Question

The financial statements of Old Chang Kee Pte Ltd are given below: Old Chang Kee Profit & Loss for Year ending 31 March ($'000) 2019 2018 2017 89,789 85,487 78,345 (32,251) (33,249) (28,721) 57,538 52,238 49,624 Revenue less Cost of goods sold Gross Profit less Expenses Selling and distribution Administrative Other expenses Operating Profit (38,039) (35,291) (32,333) (12,892) (11,782) (11,614) (1,774) (1,791) (4,504) 4,833 3,374 1,173 Interest income Other income Profit before interest & tax 64 1,145 6,042 49 1,680 5,103 81 1,351 2,605 Share of results of joint venture less Interest expense Profit before tax (301) (329) 5,412 (76) (291) 4,736 (175) 2,430 less Tax Profit after tax (1,074) 4,338 (952) 3,784 685 1,745 Other comprehensive income Net profit 76 4,414 (19) (1,703) 3,765 42

Answer 1

Answer

i)

Current Ratio = The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year.

A company with a current ratio less than one does not, in many cases, have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than one indicates the company has the financial resources to remain solvent in the short-term.

So, Ideal Current Ratio is 1. Old Chang Kee's Current Ratio is 1.49 in 2019.

Quick Ratio = The quick ratio measures the dollar amount of liquid assets available against the dollar amount of current liabilities of a company. Liquid assets are the assets that can be quickly converted into cash with minimal impact on the price received in the open market, while current liabilities are a company's debts or obligations that are due to be paid to creditors within one year.

A company that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a company having a quick ratio higher than 1 can instantly get rid of its current liabilities.

So, Ideal Current Ratio is 1. Old Chang Kee's Quick Ratio is 1.43 in 2019.

Conclusion, Both Current and Quick ratio Old Chang Kee is more than 1. Company has enough current/liquid Asset to pay its current liability/creditors.

ii) Inventory Turnover Ratio:

• Inventory turnover shows how many times a company has sold and replaced inventory during a given period.
• A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing.
• A high ratio implies either strong sales or Low / insufficient inventory.

Old Chang Kee's Inventory Turnover ration is 81.85 which is relatively High. That sgguest company Lower inventory level.

iii) Reasonable Value of Share:

Reasonable Value of Share = P/E Ration x Earnings per share

Reasonable Value of Share = 18.05 x $0.05

Reasonable Value of Share = $0.90

Old Chang Kee's share is currently underpriced as current share price is $0.78 while reasonable share price is $0.78. Hance, IT is good time to buy this share.

iv) Following is the reason for Old Chang Kee's stock price is higher the its net assets value.

When the market value exceeds the book value, the stock market is assigning a higher value to the company due to the potential of it and its assets' earnings power.

It indicates that investors believe the company has excellent future prospects for growth, expansion, and increased profits that will eventually raise the book value of the company.

They may also believe the value of the company is higher than what the current book value calculation shows.

Consistently, profitable companies typically have market values greater than book values.

Growth investors may find such companies promising.

However, it may also indicate overvalued or overbought stocks trading at a high price.