You are the accountant of Acquirer. Your entity has the strategy of growth by acquisition and your directors have identified an entity, Target, which they wish to investigate with a view to launching a takeover bid. Your directors consider that the directors of Target will contest any bid and will not be very cooperative in providing background information on the entity. Therefore, relevant financial information is likely to be restricted to the publicly available financial statements.
Your directors have asked you to compute key financial ratios from the latest financial statements of Target [for the year ended 30 November 2002] and compare the ratios with those for other entities in a similar sector. Accordingly, you have selected ten broadly similar entities and have presented the directors with the following calculations:

Required:
(a) Using the ratios provided, write a report that compares the financial performance and position of Target to the other entities in the survey. Where an issue arises that reflects particularly favourably or unfavourably on Target, you should assess its relevance to a potential acquirer.
(b) Identify any reservations you have regarding the extent to which the ratios provided can contribute to an acquisition decision by the directors of Acquirer. You should highlight the extent to which the financial statements themselves might help you to overcome the reservations you have identified.

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Ratio Basis of calculation Ratio for Spread of ratios for comparative entiies Target Highest Average Lowest 38% Gross profit margin Operating proht margin Return on total capital Gross proft Revenue Profit from operations Revenue 42% 44% 33% 29% 37% 30% 26% Profit from operations 925% 69% 52% Total capita Interest cover Profit from operations Finance cost Debt capital Total capital Profit ater tax 18 times 2.5 times 1.6 times 1.6times Gearing 52% 56% 40% 28% Dividend cover 5 2 times 5times 4tmes 3times Dividend Turn of Cost of sales Closing inventory 4.4 times 4 times 4times 3.2 times inventory Receivables Trade receivables 51 days 81 days 62 days 49 days days 1 day's salesrevenue