Question

Question 2 Aisha was tasked to research the recent financial performance for Old Chang Kee Ltd (Old Chang Kee"). Below is an extract of its financial statements: Consolidated Income Statement For the financial year ended 31 March 2019 $'000 2018 $'000 Revenue Cost of sales Gross profit 89,789 (32.251) 57,538 85,487 (33,249) 52,238 Other income 1,209 1,729 Selling and distribution expenses Administrative expenses Finance costs Other expenses Share of results of joint venture Profit before tax (38,039) (12,892) (329) (1,774) (301) 5,412 (35,291) (11,782) (291) (1,791) (76) 4,736 Income tax expense (1,074) (952) Profit for the year 4,338 3,784 Consolidated Balance Sheet As at 31 March 2019 $'000 2018 $'000 2017 $'000 Non-current assets Property, plant and equipment Intangible assets Investment in unquoted shares Investment in associates and joint venture Long term deposits 28,453 228 234 160 2,568 31,643 31,560 289 64 461 2,434 34,808 27,571 352 273 0 2,024 30,220

Answer 1

(b) Comparison of Old CHang Kee;s return on equity(ROE) for FY 2019 to FY 2018.

Using DuPont equation, ROE= Net profit margin X Asset turnover X FInancial leverage

Net profit margin calculation

Net profit margin= Net profit/Revenue

H7 A C 1 Year B 2019 $'000 2018 $'000 2 3 4338 3784 89789 85487 4 Net profit 5 Revenue 6 7 Net profit margin 4.83% 4.43% 8

Formulas used:

Function Library H7 A B C 1 Year 2019 2018 2 $'000 $'000 4338 3784 3 4 Net profit 5 Revenue 6 7 Net profit margin 89789 85487 =B4/B5 =C4/C5 00

Net profit margin has improved from FY 2018 to FY 2019. This is majorly due to the growth in revenue and reduction in cost of sales whereas other expenses have increased. So, we can say that the company is in a good trajectory.

Asset turnover calculation

Asset turnover= Revenue/Average assets

F8 fa A B D E 1 Year с 2018 $000 2019 $'000 2017 N $'000 50712 3 4 Total assets 5 Revenue 6 7 Asset turnover 50917 89789 51271 85487 1.76 1.68 00

Formulas used:

B7 fx =B5/((B4+C4)/2) A B C D 2019 2018 2017 $'000 $'000 $'000 1 Year 2 3 4 Total assets 5 Revenue 50917 150712 51271 85487 89789 6 7 Asset turnover =B5/((B4+C4/2) !=c5/((C4+D4)/2) 00

Asset turnover has improved from FY 2018 to FY 2019. This indicates that the company has been able to use its assets more efficiently and will help in improving the ROE.

Financial leverage calculation

Financial leverage= Average Assets/Average Equity

F9 А 1 Year 2 B 2019 $'000 с 2018 $'000 D 2017 $'000 3 51271 50917 28457 50712 27374 27498 4 Total assets 5 Total equity 6 7 Financial leverage 1.83 1.86 00

Formulas used:

B7 fr =((B4+C4)/2)/((B5+C5)/2) A B с D 1 Year 2019 2018 2017 2 $'000 $'000 $'000 50917 51271 50712 28457 27498 27374 3 4 Total assets 5 Total equity 6 7 Financial leverage 8 =((B4+C4/2/(B5+C5)/2) !=((C4+D4)/2)/((C5+05)/2)

FInancial leverage has reduced slightly from FY 2018 to FY 2019, which means that it will have a negative impact on ROE. The company is borrowing less to fund its operations and growth in comparison to previous year but it could also mean that the company is trying to reduce risk involved in debt.

ROE calculation:

J11 A B с D 1 Year 2019 $'000 2018 $'000 2017 $'000 N 3 4 Net profit margin 5 Asset turnover 6 Financial leverage 7 4.83% 1.76 4.43% 1.68 1.83 1.86 8 ROE 15.52% 13.83% LD

Formulas used:

B8 for =B4*35*B6 A B D 1 Year 2019 2018 2017 2 $'000 $'000 $'000 3 4 Net profit margin 5 Asset turnover 6 Financial leverage 7 8 ROE 0.0483 1.76 (1.82625323921008 10.0443 1.68 1.85856174369442 =B4*B5 B6 =C4*25*C6 9

So, overall ROE has improved from FY 2018 to 2019 which suggests that the financial performance of the company has improved.