Voest Ltd is a manufacturer and distributor of mine drilling equipment. All its customers are in the extraction industry. The technology in the extraction industry has been changing rapidly in recent years. As a result of this rapid change, Voest Ltd has been investing significantly in research and development to keep pace with the changes in the industry. The company is focused on becoming the market leader in its product offerings. The company has patented many of its existing products. This was done to protect the companys intellectual property.

Voest Ltd has a wide range of products that it manufactures. It manufactures products developed in-house and products that market leaders have designed. In 2016 Voest agreed with Steglich Ltd. Steglich Ltd is based in Munich, Germany and is a global leader in manufacturing specialised high carbon content mine drills. Voest Ltd obtained the right to manufacture and sell the high-carbon content mine drills. The technical high-carbon content mine drills will be distributed in Southern Africa. Voest Ltd pays a fixed royalty in Euros for each unit of specialised high carbon content mine drills manufactured and sold. The royalties are paid quarterly in arrears. The specialised high carbon content mine drills have proved to be very successful in South Africa because of the relatively complex geological structure of the Southern African region. The total revenue from the high-carbon content specialised drills represents 30% of the total annual revenue of Voest Ltd. Voest Ltds focus has been primarily on South African customers. However, Voest Ltd has also supported the subsidiaries of South African customers in the rest of Africa and the Middle East. The revenues from these foreign subsidiaries constitute about 10% of the total annual revenue. These subsidiaries are also invoiced in Euros.

The mining industry in South Africa has been under much pressure during the past few years. This was caused by the Covid 19 pandemic, which caused muted global economic growth. Consequently, Voest Ltd has struggled to grow its revenue over the past three years. A special type of steel is used to manufacture specialised high-carbon mine drilling equipment. Steel prices have also been very volatile over the past few years due to the Covid 19 pandemic. Thus, this has also added to the pressure on the companys profit margins.

For Voest, working capital management has become very crucial to stay afloat. Several factors caused this. Initially, many customers have been placing orders at the last moment. This caused Voest to hold larger volumes of inventory to meet the unexpected demand from these customers. It is important to note that all Voest Ltds sales are on credit. Voest ltd allows its customers 60 days to pay from the invoicing date. Many customers have been delaying payments due to cash flow problems. As a result, Voest Ltds bank overdraft has been increasing over the years, such that it has become a permanent source of finance. The interest on overdraft is 10% per annum, compounded monthly. Voest Ltd has had no other debt since 2019. Bankers are currently not very willing to grant Voest ltd long-term finance. This is due to concerns about the companys cash flow generation ability and the generally negative outlook in the mining industry.

To improve the cash flows, the management has proposed the following two options:

The company proposes to offer a 10% settlement discount to all customers that pay within 30 days. This is expected to increase revenue by 5%. The company expects 20% of all customers (by revenue value) to use the settlement discount. Introducing the settlement discount is expected to reduce bad debts by 5%.

This option involves Voest Ltd discontinuing the manufacture of specialised mine drilling equipment. Voest Ltd would purchase the equipment directly from Steglich ltd. Voest Ltd would be granted payment terms 30 days from the invoice date. The option of purchasing would expose Voest Ltd to foreign currency movements. However, the finance manager has advised the board that any exposure to currency movements would be hedged using forward or option contracts.

Extracts from the income statement for the year ended 31 December 2021.

2021 2020

R R

Sales 248 230 000 241 000 000

Cost of sales (157 580 000) (144 400 000)

Gross Profit 90 650 000 96 600 000

Bad Debts (5 100 000) (4 500 000)

Depreciation (19 800 000) (20 100 000)

Research and development (10 200 000) (11 100 000)

Other operating costs (28 750 000) (26 700 000)

Operating profit 26 800 000 34 200 000

Finance charges (12 750 000) (10 800 000)

Profit before tax 14 050 000 23 400 000

Extracts from the Balance Sheet as of 31 December 2021.

2021 2020

R R

Trade receivables 51 000 000 42 900 000

Total assets 279 900 000 264 900 000

Shareholders equity 152 200 000 142 100 000

Bank overdraft 127 500 000 102 800 000

The inventory balance as of 31 December 2021 is R28 060 000.

Question 1

1. Draft the statement of financial position.

2. Calculate the following ratios: Current ratio, Acid Test ratio, Debtors collection period (in days), Creditors payment period (in days), Inventory Turnover rate, Gross profit percentage, Net Profit Percentage, Return on capital and Debit Equity ratio,

3. Determine the working capital and Profitability.