Exam code: 7132
A business’ current liabilities are three times the level of its current assets.
Shareholders provide 20% of its capital employed.
This business has:
a high current ratio and a high gearing.
a high current ratio and a low gearing.
a low current ratio and a high gearing.
a low current ratio and a low gearing.
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To what extent are financial ratios the best way of assessing the performance of non-profit organisations, such as charities or mutuals?
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Biggs Ltd
Biggs Ltd operates in the snack food market, selling crisps, nuts and other savoury products. Potatoes are a key ingredient in its snacks. The price of potatoes has risen by 35% over the last two years.
The company is one of six firms who dominate a market that has been growing strongly for ten years. The market growth is largely due to the development of new snacks designed for children. However, Biggs Ltd’s market share has been falling since 2019.
Biggs Ltd plans to launch a completely new range of products in 2024. It will promote this by sponsoring a major televised sporting competition which has children and families as its audience.
Appendix A Extract from Biggs Ltd’s recent financial statements
2023 | 2022 | |
Revenue | 47 569 | 46 994 |
Gross profit | 22 289 | 22 820 |
Operating profit | 4 650 | 4 701 |
Payables | 5 056 | 5 221 |
Appendix B Labour productivity for Biggs Ltd and the snack food industry average (shown as an index number, base year = 2017)
Year | Biggs Ltd | Industry average |
2020 | 104.2 | 104.3 |
2023 | 100.3 | 105.9 |
Appendix C Marketing expenditure as a percentage of revenue, 2020–2024*
* 2024 based on Biggs Ltd’s forecast.
Appendix D Results of market research conducted with families on Biggs Ltd’s new product range and the promotional campaign
Survey question | Average survey score by age group | ||
6 to 16 years | 17 to 35 years | 36 years and over | |
I will definitely try the new products when they are available. | 9.9 | 7.2 | 1.8 |
The promotional campaign improves my view of Biggs Ltd’s brand. | 8.3 | 6.3 | 8.0 |
I frequently consume snack foods at sports events. | 8.9 | 6.9 | 2.7 |
Scale: 10 = strongly agree, 5 = neither agree nor disagree, 0 = strongly disagree | |||
Source: Data from 27 interviews with families, conducted by Biggs Ltd in 2021.
Appendix E Percentage of snack products bought and consumed by different box age groups
Results from a recent survey of 3000 respondents conducted by an independent market research firm.
Using Appendix A, calculate Biggs Ltd’s payables days ratio for 2023.
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Table 1 Extracts from financial records of Wot plc
£m | |
Non-current assets | 38 |
Current assets | 31 |
Current liabilities | (18) |
Non-current liabilities | (24) |
Wot plc receives £20 million from selling ordinary shares.
The company uses this money as follows:
£15 million to purchase machinery
£3 million to pay off its overdraft
£2 million to increase inventory levels.
Calculate Wot plc’s current ratio after these changes
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AJS plc
AJS plc is a manufacturer of non-recyclable packaging. This packaging is widely used by takeaway food outlets. AJS plc plans to invest £500 000 in new technology to increase capacity and make its factory more capital intensive.
Appendix A Data on proposed investment (produced by AJS plc’s operations manager)
Year | Annual net cash flow | Discount factor |
0 | (500) | 1.00 |
1 | (50) | 0.91 |
2 | 250 | 0.83 |
3 | 600 | 0.75 |
Appendix B UK market for non-recyclable takeaway food packaging
Appendix C UK market for recyclable takeaway food packaging
Appendix D Selected Human Resource data 2022
AJS plc | Industry average | |
Average salary | £22 000 | £26 000 |
Salary costs as a percentage of turnover (%) | 40 | 35 |
Labour turnover (%) | 15 | 4 |
Working days lost through industrial action | 24 | 5 |
Average number of applicants for vacancies | 14 | 55 |
Appendix E Selected Financial data for AJS plc
2022 | |
Current assets | £550 000 |
Current liabilities | £550 000 |
Non-current liabilities | £4m |
Operating profit | £3m |
Gearing | 22% |
Change in the share price of AJS plc over the year | –15% |
Change in the share price of the top 100 UK companies over the year | +8% |
Using Appendix E, calculate the Return on Capital Employed for AJS plc in 2022.
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AJS plc
AJS plc is a manufacturer of non-recyclable packaging. This packaging is widely used by takeaway food outlets. AJS plc plans to invest £500 000 in new technology to increase capacity and make its factory more capital intensive.
Appendix A Data on proposed investment (produced by AJS plc’s operations manager)
Year | Annual net cash flow | Discount factor |
0 | (500) | 1.00 |
1 | (50) | 0.91 |
2 | 250 | 0.83 |
3 | 600 | 0.75 |
Appendix B UK market for non-recyclable takeaway food packaging
Appendix C UK market for recyclable takeaway food packaging
Appendix D Selected Human Resource data 2022
AJS plc | Industry average | |
Average salary | £22 000 | £26 000 |
Salary costs as a percentage of turnover (%) | 40 | 35 |
Labour turnover (%) | 15 | 4 |
Working days lost through industrial action | 24 | 5 |
Average number of applicants for vacancies | 14 | 55 |
Appendix E Selected Financial data for AJS plc
2022 | |
Current assets | £550 000 |
Current liabilities | £550 000 |
Non-current liabilities | £4m |
Operating profit | £3m |
Gearing | 22% |
Change in the share price of AJS plc over the year | –15% |
Change in the share price of the top 100 UK companies over the year | +8% |
With reference to the data provided, would you advise a potential investor to buy shares in AJS plc?
Justify your view.
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Homeworking
Homeworking (or teleworking) is the action of working from home, using the Internet, email and the telephone to link the employee and the business remotely.
The number of people working from home has been rising steadily for several years as communications technology has improved.
Table 1 UK labour market data
2019 | 2020 | |
Number of people in employment (millions) | 32.6 | 32.5 |
Number of people working at least partly from home (millions) | 8.7 |
Some businesses now adopt homeworking as the normal practice. For example, several financial institutions have reduced the amount of office space they own or rent in city centres. The wider impact of the change has been seen through fewer commuting journeys.
There have been some concerns over increased homeworking due to a reduction in face-to-face communication between employees. There has also been a decline in sales for businesses, such as coffee shops, that rely on office staff as customers.
Some sectors, such as transportation and wholesale, provide few opportunities for people to work from home. Other sectors, such as IT, finance and insurance, provide more homeworking opportunities to staff.
Analyse one way the balance sheet of a business (its statement of financial position) might be affected if more of its employees work from home.
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Homeworking
Homeworking (or teleworking) is the action of working from home, using the Internet, email and the telephone to link the employee and the business remotely.
The number of people working from home has been rising steadily for several years as communications technology has improved.
Table 1 UK labour market data
2019 | 2020 | |
Number of people in employment (millions) | 32.6 | 32.5 |
Number of people working at least partly from home (millions) | 8.7 |
Some businesses now adopt homeworking as the normal practice. For example, several financial institutions have reduced the amount of office space they own or rent in city centres. The wider impact of the change has been seen through fewer commuting journeys.
There have been some concerns over increased homeworking due to a reduction in face-to-face communication between employees. There has also been a decline in sales for businesses, such as coffee shops, that rely on office staff as customers.
Some sectors, such as transportation and wholesale, provide few opportunities for people to work from home. Other sectors, such as IT, finance and insurance, provide more homeworking opportunities to staff.
Would increased homeworking improve the performance of businesses that use Elkington’s Triple Bottom Line to measure their success?
Justify your view.
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Based on Kaplan & Norton’s Balanced Scorecard model, a policy to increase Research and Development spending on new products by 5% would be an element of the:
customer perspective.
financial perspective.
internal business process perspective.
learning and growth perspective.
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Based on the data provided in Table 1 below.
Table 1 includes all of Magpie plc’s current assets and current liabilities at the end of its financial year, ending 31 March 2021. The inventory level on 31 March 2021 is identical to the average level of inventory held during the year.
Table 1 Extracts from financial accounts of Magpie plc
Item | (£m) |
Sales revenue | 80 |
Cost of sales | 50 |
Bank overdraft | 7 |
Inventory | 8 |
Payables | 12 |
Receivables | 17 |
Calculate the inventory turnover of Magpie plc.
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Based on the data provided in Table 1 below.
Table 1 includes all of Magpie plc’s current assets and current liabilities at the end of its financial year, ending 31 March 2021. The inventory level on 31 March 2021 is identical to the average level of inventory held during the year.
Table 1 Extracts from financial accounts of Magpie plc
Item | (£m) |
Sales revenue | 80 |
Cost of sales | 50 |
Bank overdraft | 7 |
Inventory | 8 |
Payables | 12 |
Receivables | 17 |
Calculate the payables days for Magpie plc.
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Based on the data provided in Table 1 below.
Table 1 includes all of Magpie plc’s current assets and current liabilities at the end of its financial year, ending 31 March 2021. The inventory level on 31 March 2021 is identical to the average level of inventory held during the year.
Table 1 Extracts from financial accounts of Magpie plc
Item | (£m) |
Sales revenue | 80 |
Cost of sales | 50 |
Bank overdraft | 7 |
Inventory | 8 |
Payables | 12 |
Receivables | 17 |
Calculate the current ratio for Magpie plc.
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Table 1 below shows efficiency ratios for four different companies.
Table 1 Efficiency ratios for four companies
Ratios | Company | |||
A | B | C | D | |
Payables days | 35 days | 35 days | 25 days | 25 days |
Receivables days | 25 days | 25 days | 35 days | 35 days |
Inventory turnover (times) | 15 | 10 | 15 | 10 |
Based on these ratios, which company is most likely to have the best cash flow?
Company A
Company B
Company C
Company D
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Which one of the following perspectives is not used by Kaplan and Norton’s balanced scorecard?
Customer
External businesses
Financial
Learning and growth
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The table below shows the changes in the two efficiency ratios for Wilson PLC, 2018–2019.
Ratios | 2018 | 2019 |
Receivables days | 30 | 45 |
Payables days | 38 | 43 |
Analyse the implications of these changes for Wilson PLC’s cash levels.
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Drake Hotels PLC owns 20 budget hotels in the UK. Each one is located in a different city. The industry is very competitive and Drake’s managers all have an objective to help the business to be as efficient as possible.
Drake Hotels PLC’s operating profit for the financial year 2019–20 was £18 million. Last month the company appointed a new Chief Executive, Mary Myers, to increase the profitability of the business. Mary was previously the Marketing Manager of an upmarket hotel chain.
Mary is already considering an investment proposal for a luxury hotel in Oxford. This hotel would target overseas visitors who might want to visit the city. Drake Hotels has found a suitable building but needs to invest to develop it.
Appendix A Investment appraisal results for the proposed investment into a new hotel in Oxford (based on net inflows for first eight years).
Average rate of return 12% per year
Net Present Value £25 million
Source: Chief Executive
Appendix B Sensitivity analysis for the new Oxford hotel investment proposal
Two possible changes in the economy that might affect the investment appraisal results in Appendix A | Estimated probability of this change happening |
The value of the pound against other currencies is 10% higher than originally forecasted. | 20% |
The average GDP growth in overseas countries is 1.5% higher than originally forecasted. | 30% |
Source: Chief Executive
Appendix C Selected financial data for Drake Hotels PLC
£ million as at 1 May 2020 | |
Current assets | 15 |
Current liabilities | 18 |
Total equity | 170 |
Non-current liabilities | 280 |
Appendix D Forecasted data for Drake Hotels PLC’s new Oxford hotel investment proposal
Initial investment required £20 million
Estimated income elasticity of demand +2
Percentage of customers visiting from overseas 70%
Estimated cost of borrowing for this investment 8% per annum
Appendix E Room bookings by month and day of the week in Drake Hotels PLC’s budget hotels 2019
Using the data in Appendix C, calculate the following ratios for Drake Hotels PLC in 2020.
Current ratio .......................................................................................................
Gearing ratio ......................................................................................................
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Read the case study in the Insert (opens in a new tab).
Elaine’s view is that Personal Care was Sunport PLC’s most successful division in box Europe in 2019.
To what extent do you agree with Elaine’s view?
You should support your answer using Appendix D and the other information provided.
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A business has non-current liabilities of £200 000 and a gearing ratio of 40%. It then takes out a long-term loan of £100 000 from the bank.
Calculate its new gearing ratio after taking out this bank loan.
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More businesses are now using broad measures of overall business performance, such as Kaplan & Norton’s Balanced Scorecard and Elkington’s Triple Bottom Line, rather than focusing solely on financial ratio analysis.
To what extent does this mean that financial ratio analysis is no longer important to a business?
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A business has more current liabilities than current assets and shareholders provide 90% of its capital employed.
This business has
a high current ratio and high gearing.
a high current ratio and low gearing.
a low current ratio and high gearing.
a low current ratio and low gearing.
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Marks and Spencer plc is one of the UK’s leading retailers. It provides its own-brand food, clothing and home products in 1433 stores worldwide and online.
Appendix A Extracts from Marks and Spencer plc’s published
financial accounts
Balance sheet as at 1 April 2017
£ million | |
Assets | |
Non-current assets | 6 569 |
Current assets | 1 723 |
Liabilities | |
Current liabilities | 2 368 |
Non-current liabilities | 2 774 |
Net assets | 3 150 |
Equity | |
Total equity | 3 150 |
Appendix B Marks and Spencer plc’s revenue and operating profit
2013–14 to 2016–17
Appendix C Marks and Spencer plc customer data for financial
year ending 1 April 2017
Total number of customers | Percentage change on previous year | Average number of times a year a customer buys from Marks & Spencer | Percentage change on previous year | |
Food | 20.5 million | +2.0% | 22.5 | 0% |
Clothing and home | 24.6 million | 0% | 7.2 | –5.3% |
Appendix D Marks and Spencer plc online data
2016–17 | Percentage change on previous year | |
Total online revenue | £836.3 million | +5.6% |
Weekly site visits | 8.3 million | +11% |
Appendix E Information on Marks and Spencer plc’s Board of
Directors in 2017
International experience: directors come from the following
countries
China Germany Hong Kong India Japan Italy
UK Spain Netherlands Poland South Africa USA
Gender diversity: 70% of directors are male, 30% female
Industry sector experience of directors: retail 90%, consumer 100%, finance 60%, e-commerce and technology 40%
Appendix F Marks and Spencer plc’s share price
Explain, with an example, what is meant by non-current assets.
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Marks and Spencer plc is one of the UK’s leading retailers. It provides its own-brand food, clothing and home products in 1433 stores worldwide and online.
Appendix A Extracts from Marks and Spencer plc’s published
financial accounts
Balance sheet as at 1 April 2017
£ million | |
Assets | |
Non-current assets | 6 569 |
Current assets | 1 723 |
Liabilities | |
Current liabilities | 2 368 |
Non-current liabilities | 2 774 |
Net assets | 3 150 |
Equity | |
Total equity | 3 150 |
Appendix B Marks and Spencer plc’s revenue and operating profit
2013–14 to 2016–17
Appendix C Marks and Spencer plc customer data for financial
year ending 1 April 2017
Total number of customers | Percentage change on previous year | Average number of times a year a customer buys from Marks & Spencer | Percentage change on previous year | |
Food | 20.5 million | +2.0% | 22.5 | 0% |
Clothing and home | 24.6 million | 0% | 7.2 | –5.3% |
Appendix D Marks and Spencer plc online data
2016–17 | Percentage change on previous year | |
Total online revenue | £836.3 million | +5.6% |
Weekly site visits | 8.3 million | +11% |
Appendix E Information on Marks and Spencer plc’s Board of
Directors in 2017
International experience: directors come from the following
countries
China Germany Hong Kong India Japan Italy
UK Spain Netherlands Poland South Africa USA
Gender diversity: 70% of directors are male, 30% female
Industry sector experience of directors: retail 90%, consumer 100%, finance 60%, e-commerce and technology 40%
Appendix F Marks and Spencer plc’s share price
Calculate the following ratios for Marks and Spencer plc for the financial year ending box 1 April 2017 to two decimal places. [9 marks]
The return on capital employed _________________________________
Workings__________________________________________________
The gearing ratio ____________________________________________
Workings__________________________________________________
The current ratio _____________________________________________
Workings___________________________________________________
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The information below is an extract from a company’s annual accounts.
Current assets: £3 million
Current liabilities: £2.4 million
Non-current liabilities: £4.2 million
Capital employed: £12 million
The company’s gearing ratio is
35%
250%
20%
5%
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A business has recently started to use Elkington’s Triple Bottom Line to assess its overall performance.
To what extent do you think the business is likely to have lower profits as a result of this?
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Read the case study in the Insert.
Analyse, using two financial ratios, the financial constraints faced by KMH plc in attempting to fund the new strategy.
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