Main Business Activities and Total Current Assets for the Metcash Group - Assignment Example

Question 1) Metcash Limited is a company that operates in various industries and is primarily an in-store retailer. The following are main business activities of Metcash Ltd: IGA Distribution: Metcash Ltd is involved in the distribution of IGA branded and non branded products. IGA Fresh: Metcash also provides fresh food to end consumers through its various retail outlets including meat, vegetables and fruits. Australian Liquor Marketers: Metcash also supplies liquor at wholesale rates to various liquor stores and restaurants. Campbells Wholesale: Metcash is also into the fast moving consumer goods having retail outlets all over Australia where consumers can purchase FMCGs. Mitre 10: Metcash sells hardware under this brand name. It also involves home improvement solutions for the end consumers. Metcash Ltd operates in the areas of distribution, fresh food, liquor, fast moving consumer goods and hardware. 2: a) Sale of goods accounting for $11517.4 million was the main source of revenue for the Metcash group. b) Cost of sales was the largest expense for Metcash group. It was $10435.3 million in the year 2010. c) The total comprehensive income for the Metcash group was $229.6 million in the year 2010. d) Return on assets= Net income /Total Assets Return on assets for 2009= 203.2/3286.5 =6.18% Return on assets for 2010= 230.3/3639 =6.33% e) Gross profit margin= Gross profit /Revenue Gross profit margin for 2009=1116.6/11067.5 =10.09% Gross profit margin for 2010= 1172.8/11608.1 =10.10% f) There has been a very slight improvement in the profitability of Metcash Ltd. The return on assets increased from 6.18% in 2009 to 6.33% in 2010. This can be attributed to the higher sales revenue that Metcash earned in the year 2010 compared to the revenue in the year 2009. Although Metcash purchased more assets to generate the higher revenue, the increase in revenue was more than the proportionate increase in total assets. The gross profit margin of Metcash remained relatively stable at 10.1%. This indicates that costs of Metcash remained relatively stable. Even if there was an increase in the costs, it was matched by a similar increase in the selling price to retain the gross profit margin that was earned by Metcash in 2009. 3. a) The total current assets for the Metcash group were $1974.7 million in the year 2010. b) The total current liabilities for the Metcash group were $1448.4 million in the year 2010. c) Current Ratio= Current Assets /Current Liabilities Current Ratio for 2009=1802.4/1309.8 =1.38 times Current Ratio for 2010= 1947.7/1448.4 =1.34 times d) Quick Ratio= Current Assets-Inventory /Current Liabilities Current Ratio for 2009= (1802.4-680.5)/1309.8 =0.86 times Quick Ratio for 2010= (1947.7-747.2)/1448.4 =0.83 times e) Liquidity ratios measure the ability of a company to pay off its short term debts. The current ratio of Metcash fell from 1.38 times to 1.34 times. This is due to the increase in the trade payables of Metcash Ltd. The reasons of this increase should be investigated since making timely payments to the creditors is essential to obtain trade discounts. Quick ratio includes only the most liquid of the current assets to assess if a company can cover its current liabilities. Metcash Ltd’s quick ratio also fell slightly from 0.86 times in 2009 to 0.83 times in 2010. A quick ratio of less than 1 indicates that Metcash does not have ample liquid assets to cover its short term obligations. Metcash Ltd’s most of the cash is tied up in inventory and Metcash Ltd should take measures to improve its liquidity position. f) Days inventory= (inventory/cost of sales)*365 Days inventory for 2009= (680.5/9950.9)*365 =24.96 days Days inventory for 2010= (747.2/10435.3)*365 =26.14 days g) Days Debtors= (Account receivables/Revenue)*365 Days Debtors for 2009= (967.7/11067.5)*365 =31.91 days Days Debtors for 2010= (1008/11608.1)*365 =31.70 days h) The days inventory ratio indicate the number of days it takes to sell the inventory. In the case of Metcash Ltd, the inventory days increased from 24.96 days to 26.14 days. This can be attributed to the higher inventory figure of $747.2 million in 2010 compared to $680.5 million in 2009. This is not a good sign for Metcash Ltd as piling too much inventory may lead to liquidity problems. Furthermore, inventory can become obsolete with the passage of time leading towards undue losses. There was slight fall in the days debtor ratio of Metcash Ltd as it fell from 31.91 days in 2009 to 31.7 days in 2010. Although the accounts receivables of Metcash increased, credit sales increased by a much higher proportion. Metcash Ltd should make efforts to minimize the number of days in which debtors make payments by offering cash discounts and other incentives. i) Debt ratio= Total Debt/Total Assets Debt ratio for 2009= (2007.1/3286.5) =61.07% Debt ratio for 2010= (2261.4/3639) =62.14% j) 62% of the total assets of Metcash Ltd are financed by debt in 2010. This ratio has increased in 2010 indicating that Metcash Ltd has taken more debt to expand its operations. Since debt is accompanied with fixed interest payments, taking on more debt makes a company riskier as it has to make the interest payments even if the company does not make a profit. Hence a lower debt ratio is generally better as investors perceive it to be a less risky company. However, if a company uses the debt taken productively and generate a higher rate of return than the rate of interest paid, company will grow and be profitable in the long run. 4. a) Net cash flow from operating activities for the Metcash group for 2010 was $294.7 million. b) 2 largest cash receipts were: Receipts from customers: $12440.4 million Proceeds from borrowings: $795 million Metcash group should depend on the cash receipts from customers for its long term survival since taking on debt regularly will make Metcash group a risky company. c) The payment of interest has increased drastically indicating the high level of debt Metcash group has taken. The cash outflow from investing activities has increased by $30 million in 2010 since Metcash is investing a lot of cash in acquisition of new equipment. This can lead to serious cash flow problems for Metcash group in the long term. 5. 1) What are the expansion plans that you would pursue in the future to make use of the debt and what plans do you have which will help in repayment of the debt you have taken? It is essential to know the future expansion plans of the business to decide whether to invest in the company or not. Metcash must have growth and expansion plans due to which debt is being. So it is important to know how efficiently this debt will be used in expanding the business operations of Metcash. 2) How much of the profit do you intend to pay as dividends and how much do you intend to retain? As an investor, it is important to know if company intends to pay its profit as dividend or retain it for further expansion. If Jim wants a constant income from his investment, then he will want frequent dividend payments from Metcash group. 3) What contingency plan do you have to tackle the external challenges that you may face in future? Due to the deteriorating external environment, it is important to know any contingency plans a company may have if there is a global recession in the World. Q2: 1. Allen Repair Services Corrected Income Statement For the year ending 31st December 2010 (1) $ $ Repair Service Revenue (4 and 7) 88500 Expenses: Rent Expense (6) 20300 Electricity and Telephone Expenses 5300 Salaries Expense 35900 Supplies Expense 4700 Interest Expense (3) 1600 Total Expenses 67800 Net Profit 20700 2. Allen Repair Services Corrected Balance Sheet As at 31st December 2010 (1) $ $ Current Assets: Cash at bank 6800 Prepaid Rent (6) 4000 Accounts Receivable (2 and 4) 7500 18300 Non Current Assets: Equipment (5) 21000 Motor Vehicles 36200 57200 Total Assets 75500 Current Liabilities: Accounts Payable (5) 13500 Interest owing (3) 1600 Unearned Service Revenue (7) 1000 16100 Non Current Liabilities: Bank Loan 10000 Total Liabilities 26100 Net Assets 49400 Owners Equity: Capital 49400 Total Equity 49400 Workings: (1) An income statement is a statement that shows the profitability of a business for a particular period. Tim incorrectly wrote as at 31 December 2010 for the income statement of Allan Repair services. Furthermore, a balance sheet shows the position of a company at a particular date and is not for a whole period. (2) Accounts receivable is not an income statement item but it appears on a firm’s balance sheet since it is an asset of a company. (3) Interest owing: Interest owing on a bank loan is a liability for the business and hence is credited whereas interest is an expense which is accounted for in the income statement. Interest Expense $1600 Interest owing $1600 (4) According to accrual basis of accounting, revenues recorded in the period in which they are earned. Hence even though customer has not paid for the service provided to him, the revenue should be recognized in the current period if it is earned. (5) Purchase of equipment should be recorded in the financial statements of Allan repair since it was purchased in the current period. (6) According to the matching concept, expenses should be recorded in the period in which they are incurred. Hence rent in advance is not an expense for the current period. (7) Since cash was received in advance for a service which Allan services will provide in future, it is an obligation for Allan services and hence is regarded as a liability. Repair service revenue $1000 Unearned Service revenue $1000 Read More