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Woobly Co

Woobly Co is a bakery which also owns two shops/cafés. Over the last two years, the company has

experienced declining profitability due to increased competition and so the directors wish to investigate

if this is a sector‐wide problem. Consequently, they have acquired equivalent ratios for the sector, some

of which have been reproduced below.

Sector averages for the year ended 30 June 20X7:

Return on capital employed 18.6%

Operating profit margin 8.6%

Net asset turnover 2.01

Inventory holding period 4 days

Debt to equity 80%

The following information has been extracted from the draft financial statements of Woobly Co for the

year ended 31 December 20X7.

Statement of profit or loss for the year ended 31 December 20X7

$000 Revenue 100,800 Cost of sales (70,000) Gross profit 30,800 Operating expenses (17,640) Profit from operations 13,160 Statement of financial position as at 31 December 20X7:$000

Non‐current assets                                                                                                                   55,000

Inventory                                                                                                                                    3,960

Equity:

Equity shares of \$1 each                                                                                                         17,000

Revaluation surplus                                                                                                                   5,400

Retained earnings                                                                                                                    10,480

Total equity                                                                                                                                32,880

Non‐current liabilities: 10%

bank loan                                                                                                                                    14,400

Other  information relevant  to Woobly Co:

1. In 20X6, Woobly Co acquired a popular brand name. At 31 December 20X7, the brand represented 20% of non‐current assets. The remaining 80% of non‐current assets comprises of the property from which Woobly Co operates its bakery and shops. This property is owned by Woobly Co and has no directly associated finance. The property was revalued in 20X4.
2. In the year ended 31 December 20X7, Woobly Co began offering discounted meal deals to customers. Woobly Co hoped this strategy would help to reduce perishable inventory and reduce inventory holding periods.
3. In the year ended 31 December 20X7, Woobly Co began offering discounted meal deals to customers. Woobly Co hoped this strategy would help to reduce perishable inventory and reduce inventory holding periods.

Required:

A. Adjust for the information in note (iii) and calculate the 20X7 sector average equivalent ratios for Woobly Co.
B. Assess the financial performance and position of Woobly Co for the year ended 31 December 20X7 in comparison with the sector average ratios.
C. Explain three possible limitations of the comparison between Woobly Co and the sector average ratios provided.