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

Sherston 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.

Accounts and finance

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