223 Woodbank Co

Ratio Calculation Result

Return on capital (16,250+1,750)/(175,000-25,0000) 12%
employed

Net asset turnover (150,000+1,750)/175,000 1 times

Gross profit margin 33,000/150,000 22%
Profit before interest (16,250+1,750)150000 12%
and tax margin
Current ratio 27,000/25000 1.08 :1
Gearing (55,000)/(175,000-25,000) 36.7%

B, equivalent raito for Shaw Co

Ratio Calculation Result
ROCE (16,250+1,750-5000)/(175,000- 13%
25,000-50,000)
Net asset (150,000-30000+1,750)/(175,000-25,000- 1.22 times
turnover 50,000)
Gross profit (33,000-9000)/(150,000-30,000) 20%
margin
Profit before (16250+1750-5000)/(150000-30000) 10.8%
interest and tax
margin

C,
Performance
Follow above table, we can see that If ROCE of Woodbank at the year ended
31/03/20X4 increase 2.5% ( 13%-10.5%) than ROCE of this company at th year
ended 31/0.4/20X3. It suggest that,Woodbank is more using capital effective than
prevous. However, Woodbank bought Shaw Co, Company must paid cash to buy
Shaw, it’s increase 10% loan note, therefore, Capital employed is increase and
ROCE is fall. But, they don’t worry about that, beacauce, purchasing Shaw Co will
make more earning oppertunity for company
During the three months to 31/04/20X4 Shaw Co had a gross profit margin is 30%
(9,000/30,000). Combined with Woodbank Co, it raise Woodbank Co ‘s gross
profit margin from 20% to 22%. Woodbank Co’s idividual gross profit margin Had
therefore declined by 2% Since 20X3. While revenue has risen by 9%, Cost of sale
has increased by 11%. However, Woodbank has done well at keeping down
expense and its PBIT margin withouts Shaw Co ( 10.8%) would have been up on
20X3 (9.1%). It id important to remember that Shaw Co only owned for the final
three months of the financial year. Not much times for addition asset to show a
return. It is likely that acquisition will enhance protability to a grester extent over
the next 12 months.
Liquidity
The current ratio of Woodbank Co has fallen from 1.7:1 to 1.08:1. This is a step
drop. We can see immediately that cah reserves have declined b7 $4.5 million,
which is likely to be due to using cash reserves to party fund that acquisition of
Shaw Co. Trade payable has increased by $8 million. This suggest that Woodbank
Co is having trouble paying its supplier on time or that Shaw had a large amount
of trade payable which have now been consolidated within the group. The
payable payment period had increased from 55 days to 66 days. The retain
earning balance show that Woodbank Co paid a dividend of $5.5 MILLION
DURING 20x4. This was perhaps unwise when working capital was needed to
finance expansion and pay the additional laon interest. Had the dividend not been
paid the current ratio 20X4 would be 1.3:1 – still a fall from 20X3, but less
alarming.
Gearing
Gearing has risen from 5.3% to 36.7%, attributable to an additional $50 million
loan note issued to finance the acquisition of Shaw.The interest payment each
year $5.5 million ( 10%*50 million) which is the same as the amount od the
dividend paid 20X4, Shareholder may be expect to receive less in future years as
the servicing of the debt will take priority, but had the acquisition been funded by
by the share issuedd their return would have been diluted, Gearing of 36.7% is
still within acceptable limites and futnd future good return from the acquisition
will build up retain earning and keep gearing in check.
Consolution
Woodbank Co’s performance would have been broadly comparable to previous
year had no acquisition of Shaw Co. The acquisition of Shaw Co has had
distrimental effect on liquidity anf gearing for 20X4 but appear from three months
result to have the capacity to significantly increase profit for Woodbank Co. It
seems likely that over a longer period this will also improve liquidity and gearing,
giving overall positive result for shareholders