Question 31c
Funject Co has identified Aspect Co as a possible acquisition within the same industry.
Aspect Co is currently owned by the Gamilton Group and the following are extracts from the financial statements of Aspect Co:
Extract from the statement of profit or loss for the year ended 31 December 20X4
| $’000 | ||
|---|---|---|
| Revenue | 54,200 | |
| Cost of sales | 21,500 | |
| Gross profit | 32,700 | |
| Operating expenses | 11,700 | |
| Operating profit | 21,000 |
Statement of financial position as at 31 December 20X4
| $’000 | $’000 | |
|---|---|---|
| Assets | ||
| Non-current assets | 24,400 | |
| Current assets | ||
| Inventory | 4,900 | |
| Receivables | 5,700 | |
| Cash at bank | 2,300 | 12,900 |
| Total assets | 37,300 | |
| Equity and liabilities | ||
| Equity | ||
| Equity shares | 1,000 | |
| Retained earnings | 8,000 | |
| 9,000 | ||
| Liabilities | ||
| Non-current liabilities | ||
| Loan | 16,700 | |
| Current liabilities | ||
| Trade payables | 5,400 | |
| Current tax payable | 6,200 | 11,600 |
| Total equity and liabilities | 37,300 |
Additional information:
| (i) | On 1 April 20X4, Aspect Co decided to focus on its core business and so disposed of a non-core division. The disposal generated a loss of $1·5m which is included within operating expenses. The following extracts show the results of the non-core division for the period prior to disposal which were included in Aspect Co’s results for 20X4: |
|---|
| $’000 | |
|---|---|
| Revenue | 2,100 |
| Cost of sales | (1,200) |
| Gross profit | 900 |
| Operating expenses | (700) |
| Operating profit | 200 |
| (ii) | At present Aspect Co pays a management charge of 1% of revenue to the Gamilton Group which is included in operating expenses. Funject Co imposes a management charge of 10% of gross profit on all of its subsidiaries. |
|---|---|
| (iii) | Aspect Co’s administration offices are currently located within a building owned by the Gamilton Group. If Aspect Co were acquired, the company would need to seek alternative premises. Aspect Co paid rent of $46,000 in 20X4. Commercial rents for equivalent office space would cost $120,000. |
| (iv) | The following is a list of comparable industry average key performance indicators (KPIs) for 20X4: |
|---|
| KPI | |
|---|---|
| Gross profit margin | 45% |
| Operating profit margin | 28% |
| Receivables collection period | 41 days |
| Current ratio | 1·6:1 |
| Acid test (quick) ratio | 1·4:1 |
| Gearing (debt/ekvity) | 240% |
Required:
| (c) | Using the ratios calculated in part (b), comment on Aspect Co’s 20X4 performance and financial position compared to the industry average KPIs provided in note (iv). (10 marks) |
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