QUESTION 6

Rudo is considering investing in CDE LTD, a listed entity, and has asked for your analysis of the financial performance and financial position of CDE LTD based on the most recently published financial information.

CDE LTD is a manufacturing entity operating in the technology sector. The entity has two large manufacturing plants, one in Harare and the other in Bulawayo. The majority of sales revenue is earned in Masvingo and Mutare.

CDE LTD recently invested in technology associated with mobile phone ports for motor vehicles and sales of these items began on 1 April 2019. The financial statements for CDE LTD are provided below:

Consolidated statement of financial position as at 31 December

	2019	2018
	$m	$m
ASSETS
Non-current assets
Property, plant and equipment	290	235
Intangible assets development costs	50	30
	340	265
Current assets
Inventories	110	80
Trade and other receivables	75	60
Cash and cash equivalents	--	10
	185	150
Total assets	525	415
EQUITY AND LIABILITIES
Equity
Share capital ($1 shares)	80	60
Share premium	30	10
Other elements of equity	2	2
Revaluation reserve	20	--
Retained earnings	220	248
Total equity	352	320
Non-current liabilities
5% convertible debt	22	20
Provisions	14	5
	36	25
Current liabilities
Trade and other payables	120	70
Short-term borrowings	17	--
	137	70
Total liabilities	173	95
Total equity and liabilities	525	415

Consolidated statement of comprehensive income for the year ended 31 December

	2019	2018
	$m	$m
Revenue	470	410
Cost of sales	(285)	(260)
Gross profit	185	150
Administrative expenses	(56)	(35)
Distribution costs	(70)	(60)
Finance costs	(5)	(1)
Profit before tax	54	54
Income tax expense	(15)	(13)
Profit for the year	39	41

Other comprehensive income that will not be reclassified to profit or loss

Revaluation gains from property (net of tax)	20	--
Total comprehensive income	59	41

Additional information:

1. Included in provisions is $8 million in respect of a lawsuit that was raised by a competitor, X which is accusing CDE LTD of using technology developed by X, without a licence. The lawsuit was filed in December 2019 and the provision represents the initial estimate by CDE LTDs legal advisors of a potential settlement.

2. There was a significant labour dispute in February 2019 in the manufacturing plant in Bulawayo. CDE LTD settled the dispute within one month but incurred significant legal fees in the process.

Required:

(a) Analyse the financial performance and the financial position of CDE LTD.

(b) Discuss why investors may find it useful to review the segmental information of CDE LTD when attempting to assess the future profitability of CDE LTD.