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Question 4a

Kamala Co, a listed company, manufactures parts and machinery for the construction industry. About five years ago, Kamala Co started to manufacture parts and machinery for hospitals and companies engaged in biomedical research using largely the same manufacturing and processing systems it already had in place. In 2011, a young and ambitious chief executive officer (CEO) took over the running of the company.

With the publication of the latest financial statements for the year to 30 November 2014, the CEO made a brief statement and it includes the following two points:

– The CEO was very pleased with growth in the financial ratios provided and sales revenue from 2012 to 2014.
More pleasing was growth in the share price, which increased even faster than the growth in the market index, suggesting that Kamala Co has been a successful company.
– The CEO expressed a desire to make Kamala Co the leading manufacturer of parts and machinery for the construction industry by acquiring a major rival manufacturer in 2015, and financing the acquisition through an issue of a new bond and a small rights issue.

An analyst, after examining the recent financial statements and the two points above, was less positive about Kamala Co’s future prospects.

Given below are extracts from the recent financial statements, some ratios, and other financial information for Kamala Co.

ACCA AFM (P4) Past-papers Q4

Required:
(a) Discuss the advantages and drawbacks of using the economic value added (EVATM) technique to assess a company’s performance. (6 marks)