QUESTION 4 MedTech Limited is interested in acquiring a majority shareholding in Computronic Limited. As a financial analyst you are asked to undertake an evaluation of the company and suggest whether MedTech Limited should go ahead with the purchase of Computronic Limited or not. The following information is available: Financial statements from the company: 53 COMPUTRONIC LIMITED STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 20X1 R 20X0 R ASSETS Non-current assets Property, plant and equipment 360 000 344 000 Current assets 1 290 000 1 124 000 Inventories Accounts receivable Cash 836 000 402 000 52 000 715 200 351 200 57 600 1 650 000 1 468 000 EQUITY AND LIABILITIES Capital and reserves 680 000 663 000 Share capital Retained earnings 460 000 220 000 460 000 203 000 Non-current liabilities 655 000 524 000 8% Redeemable preference shares (Redeemable on 30/09/20X3) Long-term loan 225 000 430 000 200 000 324 000 Current liabilities 315 000 261 000 Accounts payable Accrued expenses 175 000 140 000 145 000 324 000 1 650 000 1 468 000 COMPUTRONIC LIMITED INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 20X1 20X0 R R Sales 3 850 000 3 432 000 Cost of sales (3 250 000) (2 864 000) Gross profit 600 000 568 000 Other expenses (430 300) (340 000) Depreciation (20 000) (18 900) Profit from operations 149 700 209 100 Interest expense (76 000) (62 500) Profit before tax 73 700 146 600 Taxation (22 110) (43 980) Profit for the period 51 590 102 620 54 A download from an information service relating to Computronic Ltd at 30 September: 20X1 20X0 Share price at year end (30 Sept) 1 200c 3 000c Number of shares in issue 100 000 100 000 Dividend per share 22c 22c Industry average data for 20X1 Current ratio 2,7:1 Quick ratio 1,0:1 Inventory collection period 52 days Accounts receivable collection period 32 days Non-current assets turnover 10,7 times Total asset turnover 2,6 times Debt: equity ratio 100% Interest cover ratio 2,5 times Profit margin 3,5 % Return on assets 9,1 % Return on equity 18,2 PE ratio 14,2 Extract from the press release issued by the company on 12 October 20X1: Computronic Limited is a biotechnological company that undertakes research and development of medical innovations. The company has completed trial runs of the long-awaited anti-aging electronic treatment device. This device stimulates the production of high-growth hormone (HGH) in your body. HGH is associated with human growth and cell health. As a mood elevator, most people find a youthful sense of wellness and a zest for life restored when their levels of human growth hormone are increased. The companys clinical evidence proves that by elevating our growth hormone levels we can significantly stop and even reverse the symptoms of aging! The electronic device has been successfully patented in South Africa and the United States but is awaiting approval from the food and drug administration (PDA) for use in the United States of America. You are required to: a. Discuss the purpose of financial statement analysis. b. Calculate the current and quick ratios for both years and briefly analyse your results. c. Calculate the return on equity (ROE) ratio for 20X1. Explain why this ratio will be important to MedTech Limited or any potential investor. d. Calculate the debt to equity ratio for both years and discuss its usefulness. e. Calculate the PE ratio for both years and briefly discuss its interpretation with particular reference to companies with high or low ratios. 55 f. Although financial statements analysis can provide useful information about a companys operations and its financial condition, this type of analysis has some potential problems and limitations and must be used with care and judgement. Discuss some problems and limitations of financial statement analysis. g. Justify your recommendation to MedTech Limited about their intention of buying a majority shareholding in Computronic Limited.