Task: Interpret financial statements using appropriate ratios and comparisons, both internal and external
Case Study:
The Green Garden Company Limited (TGGC Ltd) owns and runs 20 Green Fingers garden centres across the South of England, from Cornwall to Kent. The business was established 15 years ago and store numbers have increased gradually. However, no new stores have been opened since 2007 due to the recession in the UK.
The company Board of TGGC Ltd is as follows:
• Managing Director - Tim Smith
• Company Secretary - James Ireland
• Finance Director - Kim Franks
• Operations Director - Sam Raine
The Board of TGGC Ltd believe that the economic recovery has started and have plans to expand by opening a further 10 stores in the Midlands and Wales.
Your brief is to provide TGGC Ltd with an understanding of the financial issues they need to consider before any expansion takes place and prepare a detailed report and presentation to the owners addressing the following tasks from the information provided:
You have been provided with the relevant industry average ratios which are as follows:
|
|
2010
|
2009
|
|
Return on Capital Employed
|
9.6%
|
9.4%
|
|
Net Profit %
|
21.4%
|
21.3%
|
|
Quick Ratio/Acid Test
|
1.0:1
|
0.9:1
|
|
Gearing (Debt/Capital Employed)
|
36%
|
37%
|
The Green Garden Company’s current financial information is as follows:
|
The Green Garden Company Limited
|
|
Summary Income Statements ended 31st December
|
|
|
2010
£K
|
2009
£K
|
|
Revenue
|
2,300
|
2,100
|
|
Cost of Sales
|
1,035
|
945
|
|
Gross Profit
|
1,265
|
1,155
|
|
|
|
|
|
Administrative Expenses
|
500
|
490
|
|
Distribution Costs
|
213
|
203
|
|
Net Profit
|
552
|
462
|
|
|
|
|
|
The Green Garden Company Limited
|
|
Summary Statement of Affairs as at 31st December
|
|
|
2010
£K
|
2009
£K
|
|
Non-current Assets
|
|
|
|
Property Plant and Equipment
|
4,764
|
5,418
|
|
|
|
|
|
Current Assets
|
|
|
|
Inventory
|
522
|
419
|
|
Receivables
|
406
|
356
|
|
Cash Balances
|
117
|
62
|
|
|
|
|
|
Total Current Assets
|
1,045
|
837
|
|
|
|
|
|
Current Liabilities
|
|
|
|
Trade Liabilities
|
305
|
254
|
|
Tax Liabilities
|
170
|
211
|
|
Total Current Liabilities
|
475
|
465
|
|
|
|
|
|
Net Current Assets
|
570
|
372
|
|
|
|
|
|
Long Term Loan
|
1,654
|
2,490
|
|
|
|
|
|
Total Liabilities
|
2,129
|
2,955
|
|
|
|
|
|
|
3,680
|
3,300
|
|
|
|
|
|
Equity
|
|
|
|
Share Capital
|
1,382
|
1,227
|
|
Retained Earnings
|
2,298
|
2,073
|
|
|
3,680
|
3,300
|
Question:
Comment on TGGC’s profitability, liquidity and financial position and how it has changed over the two years and include comparisons with the industry as a whole from figures provided. Your report should include calculations of the following ratios for the two years:
a. Return on Capital Employed
b. Net Profit %
c. Quick Ratio/Acid Test
d. Gearing