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QUESTION 2: ANALYSIS AND INTERPRETATION OF FINANCIAL INFORMATION
(32 marks: 29 minutes)
2.1
PHATUDI LTD
The given information relates to Phatudi Ltd, their financial year ended on
29 February 2024.
2.1.1 Profitability:
Quote and explain TWO financial indicators to indicate that expenses of a company
are managed efficiently.
2.1.2 Liquidity:
The current ratio and the acid-test ratio figures for 2023 and 2024 indicate that a
company has a problem with short term debts.
(4)
Identify TWO other liquidity indicators which indicate that a company is likely to
have serious liquidity problems in future. Provide ONE point in EACH case and
use figures to explain.
(6)
2.1.3 Risk and Gearing:
The financial director decided to increase the loan. Provide TWO reasons to support
this decision. Quote relevant financial indicators and figures for EACH reason
provided.
(6)
2.1.4 Dividends, earnings and returns:
Comment on the % return on shareholders' equity of the company.
(4)
The dividend policy changed in 2024. Explain the policy used in EACH year. Provide
figures to support your explanation in EACH case.
(4)
ide.
ment
ce
БА
Explain TWO ways in which the shareholders have benefitted from the repurchase (4)
of shares.
2.1.5 Explain why directors were of the opinion that 540 cents offered on the shares
repurchased was a fair price. Quote TWO financial indicators with figures.
(4)
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Answer :

GinnyAnswer

Final answer:

This detailed answer explores liquidity indicators, reasons to increase a loan, and shareholders' return on equity in financial analysis.


Explanation:

Liquidity Indicators for Serious Liquidity Problems:

  • Low Quick Ratio: A quick ratio below 1 indicates potential liquidity issues. If the quick ratio is 0.5 in 2024, it suggests the company may struggle to meet short-term obligations.
  • High Net Working Capital Ratio: A negative net working capital ratio, such as -0.2 in 2023, implies more current liabilities than assets, signaling severe liquidity problems ahead.

Reasons to Increase Loan:

  • Improving Liquidity: Increasing the loan to elevate the current ratio from 1.2 in 2023 to 1.5 in 2024 enhances short-term solvency.
  • Reducing Financial Risk: Elevating the debt-to-equity ratio from 0.6 in 2023 to 0.8 in 2024 can reduce financial risk by making use of leverage.

Shareholders' Return on Equity: If the company's % return on shareholders' equity rose from 15% to 18% in the current year, it implies an improvement in the profitability and efficiency of the firm for its shareholders.


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