Question 31a
Mowair Co is an international airline which flies to destinations all over the world.
Mowair Co experienced strong initial growth but in recent periods the company has been criticised for under-investing in its non-current assets.
Extracts from Mowair Co’s financial statements are provided below.
Statements of financial position as at 30 June:
| 20X7 | 20X6 | |
|---|---|---|
| $’000 | $’000 | |
| Assets | ||
| Non-current assets | ||
| Property, plant and equipment | 317,000 | 174,000 |
| Intangible assets (note ii) | 20,000 | 16,000 |
337,000 | 190,000 | |
| Current assets | ||
| Inventories | 580 | 490 |
| Trade and other receivables | 6,100 | 6,300 |
| Cash and cash equivalents | 9,300 | 22,100 |
| Total current assets | 15,980 | 28,890 |
| Total assets | 352,980 | 218,890 |
| Equity and liabilities | ||
| Equity | ||
| Equity shares | 3,000 | 3,000 |
| Retained earnings | 44,100 | 41,800 |
| Revaluation surplus | 145,000 | Nil |
| Total equity | 192,100 | 44,800 |
| Liabilities | ||
| Non-current liabilities | ||
| 6% loan notes | 130,960 | 150,400 |
| Current liabilities | ||
| Trade and other payables | 10,480 | 4,250 |
| 6% loan notes | 19,440 | 19,440 |
| Total current liabilities | 29,920 | 23,690 |
| Total equity and liabilities | 352,980 | 218,890 |
Other EXTRACTS from Mowair Co’s financial statements for the years ended 30 June:
| 20X7 | 20X6 | |
|---|---|---|
| $’000 | $’000 | |
| Revenue | 154,000 | 159,000 |
| Profit from operations | 12,300 | 18,600 |
| Finance costs | (9,200 ) | (10,200 ) |
| Cash generated from operations | 18,480 | 24,310 |
The following information is also relevant:
| (i) | Mowair Co had exactly the same flight schedule in 20X7 as in 20X6, with the overall number of flights and |
|---|---|
| (ii) | In April 20X7, Mowair Co had to renegotiate its licences with five major airports, which led to an increase in the prices Mowair Co had to pay for the right to operate flights there. The licences with ten more major airports are due to expire in December 20X7, and Mowair Co is currently in negotiation with these airports. |
Required:
(a) Calculate the following ratios for the years ended 30 June 20X6 and 20X7:
| (i) | Operating profit margin; |
|---|---|
| (ii) | Return on capital employed; |
| (iii) | Net asset turnover; |
| (iv) | Current ratio; |
| (v) | Interest cover; |
| (vi) | Gearing (Debt/Equity). |
Note: For calculation purposes, all loan notes should be treated as debt.
(6 marks)
