Dragon Limited is a public entity which has grown in recent years by acquiring established business entities.

The directors of Dragon Limited have identified two potential entities targeted for a takeover. The directors believe
that the shareholders of the two target companies would be receptive to a takeover.
As a pre-requisite to the takeover decision, the directors have tasked a firm of consultants to carry out a cross-
sectional analysis of the financial statements of the two potential target companies which operate in the same
industry sector.
The financial statements of the two entities as at 30 April 2022 are shown below:
Statement of profit or loss for the year ended 30 April 2022:
Able Ltd Ceda Ltd
Sh.'000' Sh.'000'
Revenue 87,500 140,000
Cost of sales 66,500 114,800
Gross profit 21,000 25,200
Distribution costs 1,495 2,710
Administrative expenses 2,880 5,340
Operating profit 16,625 17,150
Finance costs 875 3,150
Profit before tax 15,750 14,000
Income tax expense 3,150 3,500
Profit for the year 12,600 10,500

Statement of financial position as at 30 April 2022:

Able Ltd Ceda Ltd
Sh.'000' Sh.'000'
Assets
Non-current assets:
Property 9,800 10,500
Owned plant 7,000 8,050
Right of use asset - 17,500
16,800 36,050
Current assets:
Inventory 5,600 11,900
Trade receivables 7,350 17,850
Bank 3,850 700
Total assets 33,600 66,500
Equity and liabilities:
Equity:
Ordinary share capital( Sh.10 par value) 3,500 7,000
Revaluation surplus 1,750 3,150
Retained earnings 5,600 9,450
Total equity 10,850 19,600
Non-current liabilities:
Lease liability - 14,700
10% loans 15,750 17,500
Current liabilities:
Trade payables 4,375 7,350
Lease liability - 2,450
Current tax 2,625 4,900
Total equity and liabilities 33,600 66,500

REQUIRED:
i) Common size statements of profit or loss for the two entities for the year ended 30 April 2022.
ii) Common size statements of financial position as at 30 April 2022.
iii) Advise the directors of Dragon Limited on the best company for take over.
rectors believe
RATIOS FORMULAE:

DEBT RATIOS
1 Debt to equity ratio Total Liability
Total shareholder equity

2 Debt ratio Total Liabilities

Total Assets

3 Proprietary ratio Shareholders Fund

Total Assets

4 Capital gearing ratio Equity share capital

Fixed interest bearing funds

5 Debt service ratio PBIT

Fixed interest charges
LIQUIDITY RATIOS
1 Current ratio Current assets
Current liabilities

2 Quick ratio Current assets( less inventory)

Current liabilities
PROFITABILITY RATIOS
1 Return on equity Net income
Average shareholder equity

2 Gross margin Gross profit * 100

Sales (Net)

3 Return on assets Net Income * 100

Total assets
4 Operating cost ratio Operating cost * 100
Sales
5 Return on investment Profit after I and T * 100
Shareholders fund invested

6 Return on capital PAT * 100

Gross capital employed

7 Earning per share Profit attributable to ordinary shareholders

Number of ordinary shares in issue

8 Dividend pay-out ratio Dividend per share * 100

 EPS

9 Dividend yield ratio Dividend per share * 100

Market price per share

10 Price Earnings ratio Market price per share * 100

EPS

11 Net profit to net worth ratio PAT * 100

Shareholders net worth

WORKING CAPITAL RATIOS

1 Inventory ratio Sales

Inventory

2 Debtors turnover ratio Sales

Account receivables

3 Debt collection ratio Receivables * Months/ days in a year

Credit sales

4 Creditors turnover ratio Purchases

Average accounts payable

5 Average payment period Average creditors * 100

Credit purchases

6 Working capital turnover ratio Sales

Working capital

7 Fixed assets turnover ratio Cost of sales

Total Fixed assets

8 Capital turnover ratio Cost of sales

Capital employed