same question

is about accounting ratios

Question 2 Credit analysis for investment and lending decisions Alpha Industries Limited is a manufacturer of PVC pipes and plastics for use in domestic and industrial establishments. The company was founded some 10 years ago as a family concern and has transformed into a medium-sized entity. The company owned its rapid growth to private housing development springing up in the Accra and Tema metropolis. It also won a tender to supply to 3 big state institutions, about 5 years ago, which together form 40% of sales. Henry Alpha-Koney, 68, founder and chairman plays less active role in the day to day running of the company which is now being managed by his children. Paul, 38, the eldest son and managing director took over from his father 2 years ago. Francis, 35, looks after the production whist Selina, who is 29, is responsible for finance and administration. Paul and Francis call in today to see you. They have drawn up a 3-year business plan which forecast sales growth at 20% annually. This will involve the upgrading of production equipment and an extension to the existing factory. They had initially intended to fund this expansion by raising equity capital which did not materialised at the last minute due to their foreign partner's inability to raise his share of the funds from his oversee bankers. They claim some attractive offers have been coming from some rival banks but will want to give your bank the opportunity to finance this project if possible, in view of the long-standing relationship. The venture is expected to cost GH550,000 which will go into purchasing modern plant and equipment and to make extensions to the existing factory, which is too small for the growth, envisaged. More details about the project can only be made available only if the bank can give some agreement in principle. The request for the financing is to cover the cost of the new plant and the equipment at the current interest rate of 24% per annum for the period of 6 years' repayment duration Required Based on the information provided plus the financial statement, including the industry average data, make an assessment to determine whether the bank should grant the request to finance the project. Alpha Industries Limited Comprehensive Income Statement for December 2018 2019 2020 GH GH GH Sales 885,680 1.058,630 1,501,000 Cost of sales 575.890 667.630 749.720 Gross profit 309,800 391,000 751,280 Selling, general and administration expense 163,660 208,080 351.000 Net operating profit 146,140 182,920 403,280 Interest income 3,730 3,890 4,200 Interest expense 33,920 24,350 33,280 Profit before tax 115,950 162,460 371,200 Tax 53,620 75,990 86,420 Net profit after tax 62.330 86,470 284,780 Dividends payable 20,000 25,000 Retained earnings 62.330 66.470 259,780 Page 3 of 5 Alpha Industries Limited Statement of Financial Position as at 31 December 2018 GH 2019 GH 2020 GH 10,800 195,740 206,540 10,800 192.770 203,570 10.800 190,890 201,690 Non-current assets Land Machinery and equipment Total non-current assets Current assets Stock Debtors Prepayments 409,870 126,730 36,540 66.780 639.920 846.460 342,510 173,240 35,800 61.450 613,000 816.570 390,000 230,000 40.550 72.100 732.650 234.340 Cash Total current assets Total assets 120,000 269.010 389,010 120,000 335,480 455,480 120,000 447,370 567,370 Share capital and surplus Stated capital Income surplus Shareholders' funds Current liabilities Trade creditors Accrued expenses Short term loans Total current liabilities Non-current liabilities Long-term debt Deferred tax Total non-current liabilities Equity plus liabilities 68,790 37.800 122.360 228,950 72,340 38,310 70.780 181,430 85.610 42,900 105.800 234,310 200.000 28.500 228.500 846.460 150,000 29.660 179.660 816,570 100,000 32.660 132,660 934.340 Note: (a) The selling, general and administration expense for 2020 includes the following: (i) Loss on sale of plant GH20,000 Profit on sale of equipment GH32,000 Depreciation GH38,900 (iii) Accounting ratios Gross profit margin (%) Net profit margin (%) Return on equity (%) Return on assets (%) Current ratio Quick ratio Cash ratio Stock turnover ratio (times) Stock holding period (days) Debtors' collection period (days) Creditor's payment period (days) Debt to total assets (%) Interest cover (times) Industry average 42 15 45 30 2.0 1.0 0.5 2.0 180 50 30 40 3.0 Page 4 of 5