Question 4 (12 marks)

Analyze the key profitability ratios and identify the reason for the change in them by answering the following questions.,

Keep in mind the following assumptions for solving this question:

• The key profitability ratios are Variable Margin (as a % of sales), Operating Margin, Return on Equity and Return on Average Capital Employed.
• Assume that there is no change in the capital employed during the year 2002 so that the capital employed at the beginning of the year is the same as that during the ending of the year.
• The gross profit is also known as the variable margin./

Question 4A: Calculate the key profitability ratios for the years 2002 to 2006(E). (8 marks, 2 for each key ratio)please answer in the excel sheet containing with all the workings and formulas used for this question

Question 4B: What is the trend in ROE from 2002 to 2006(E)? List down at least one reason for the increase/decrease in ROE by assessing the drivers of ROE and explain your answer (1+1 marks)

Question 4C: What is the trend in ROACE from 2002 to 2006(E)? List down at least one reason for the increase/decrease in ROACE by assessing the drivers of ROACE and Explain your answer (1+1 marks)

2006E 1,955 14,471 3,847 20,273 4,347 645 Exhibit 2- Balance Sheet (in $ thousand, some numbers are rounded) At December 31 2002 2003 2004 2005 Assets Cash 705 1,542 1,818 2,158 Accounts Receivable 3,485 4,405 6,821 10,286 Inventories 3,089 2,795 3,201 3,291 Current Assets 7,279 8,742 11,839 15,735 Plant, Property, & Equipment (net) 2,257 2,680 2,958 3,617 Other Assets 645 645 645 645 Land 450 1,750 2,853 2,853 Non-Current Assets 3,352 5,075 6,456 7,115 Total Assets 10,631 13,817 18,295 22,850 Liabilities & Shareholders Equity Accounts Payable 2,034 2,973 4,899 6,660 Current Portion of Long-term Debt 315 352 525 730 Current Liabilities 2,349 3,325 5,423 7,390 Long-Term Debt 3,258 4,400 5,726 7,123 Shareholders Equity 5,024 6,091 7,146 8,336 Total Liabilities & Shareholders Equity 10,631 13,817 18,295 22,850 2,853 7,844 28,117 9,424 649 10,074 8,480 9,563 28,117 Derived Statement of Cash Flows (in $ thousand, some numbers are rounded) For Years Ending December 31 2003 2004 2005 Net Income 1,293 1,279 1,488 Depreciation & Amortization 412 455 557 Change in Accounts Receivable -920 -2,416 -3,465 Change in Inventories 294 -406 -90 Change in Accounts Payable 939 1,926 1,761 Operating Cash Flow 2,019 838 250 2006E 1,534 669 -4,185 -556 2,765 226 -835 -734 -1,215 0 -1,398 0 0 0 Investment in PP&E Investment in Other Assets Investment in Land Investing Cash Flow 0 0 -1,300 -2,135 -1,103 -1,836 -1,215 -1,398 Debt Issuance Retirement of Debt Dividends Financing Cash Flow 1,494 -315 -226 953 1,850 -352 -224 1,274 2,128 -525 -298 1,306 2,006 -730 -307 969 Change in Cash 837 276 340 -203 2006E 2005 35,088 28,597) 6,491 42,597 35,100 7,497 2,877 3,578 Exhibit 3 - Income Statement (in thousand, some numbers are rounded) For Years Ending December 31 2002 2003 2004 Sales 24,652 26,797 29,289) Cost of Goods Sold 20,461 21,706 23,841 Gross Profit 4,191 5,091 5,448 General & Administrative 1,999 2,138 2,372 Expense Research & Development 203 203 212 Depreciation & Amortization 3471 412 455 Earnings before Interest & 1,641 2,338 2,408 Taxes Interest 187 349 440 Earnings before Taxes 1,454 1,989 1,968 Taxes 264 696 689 222 232 557 669 2,836 3,018 547 2,289 801 658 2,360 826 Net Income 1,191 1,293 1,279 1,488 1,534