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Squad Co (Sept/Dec 17)

Squad Co is an international airline which flies to destinations all over the world. Squad Co experienced strong initial growth but in recent periods the company has been criticised for under-investing in its non-current assets.

Extracts from Squad Co's financial statements are provided below.

Statements of financial position as at 30 June:

                                                                                                20X7                                    20X6

                                                                                                                        $'000                                   $'000

Assets

Non-current assets

Property, plant and equipment                                                              317,000                              174,000

Intangible assets (note ii)                                                                           20,000                                 16,000

                                                                                                                        337,000                              190,000

 

 

Current assets

 Inventories                                                                                                      580                                        490

Trade and other receivables                                                                    6,100                                      6,300                

Cash and cash equivalents                                                                       9,300                                    22,100

 

 

Total current assets                                                                                   15,980                                28,890

 

Total assets                                                                                                  352,980                              218,890

 

Equity and liabilities

Equity

Equity shares                                                                                                3,000                                     3,000

Retained earnings                                                                                      44,100                                41,800

Revaluation surplus                                                                                   145,000                                  Nil

Total equity                                                                                                  192,100                              44,800

 

Liabilities

Non-current liabilities

6% loan notes                                                                                              130,960                              150,400

 

Current liabilities

Trade and other payables                                                                          10,480                                  4,250

6% loan notes                                                                                                19,440                                19,440

Total current liabilities                                                                                29,920                                23,690

Total equity and liabilities                                                                        352,980                              218,890

 

 

Other EXTRACTS from Squad Co's financial statements for the years ended 30 June:

 

                                                                                                                        20X7                     20X6

                                                                                                                        $'000                    $'000

Revenue                                                                                                        154,000               159,000

Profit from operations                                                                                12,300                 18,600

Finance costs                                                                                                 (9,200)               (10,200)

Cash generated from operations                                                            18,480                  24,310

The following information is also relevant:

1. Squad Co had exactly the same flight schedule in 20X7 as in 20X6, with the overall number of flights and destinations being the same in both years.
2. In April 20X7, Squad Co had to renegotiate its licences with five major airports, which led to an increase in the prices Squad Co had to pay for the right to operate flights there. The licences with ten more major airports are due to expire in December 20X7, and Squad Co is currently in negotiation with these airports.

Required

A. Calculate the following ratios for the years ended 30 June 20X6 and 20X7:

1. Operating profit margin;
2. Return on capital employed;
3. Net asset turnover
4. Current ratio;
5. Interest cover;
6. Gearing (Debt/Equity).

Note. For calculation purposes, all loan notes should be treated as debt.
B. Comment on the performance and position of Squad Co for the year ended 30 June 20X7.

Note.
Your answer should highlight any issues which Squad Co should be considering in the near future.

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