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Ratio analysis - limitations

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This is an opportunity to consolidate, and review progress to date in this long, complex unit. The following case study covers all of the topics covered in this unit so far. It is a good revision exercise.

Sherston Antiques plc

Antiques.pngSherston Antiques have been trading for 10 years. Their accounts for the last four years are shown below.

The business grew quickly, but like many small businesses they have had some financial issues along the way. They are now looking to raise capital for a further expansion through a rights issue. The proposal is a 2 for 1 deal, at a price of 40 cents per share.

They have been able to revalue their properties as a result of the housing boom in the recent years. However, they have been hit by a series of bad debts in Latin America markets.

The company has built up a very good reputation, and its logo is well known, and has become a sign of quality and value. The CEO is proposing at the next Board Meeting that this should now be recognised in the accounts by the inclusion of an entry for intangible assets.

You are a shareholder of Sherston Antiques and have just received the latest Annual Report and Accounts, and the papers for the rights issue. Examine the accounts, and then answer the following questions.

Accounts summary for Sherston Antiques plc

Year 1 2 3 4
Sales revenue 1,000 1,200 1,100 1,500
Cost of sales 500 600 600 700
Gross profit 500 600 500 800
Other costs 200 250 300 360
Depreciation 50 50 60 60
Profit before interest and tax 250 300 140 380
Interest 50 50 100 80
Taxation 40 50 20 200
Profit after interest and tax 160 200 20 100
Dividends 80 80 80 80
Retained profits 80 120 (60) 40


Fixed assets
Buildings 1000 1000 1950 1950
Others 4300 4420 4370 4410
Intangibles 0 0 0 0
5300 5420 6320 6360
Current assets
Stock 200 250 350 250
Debtors 250 250 110 250
Cash 100 110 100 80
550 610 560 580
Current liabilities
Creditors 100 80 60 40
Overdrafts 100 120 140 160
200 200 200 200
Net current assets 350 410 360 380
Net assets 5650 5830 6680 6740
Financed by:
Share capital 3000 3000 3000 3000
Revaluation reserve 500 500 1500 1500
Retained profits 1000 1120 1060 1100
Long-term liabilities
Loans 500 1210 1020 1040
Debentures 650 0 100 100
Capital employed 5650 5830 6680 6740
Share price 1.00 1.05 0.94 1.05


Note: There are 3 million shares sold, with a face value of 10c, on the market today. The sale of another 2 million shares is already authorised.


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Question 1

Explain the term 'rights issue'.

Question 2

Identify when:

  • Sherston Antiques revalued their buildings
  • wrote off their bad debts

Question 3

Explain the consequences of these actions on the ratios of the company.

Question 4

Analyse the benefits of the rights issue for Sherston Antiques.

Question 5

Discuss the advantages and disadvantages of including intangible assets in company accounts.