Question
You are an analyst for an investment company, and your job is to identify quality businesses and to make recommendations on those businesses you consider
You are an analyst for an investment company, and your job is to identify quality businesses and to make recommendations on those businesses you consider to be worthwhile investment decisions.
You have just been provided with the financial statements for Nella's Ltd, a large Australian based confectionery company.
Nella's shares are currently trading at $5.00 per share.
30 June 2020 financial statements, along with calculated key ratios, are provided below:
Nella's Ltd - Balance Sheet as at 30 June 2020
2020
2019
Assets
($ 000's)
($ 000's)
Current Assets
Cash
20,000
40,000
Accounts Receivable
60,000
90,000
Inventory
210,000
150,000
Prepaid Insurance
10,000
30,000
Total Current Assets
300,000
310,000
Property, Plant and Equipment
440,000
400,000
Intangibles
200,000
170,000
Total Assets
940,000
880,000
Liabilities
Current Liabilities
Accounts Payable
120,000
100,000
Notes Payable
50,000
50,000
Total Current Liabilities
170,000
150,000
Bonds Payable
560,000
560,000
Total Liabilities
730,000
710,000
Shareholder's Equity
Issued Equity (Average # 200,000 shares)
150,000
150,000
Retained Earnings
60,000
20,000
Total Shareholder's Equity
210,000
170,000
Total Liabilities and Shareholder's Equity
940,000
880,000
Nella's Ltd - Income Statement for the Financial Year ending 30 June 2020 ($ 000's)
Sales
500,000
Cost of Goods Sold
300,000
Gross Profit
200,000
Administrative Expenses
50,000
Depreciation Expense
30,000
Total Operating Expenses
80,000
Operating Income
120,000
Interest Expense
20,000
Net Profit Before Tax
100,000
Income Tax Expense
50,000
Net Profit After Tax
50,000
Nella's Ltd - Summary of Key Financial Ratios 2020
Key Ratio
Formula
Ratio Calculation for Nella's
Profit Margin
Net Profit After Tax (NPAT) / Net Sales
10.0%
Return on Equity
NPAT / Average Shareholder's Equity
26.3%
Return on Assets
NPAT / Average Total Assets
5.5%
Earnings per Share
NPAT / Average No. Ordinary Shares
$0.25
Price to Earnings
Current Share Price / Earnings per Share
20.0
Current
Current Assets / Current Liabilities
1.76
Quick
(Cash + AR) / Current Liabilities
0.47
Receivables Turnover
Net Credit Sales / Average Accounts Receivable
6.67
Inventory Turnover
Cost of Goods Sold / Average Inventory
1.67
Debt to Assets
Total Liabilities / Total Assets
0.78
Debt to Equity
Total Liabilities / Total Shareholder's Equity
3.48
Times Interest Earned
(NPAT + Income Tax Expense + Interest Expense) /
Interest Expense
6.0
REQUIRED:
1.Undertake an analysis of Nella's financial statements using the information provided. Your analysis should include commentary on Nella's profitability, liquidity and solvency. Based on your findings, make a recommendation on whether your employer should invest in Nella's, including reasons for your recommendation.
Comment on the adequacy (or otherwise) of the information supplied to conduct your analysis. What additional information (if any) do you consider might have improved the quality of your analysis, and if so, how.
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Fundamentals Of Accounting
Authors: Claudia Gilbertson
10th Edition
1111581169, 978-1111581169
