Reference no: EM13179221

Peter Harris has been told that Tech Logistics plc is a fast growing company and he seeks your advice on whether or not to buy shares in the company. He has provided you with the following summarised information taken from the recent annual accounts of Tech Logistics plc:

	2011 (£'000)	2010 (£'000)
Income statement for the period:
Revenue*	27,400	25,000
Gross profit	9,300	7,300
Net profit (after interest and taxation)	890	810
Dividend	500	500
Balance sheet:
Non-current assets	11,340	10,860
Inventories	1,380	1,300
Trade receivables	980	810
Cash at bank	320	400
Current Liabilities/Trade payables	3,140	2,900
Non-current liabilities	1,620	1,700
Share capital (£1 shares fully paid)	8,000	8,000
Retained earnings	1,340	860

* Assume all sales and purchases are made on credit rather than cash payment.

The share price of Tech Logistics plc is currently 130 pence per share (110 pence in 2010) and it has been around this level for the past few months. The trade association to which Tech Logistics plc belongs compiles ratios taken from the annual accounts of its members, and from other sources, and you have obtained the following recent industry averages for some key ratios:

     Gross profit margin - 50%

     Current ratio - 2.50 times (or 2.50:1)

     Acid test ratio - 1.90 times (or 1.90:1)

     Average settlement period for trade receivables - 25 days

     Average inventories turnover period - 30 days

     Gearing ratio - 60%

     Price/earnings ratio - 10 times

Question 1

Calculate the above ratios (a)-(g) for Tech Logistics plc for the 2010 and 2011 periods. Show how you have arrived at your answers, so your tutor can provide specific feedback if errors have been made.

Question 2

Comment on how the company's overall performance compares to the average for its industry, pointing out any significant features, assumptions and limitations of the information used to analyse the company's performance.

Question 3

On the basis of the data available, what advice would you give to Peter Harris? Consider the return that Peter could expect from owning the shares compared with leaving the money on deposit with the bank. What further information would you advise him to seek before deciding whether or not to buy shares in Tech Logistics Plc.?

Guidance for Part 1

This part of TMA03 is closely related to and builds on several accounting concepts which were taught in Block 4. It is essential to treat ratio analysis with great caution and to understand the basis of calculations and the nature of the data used. In this TMA sufficient information has been made available to you to compare and interpret the ratios of Tech Logistics plc and industry averages. The key approach in tackling this TMA is to ask yourself 'What value do we expect for each ratio? What additional information would be useful for interpretation of the company's performance?' and seek an interpretation of the similarities and differences.