Reference no: EM132341615 , Length: word count:2000
Task -
Sustainable business and mission requires effective planning and financial management. Ratio analysis is a useful management tool that will improve your understanding of financial results and trends over time, and provide key indicators of organizational performance. Managers will use ratio analysis to pinpoint strengths and weaknesses from which strategies and initiatives can be formed.
You are the assistant to the Chief Financial Officer of ELB and you have been asked to perform a preliminary review of, and prepare a commentary on, the yearend figures. These comments will form part of the financial presentation to the board.
ELB is an entity that manufactures and sells paper and packaging. For the last two years, the directors have pursued an aggressive policy of expansion. They have developed several new products and market share has increased.
ELB has finalized its financial statements for the year ended 31 December 2018. These will be presented to the Board of Directors at its next meeting, where the results for the year will be reviewed.
As part of their review, the directors will discuss certain key ratios that form part of the banking covenants in respect of the borrowing facilities as well as reviewing the performance in the year. The key ratios for the covenants include:
- Gearing (debt/equity) target is 50%
- Interest cover target is 9.5 times
- Current ratio target is 1.5: 1
- Quick ratio target is 1.1: 1
The income statement and balance sheet at the year end and its comparative for last year are presented below:
|
Income statement for the year ended 31 December
|
2018
|
2017
|
|
$000
|
$000
|
|
Revenue
|
34,200
|
28,900
|
|
Cost of sales
|
(24,000)
|
(20,250)
|
|
Gross profit
|
10,200
|
8,650
|
|
Distribution costs and administrative expenses
|
(5,120)
|
(3,300)
|
|
Finance costs
|
(520)
|
(450)
|
|
Profit before tax
|
4,560
|
4,900
|
|
Income tax expense
|
(1,300)
|
(1,400)
|
|
Profit for the year
|
3,260
|
3,500
|
|
Balance sheet
|
2018
|
2017
|
|
$000
|
$000
|
|
Assets
|
|
|
|
Non-current assets
|
|
|
|
Property, plant and equipment
|
25,930
|
17,880
|
|
Investments - available for sale
|
6,200
|
5,400
|
|
32,130
|
23,280
|
|
Current assets
|
|
|
|
Inventories
|
4,500
|
3,600
|
|
Trade receivables
|
4,300
|
5,200
|
|
Cash and cash equivalents
|
-
|
120
|
|
8,800
|
8,920
|
|
Total assets
|
40,930
|
32,200
|
|
Equity and liabilities
|
|
|
|
Equity
|
|
|
|
Share capital ($1 ordinary shares)
|
10,000
|
10,000
|
|
Revaluation reserve (Note 1)
|
4,200
|
1,100
|
|
Other reserves (Note 2)
|
1,800
|
1,000
|
|
Retained earnings
|
7,460
|
4,200
|
|
23,460
|
16,300
|
|
Non-current liabilities
|
|
|
|
Term loan
|
6,000
|
6,000
|
|
6% bonds 2020 (Note 3)
|
5,400
|
5,200
|
|
11,400
|
11,200
|
|
Current liabilities
|
|
|
|
Trade and other payables
|
5,800
|
4,700
|
|
Short term borrowings
|
270
|
-
|
|
6,070
|
4,700
|
|
Total equity and liabilities
|
40,930
|
32,200
|
Note 1 - The movement on the revaluation reserve relates to property, plant and equipment that was revalued in the year.
Note 2 - The movement on other reserves relates to the gains made on the available for sale investments.
Note 3 - The bonds are repayable on 1 July 2020.
Task 1 - Prepare a report that explains the financial performance and position of ELB for presentation to the Board of Directors, including reference to the banking covenants. The reports should include all the required ratio as part of the review of covenants and any other ratios that are relevant to assess the financial performance and position of ELB.
Identify, and briefly describe, any other points that should be added to the meeting agenda for the Board of Directors to discuss in respect of the future financing and improvement of ELB.
Note - Total around 2000 words and don't forget to use some references "Harvard referencing".