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
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:
Non‐current assets 55,000
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.