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Berri Co

Berri Co would like to acquire 100% of a suitable private entity. It has obtained the following draft financial statements for two entities, Volka and Redel. They operate in the same industry and their managements have indicated that they would be receptive to a takeover.

Statements of profit or loss for the year ended 30 September 2020

    Volka    Redel
    $000    $000 
Revenue             12,000            20,500
Cost of sales          (10,500)          (18,000)
Gross profit                1,500             2,500
         
Operating expenses                (240)               (500)
Finance costs          
                       loan                (210)               (300)
                       overdraft     Nil                  (10)
                       lease     Nil                (290)
Profit before tax               1,050             1,400
Income tax expense               (150)               (400)
Profit for the year                 900             1,000
         
Note: Dividends paid during the year                250                700

Statement of financial position as at 30 September 2020

 Assets             
 Non‐current assets           
 Freehold factory (note (i)               4,400      Nil 
 Owned plant (note (ii))               5,000               2,200
 Right‐of‐use asset (note (ii))      Nil                5,300
               9,400               7,500
           
 Current assets           
 Inventory                2,000               3,600  
 Trade receivables                2,400               3,700  
 Bank                   600            5,000    Nil            7,300
 Total assets              14,400              14,800
           
 Equity and liabilities           
 Equity shares of $1 each               2,000               2,000
           
 Property revaluation surplus                   900      Nil   
 Retained earnings                2,600            3,500                800              800
               5,500               2,800
 Non‐current liabilities           
 Lease liabilities (note (iii))   Nil                3,200  
 7% loan notes                3,000      Nil   
 10% loan notes   Nil                3,000  
 Deferred tax                   600                  100  
 Government grants                1,200            4,800    Nil            6,300
           
 Current liabilities           
 Bank overdraft   Nil                1,200  
 Trade payables                3,100               3,800  
 Government grants                   400      Nil   
 Lease liabilities (note (iii))   Nil                   500  
 Taxation                     600            4,100                200           5,700
 Total equity and liabilities               14,400              14,800


                                                                                 Volka                           Rebel

                                                                               $000                              $000

 

Owned plant – cost                                           8,000                            10,000 

Right‐of‐use plant – initial value                      Nil                                 7,500

There were no disposals of plant during the year by either entity.

3. The interest rate implicit within Rebel’s leases is 7.5% per annum. For the purpose of calculating ROCE and gearing, all lease obligations are treated as long‐term interest bearing borrowings.

4. The following ratios have been calculated for Volka and can be taken to be correct:

Return on year end capital employed (ROCE)                                                14.8%

(capital employed taken as shareholders’ funds plus long‐term interest  

bearing borrowings – see note (iii) above)  

Gross profit margin                                                                                             12.5%  

Operating profit margin                                                                                     10.5%  

Current ratio                                                                                                     1.2:1  

Closing inventory holding period                                                                       70 days  

Trade receivables’ collection period                                                                   73 days  

Trade payables’ payment period (using cost of sales)                                           108 days  

Gearing (see note (iii) above)                                                                             35.3%  

Required:

A. Calculate for Rebel the ratios equivalent to all those given for Volka above.

B. Assess the relative performance and financial position of Volka and Rebe; for the year ended 30 September 2020 to inform the directors of Berri Co in their acquisition decision.
C. Outline the problems in using ratios for comparison purposes between entities, and suggest what additional information would be useful for Berri Co in reaching its decision.

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