Sally Gorden seeks your assistance to decide whether she should invest in Ruby plc or Sapphire plc. Both companies are quoted on the London Stock Exchange. Their shares were listed on 20 June 20X4 as Ruby 110p and Sapphire 120p. The performance of these two companies during the year ended 30 June 20X4 is summarised as follows: Ruby plc Sapphire plc £000 £000 588 445 (144) (60) 444 385 (164) (145) Profit after taxation 280 240 Interim dividend paid (30) — Preference dividend paid (90) — Ordinary dividend paid (60) (160) Operating profit Interest and similar charges Taxation The companies have been financed on 30 June 20X4 as follows: Ruby plc Sapphire plc £000 £000 1,000 1,500 600 — 60 — Retained earnings 250 450 17% debentures 800 — 12% debentures — 500 2,710 2,450 Ordinary shares of 50p each 15% preference shares of £1 each Share premium account On 1 October 20X3 Ruby plc issued 500,000 ordinary shares of 50p each at a premium of 20%. On 1 April 20X4 Sapphire plc made a 1 for 2 bonus issue. Apart from these, there has been no change in the issued capital of either company during the year. Questions: a. Calculate the earnings per share (EPS) of each company. b. Determine the price/earnings ratio (PE) of each company. c. Based on the PE ratio alone, which company’s shares would you recommend to Sally? d. On the basis of appropriate accounting ratios (which should be calculated), identify three other matters Sally should take account of before she makes her choice. Drucker plc is a public listed wholesaler. Its summarised financial statements for the year ended 31 December 2013 (and 2012 comparatives) are as follows: Statements of profit or loss and other comprehensive income for the years ended 31 December Revenue Cost of sales Gross profit Operating costs 2013 2012 € million € million 275 200 (200) (100) 75 100 (36) (30) Investment income - 2 Gains on revaluation of investments held at fair value through P/L (5) 10 Finance costs (5) (5) Profit (loss) before taxation 29 77 Income tax expense (4) (15) Profit for the year 25 62 Revaluation losses on property plant & equipment (45) – Total comprehensive income (loss) for the year (20) 62 Other comprehensive income (Amounts that will not be reclassified to profit or loss) Statements of Financial Position as at 31 December: 2013 2012 € million € million 215 245 35 40 250 285 Inventory 40 19 Trade receivables 52 28 – 10 Assets Non-current assets: Property, plant and equipment Investments at fair value through profit or loss Current assets Bank 2013 2012 € million € million 92 57 342 342 120 120 Revaluation reserve 10 55 Retained earnings 90 65 220 240 50 50 Total assets Equity and liabilities Equity: Equity shares of €1 each Non-current liabilities: Bank loan 2013 2012 € million € million Current liabilities: Trade payables 50 39 Bank overdraft 20 – 2 13 72 52 342 342 Current tax payable Total equity and liabilities You are a newly recruited accountant working for Drucker plc. The draft financial statements for year ended 31 December 2013 have just been produced. Your managing director, Tom Kirby, has asked you to explain to him what the above financial statements mean for the company’s performance for the year 2013 and its financial position at 31 December 2013. He makes you aware of the following points and opinions: a. Drucker plc has traditionally been very profitable, but in recent years has been finding it difficult to keep up its sales level due to the effects of internet sales. Basically it finds more customers are buying directly online from suppliers and cutting out the middleman, which includes Drucker as a wholesaler. To counteract this, on 1 January 2013, Drucker launched a strategy of cutting its prices in the hope that this would generate additional sales volume and profits. b. To support the new strategy and allow faster movement of goods, a new product movement and control system was commissioned and installed on 1 January 2013 at a cost of €40 million. This is being depreciated over a fiveyear useful economic life. The old system was disposed of for nil consideration on the same date, but had been carried at €15 million at the date of disposal. The loss was taken to Cost of Sales, as is depreciation. No other noncurrent assets were acquired or disposed of in either of the two years. c. Tom expresses the opinion that this strategy has not failed so far, as the total on the statement of financial position has remained the same from year to year. This proves (he claims) the company has retained its book value and therefore has not suffered any deterioration in performance from 2012 to 2013. d. The share price has declined from €2.80 per share on 31 December 2012 to €1.60 per share on 31 December 2013. Tom does not understand the reasons for this. e. Tom is aware that there are valuable tools for analysing profitability, liquidity and efficiency. However, he has no knowledge of how to calculate or interpret these. Please calculate at least eight suitable ratios for each financial year in order to assist in addressing the issues raised by the managing director.
