On hearing that you are undertaking a subject in accounting as a part of your degree you are approached by a friend, Michael Graham, to give him advice regarding the potential purchase of a business.
Michael grew up working in his parents' convenience store (The Family Mart) for many years and he understands the business well. He now has the opportunity to purchase 100% of the shares of Get 'N' Go Pty Ltd, which runs a similar convenience type store. Michael has been left enough money by his uncle to pay cash for the shares in the company. He has asked you to analyse the accounts of Get 'N' Go Pty Ltd and to advise him on whether to buy it. Another alternative is simply to invest the asking price of $2,000,000 in a 5 year term deposit at a local bank.
Additional Information:
- The share capital of the business represents 100,000 ordinary shares (the company has not issued any preference shares) and they are not listed on the stock exchange, as it is a private company.
- The price being offered for the business can only be used to calculate a proxy share price for the latest year as the price of the business may have been significantly different if it had been offered for sale in the other years.
- Of the operating expenses, selling and administrative expenses account for the following:
2011: $168,000 2010: $168,000 2009: $210,000
The remainder of the operating expense is financial. The financial expense is wholly comprised of interest.
- Get 'N' Go Pty Ltd paid its owners a dividend of $180,000 in 2009.
- In late 2009 a major grocery chain store set up a new shop one street from the Get 'N' Go Store and this is reflected in the drop in sales in 2010.
- For the purpose of this assignment ignore the taxation implications of Michael's investment.
- On average 20% of Get 'N' Go's sales are made on credit.
REQUIRED:
1. Prepare a report for Michael Graham which analyses the profitability, liquidity and financial stability of Get 'N' Go Pty Ltd. Maximum 1,000 words.
2. As part of your report present a recommendation based upon your analysis as to whether you believe Michael should buy Get 'N' Go Pty Ltd. Maximum 250 words.
3. Explain some of the shortcomings/disadvantages you see in basing decisions purely on the results of financial statement analysis. What other actions which would add depth, insight and additional information could be taken when seeking to analyse a business entity? This section does not need to be addressed to Michael. Consider what you may have learned in other core courses such as marketing, economics, human resources, statistics, law etc. that may also impact on this type of decision.
Get 'N' Go Pty Ltd.
Comparative Income Statements
for the years ended 30 June 2011, 2010 and 2009.
(in thousands of $'s)
|
|
2011
|
2010
|
2009
|
|
Net Sales
|
1,860
|
1,830
|
2,100
|
|
Cost Of Sales
|
1,320
|
1,320
|
1,500
|
|
Gross Profit
|
540
|
510
|
600
|
|
Operating Expenses
|
204
|
204
|
252
|
|
Operating Profit before Tax
|
336
|
306
|
348
|
|
Income tax expense
|
101
|
92
|
104
|
|
Operating Profit after Tax
|
235
|
214
|
244
|
Get 'N' Go Pty Ltd.
Comparative Balance Sheets
as at 30 June 2011, 2010 and 2009
(in thousands of $'s)
|
|
2011
|
2010
|
2009
|
|
Assets:
|
|
|
|
|
Cash
|
192
|
168
|
240
|
|
Debtors
|
72
|
72
|
90
|
|
Inventory
|
146
|
140
|
170
|
|
Land and Buildings (net)
|
720
|
720
|
720
|
|
Other Non-Current Assets (net)
|
40
|
40
|
40
|
|
Total Assets
|
1,170
|
1,140
|
1,260
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Creditors
|
222
|
228
|
240
|
|
Short Term Borrowings
|
60
|
66
|
72
|
|
Accrued Expenses
|
12
|
18
|
12
|
|
Non-Current Liabilities
|
96
|
108
|
120
|
|
Total Liabilities
|
390
|
420
|
444
|
|
NET ASSETS
|
780
|
720
|
816
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
Share Capital (100,000 shares)
|
600
|
600
|
600
|
|
Retained Profits
|
180
|
120
|
216
|
|
|
780
|
720
|
816
|
| The Family Mart Averages |
|
|
Gross profit margin
|
30%
|
|
Profit after tax
|
15%
|
|
Current ratio
|
2.1:1
|
|
Average collection period
|
36 days
|
|
Inventory turnover
|
13 times
|
|
Equity ratio
|
62%
|
|
Asset turnover
|
4.5 times
|
Attachment:- Prepare a report for Michael Graham.xls