Question

Question 4 (25 marks)

	Speed supermarket		Industry average (Benchmark)
	2019	2018	2019
Profitability:
Gross profit % (GP/sales)	14%	11%	12%
Net profit % (profit after tax/sales)	3%	1.8%	4%
Return on equity (profit/equity)	10%	8.30%	14.28%
Activity and Short-term liquidity
Current ratio	2.8:1	2.3:1	2.5:1
Acid-test ratio (Liquidity ratio)	1.5:1	1.7:1	1.9:1
Inventory turnover period (days)	10 days	5 days	7 days
Account payable turnover period (days)	45 days	35 days	40 days
Asset turnover (sales/total assets)	2	3	2.5
Long-term solvency (liquidity)
Debt ratio ( or debt-equity ratio)	40% (66.6%)	35% (53.8%)	30% (42.9%)
Investment ratios
P/E ratio	8	11	10
Dividend yield	2%	2.5%	3%

Required:

(a) Comment on the performance of Speed supermarket for the years of 2019 and 2018 with reference to the ratios above in the following areas:

            a. Profitability                                                                                                

            b. Activity and Short-term liquidity                                                              

            c. Long term solvency                                                                                   

            d. Investment                                                                                                 

                                                                                                                                    [20 marks]

(b) Based on the comment above, if you are a financial adviser, will you advise investors to buy the shares of this company? Justify your answer.                                                 [5 marks]

Answer 1

1 Profitability * The Gross Profit ratio of industry is 12% as given which is a healthy %. * The GP ratio for the said company was 11% in 2018 which shows less profit as compared to industry. Also, the GP % for 2019 is 14% which shows growth of 3% as compared to last year and excess of 2% as compared to average industry Gross Profit. * The Net Profit ratio of industry is 4% as given which is a healthy %. * The NP ratio for the said company was 1.8% in 2018 which shows less profit as compared to industry. Also, the NP % for 2019 is 3% which shows growth 1.2% as compared to last year. * However, it is still less than industry NP of 4% which menas company has lots of indirect expenses. * Similarly, Return on Equity of company is 8.30% in 2018 and grown to 10% in 2019 * However it is still lower then industry ROE of 14.28% * The company is not able to deliver industry average return to its shareholders. 2 Activity and short term Liquidity * Current Ratio menas current asset upon current liabilities. The industry Current ratio is 2.5:1 * The company has improved its current ratio from 2.3:1 to 2.8:1 * The company has 2.8 times current assets for every 1 current liability. * Similarly, acid test of liquidity ratio of company had reduced from 1.7 to 1.5. * However, it is still better as compared to industry ratio. * Inventory turnover ratio has degraded from 2018 and turn double from 5 to 10 days. * It has gone beyond industry average of 7 days. * The company is taking 10 days for its inventory to completely sale. * Accounts payable menas number of days taken to make payment to creditor which is 40 days average. * It has increased from 35 days in 2018 to 45 days in 2019. This gives negative impact as company is not paying its creditors which might mean liquidity cunch. * Assets turnover means amount of assets as compared to turnover and higher is better. * Industry average is 2.5 times and company has 3 times in 2018 and reduced to 2 times in 2019. * The company has not been able to maintain its turnover or reduced the amount of assets. In both cases, the impact doesn't give positive review of the company. 3 Long Term Investment * Standard debt equity ratio is 2:1. Industry ratio is 42.9%. * The companys debt ratio has increased from 35% in 2018 to 40% in 2019 * However, it is still better than industry ratio of 42.9% 4 Investment Ratios * P/E ratio menas price upon equity and industry P/E is 10 times. * The company's P/E has gone down from 11 times to 8 times in 2019. * This is a bad sign as higher P/E ratio signifies higher market price. * The company's share price has gone down or earnings have gone down. * Dividend yield of 3% is industry average and company has 2.5% in 2018 and 2% in 2019 * The company has reduced its dividend giving % as compared to 2018 in 2019. * Ths shareholders are not getting enough return on their investment in terms of dividend. b FINAL ANSWER * Though there are both positives and negatives about every company and every business, as a investor I would be reluctant to invest because the NP ratio is less as compared to industry. * ROE is lower and P?E ratio has also gone down. * The accounts payable days have increased and there might be liquidity crunch. * The company is not paying dividend. * The current assets have increased but liquidity has reduced.