Assets $($ROA$)0\mathrm{.}0450\mathrm{.}050\mathrm{.}04$

Return on Equity $($ROE$)0\mathrm{.}0610\mathrm{.}0670\mathrm{.}066$

Market

Earnings Per Share $($EPS$)$ $ $1\mathrm{.}75$ $ $2\mathrm{.}20$ $ $1\mathrm{.}50$

Price$/$Earnings $($P$/$E$)$ ratio $12\mathrm{.}0010\mathrm{.}5011\mathrm{.}20$

Market$/$Book $($M$/$B$)$ ratio $1\mathrm{.}201\mathrm{.}051\mathrm{.}10$

Required: $[25$ marks$]$

a$)$ Calculate South Coast Company$$s financial ratios category wise for the most recent year.

$(12$ marks$)$

b$)$ Analyse South Coast Company overall financial situation using both a cross$-$sectional and a

time$-$series viewpoints as relates to: $(10$ marks$)$

$1)$ Liquidity,

$2)$ Activity,

$3)$ Solvency,

$4)$ Profitability, and

$5)$ Market.

c$)$ In a paragraph, provide a summary of the company$$s overall financial condition and

performance. $(3$ marks$)$