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BPP Question 234

The acquisition of Shaw Co has negatively impacted Woodbank Co's liquidity and gearing ratios for the year ending March 31, 2024, with the current ratio dropping from 1.7:1 to 1.08:1 and gearing increasing from 5.3% to 36.7%. However, the acquisition has led to improved profitability metrics, with a higher gross profit margin and profit before interest and tax margin compared to the previous year. Overall, while the immediate financial position appears weakened, the long-term outlook for profitability is positive as the full benefits of the acquisition materialize over the next year.

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24 views2 pages

BPP Question 234

The acquisition of Shaw Co has negatively impacted Woodbank Co's liquidity and gearing ratios for the year ending March 31, 2024, with the current ratio dropping from 1.7:1 to 1.08:1 and gearing increasing from 5.3% to 36.7%. However, the acquisition has led to improved profitability metrics, with a higher gross profit margin and profit before interest and tax margin compared to the previous year. Overall, while the immediate financial position appears weakened, the long-term outlook for profitability is positive as the full benefits of the acquisition materialize over the next year.

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seong040616
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Ratio Woodba Working Woodba Working Woodba

nk Co nk nk Co
2023 Co 2024
2024 Excludin
g Shaw
Return on 10.5% (16250+17 12% ^ (16250+17 13%
capital 50)/ 50-5000)/
employed (95000+55 (150000-
000) 50000)
Gross profit 22% 33000/1500 22% ^ (120000- 20%
Margin 00 96000)/
120000
Profit before 9.1% (16250+17 12% ^ 13000/120 10.8%
Interest and 50)/ 150000 000
tax Margin
Current ratio 1.7:1 27000/2500 1.08:1
0
Gearing 5.3% 55000/ 36.7%
(debt/ (55000+95
debt+equity) 000)

(c) Assess the comparative financial performance and position of Woodbank


CO for the year ended 31 March 2024. Your answer should refer to the effects
of the purchase of Shaw Co.

Analysis of performance
The acquisition of Shaw Co has materially affected the results of WoodBank
Co for the year ended 31 March 2024. In order to make its results of 2024
more comparable to year 2023, it is necessary to calculate Woodbank Co
performance without the acquisition of Shaw Co.

Profitability
The acquisition of Shaw Co give rise to higher Gross profit margin and Profit
before interest and tax margin as compared to Wood Co Ratio results without
the acquisition of Shaw Co.
However, 50m of 10% loan notes as consideration to acquire Shaw Co will
increase Capital employed and therefore reduced the ROCE, ROCE with Shaw
CO is 12% which is lower than the ROCE without Shaw Co of 13%. This can be
due to there is only three months profit of Shaw Co was being included in
PBIT. If 12 months profit is included we could expect the ROCE will be higher
in next financial year.
Woodbank Co individual Gross profit margin is 20% which is 2% lower as
compared to previous year Gross Profit margin, when its sales increased by
9% and its cost of sales increased by 11.8%. However, the results included
Shaw Co show a higher Gross profit margin of 2%. It is important to remember
that Shaw Co was only owned for the final three months of the financial year,
not much of time to use the additional assets to show a return. It is likely that
the acquisition will enhance profitability and give rise to higher performance
ratio over the next 12 months.

Liquidity
The current ratio of Woodbank Co has fallen from 1.7:1 to 1.08:1. We can see
immediately that the cash reserves has declined by 4500, which is likely be
due to the consideration paid to acquire Shaw Co. Additionally trade payable
of Woodbank Co was significantly increased by 8m. This could be due to
Woodbank Co is having trouble paying its suppliers on time or the larger
amount of Woodbank Co is from the consolidated of Shaw Co payable.

Gearing ratio
Gearing has significantly risen from 5.3% to 36.7%. This could be explain by
Woodbank Co attribute 50m 10% loan notes to acquire Shaw Co. The interest
payments of loan each year will be 5.5m. There is an indication that
Woodbank Co ability to service the interest. Since the gearing is higher
Woodbank Co is now harder to get finance from bank if its want to expand its
business.

Conclusion
The acquisition of Shaw Co has had a unfavorable effect on liquidity and
gearing for year 2024, but the appears from the 3 months results is has a
capacity to significantly increase woodbank Co’s profit for the next 12 months.

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