Question
You have just completed preliminary analytical procedures of your client, Modern Technology Ltd (MTL), which has a 30 June financial year end. MTL is involved
You have just completed preliminary analytical procedures of your client, Modern Technology Ltd (MTL), which has a 30 June financial year end.
MTL is involved in the development and design of new computer games and is in the final development stages of a new game that it expects to be a huge success. The game has involved substantial research and development over the past year. The CEO, Jackson Clark, is extremely excited about this new product and believes that its sales will reverse any past trading problems the company has had. He has also told you that he has raised sufficient finance to enable finalisation and launch of the new game within four months.
During the initial years when the company experienced rapid growth, all profits were ploughed into research and development, computer equipment and the purchase of an office block as its corporate headquarters. Office space not required by the company is rented out to tenants on normal commercial terms. The results of the ratio analysis undertaken as part of your preliminary analytical procedures are as follows:
Ratio
2017
2018
2019
Quick Asset ratio
1.13
.86
.75
Days in receivables
21
31
40
Debt to equity ratio
1.7
1.95
2.35
Gross profit ratio
.35
.27
.21
Net profit ratio
-.05
-.07
-.09
REQUIRED:
For each of the above ratios identify the trend and outline. What does this mean for MTL's financial position with reference to the ratio analysis undertaken as part of the analytical procedures?
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