Question Two (50 Marks):

Bath Ltd. (Bath) is a biotechnology company established in Hong Kong since year 2000. It went listed three years ago. Bath primarily engages in the research and production of skin-care products as well as dietary supplement. The company previously focused on the U.S. and European Markets. But with the fund raised on the stock market, it recently started to expand its market in the Greater China area (regions including mainland China, Hong Kong, Macau and Taiwan).

Extracts from the accounts of Bath for the year ended 31 March 2019 and selected financial ratios there from are presented below:

(in Hong Kong dollars) 2019 2018

Turnover: Local & Mainland 263,500,000 16,000,000

Overseas 1,135,450,000 1,254,360,000

Cost of Goods Sold: Local & Mainland 166,350,000 14,250,000

Overseas 382,370,000 426,650,000

Promotional Expenses: Local & Mainland 38,600,000 12,000,000

Overseas 14,500,000 13,000,000

Research & Development Expenses 35,000,000 48,000,000

Current Ratio 2.52 2.86

Acid Ratio 1.75 2.43

Cash to Current Assets 16% 15%

Current Asset / Total Asset 0.65 0.53

Property, Plant & Equipment / Total Asset 0.26 0.36

Operation Margin 36% 32%

Net Margin 23% 24%

Return on Assets 22% 20%

Return on Equity 17% 22%

Debt / Equity 52% 40%

Bath claims that the company is getting even more business opportunities by expanding into the Asian market. But some financial analysts query its profitability and liquidity situation.

You are required to:

1. Discuss the possible difficulties in analyzing Bath with reference to its published financial reports (assuming that you can obtain the full set of published financial report). (15 marks)

One difficulties will be that

2. Comment on the profitability and liquidity of Bath with regard to the extracted historical data. You may make your own assumptions when necessary.

(25 marks)

3. Discuss potential chances and obstacles that Bath may have in the near future. You may wish to look at both internal and external factors that are relevant to its potential growth.

(10 marks)