Question

Michael and Simphiwe have been successfully running a retail business for a few years now, but have decided it is time to expand and would like your help in analysing their financial statements. You may require the following information to assist them: The business is a public company trading at R18 per share at the end of 2016 and was trading at R19 per share at the end of 2015. There are 10 000 000 ordinary shares in issue, and no preference shares. The company declared a dividend of R0.50 per share in 2015 and R0.60 in 2016.

Answer 1

1-
Years			2016		2015
debt ratio	total of liabilities/total of assets	(180000+88820)/502898	0.53	(200000+95750)/492378	0.60
Interest coverage ratio	EBIT/Interest	81300/20000	4.07	84440/23000	3.67
Yes company is able to meet its interest expense obligation as Interest coverage ratio is Increasing in comparison to previous Year
Yes both the ratios are showing increasing trend so they should not be worried about the trend in the ratio. Trend shows a positive trend over the years
2-
The investor would demand a lower cost of capital because if additional fund is raised through a debt financing, the increased leverage in capital structure would increase the financial risk and investors would demand a higher cost of capital
3-			2016		2015
EPS	Net income/no. of shares	43450/10000	4.345	44240/10000	4.424
PE ratio	Market price/EPS		4.14		4.29
4-	EPS ratio had declined over the year and PE ratio also shows a declining trend in comparison to previous year means investors are ready to pay less per dollar of earning per share
5-	ROE	profit margin*total asset turnover*equity multiplier	5.69%*1.52*2.15	18.59%
	profit margin	net profit/sales	43450/763000	5.69%
	total asset turnover	total sales/total assets	763000/502898	1.52
	equity multiplier	total of assets/total of equity	502898/234078	2.15
6-	No I would not be happy with the return on equity of 18.59% because cost of capital is 22% which is rate of minimum required return
7-	Trade off between short term profit maximization and long term goal of wealth creation would help to achieve the long term objective of wealth creation or increase in the intrinsic value of share price can be achieved with the short term profitability goal of organization. Example of short term profitability and long term losses is that suppose you hold a land which now can be sold at a price increase of 200% but that land would be needed for expansion of factory outlet so this decision in short term results in capital gain but in long term this would result in long term losses.
8-	one year of financial statement would help you to know the profitability, solvency, liquidity position of the current year but this analysis over the years would help you to find out the trend over the period. Common size income statement, balance sheet, horizontal and trend analysis and ratio analysis would help you to better understand the clear picture of company over a period of time.