Page 23 - CIMA MCS Workbook February 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Analysis

All references to 2018 / 2017 are referring to the years ending 31 December 2018 / 31 December 2017
respectively.

Note that calculations for average inventory days, average receivables’ collection period and average
payables’ credit period have been performed but they may be of limited value, given the nature of
Crowncare’s business. This is considered further within the analysis, which follows.

Financial performance
The revenue of Crowncare increased by 15.7% in 2018 compared to the previous year with
operating profit and pre‐tax profit increasing by 12.9% and 16.4% respectively (there were no
finance costs) indicating strong growth.

Possible reasons for the growth of revenue and profitability could be that it was due to acquisition
of subsidiaries. It is possible that organic growth is partly responsible for this increase, particularly
if some of Crowncare’s weaker competitors ceased trading during the year.

Operating profit margin fell slightly from 42.3% in 2017 to 41.3% in 2018, which is the same as the
pre‐tax margin, as Crowncare has no debt or overdraft, and therefore incurs no finance charges.

Crowncare’s return on capital employed (ROCE) fell from 75.6% in 2018 to 63.6% in 2018.
Although there was an increase in operating profit from 2017 to 2018, this was more than offset
by an increase in capital employed. There was a reduction in long‐term loan finance, but there
was a significant increase in equity in the SOFP, with significant increases in both share
capital/share premium and retained earnings.

From 2017 to 2018, there was a decrease in non‐current asset utilisation, which fell from 2.8
times to 2.3 times, based upon using PPE (excluding goodwill). In a similar manner to ROCE,
growth in revenue was more than offset by an increase in PPE during the period under review.
However, there is evidence that new PPE was acquired during the year as the carrying amount of
PPE increased from V$34.254m to V$48.102m.

Note also that the carrying amount of goodwill increased from V$27.248m in 2017 to V$32.847m
in 2018, indicating that one or more acquisitions were made during the year ended 31 December
2018.

A calculation of the dividend paid in 2018 identifies that a dividend of V$20.739m was paid by
Crowncare, which represent approximately 62% of the profit after tax for the year. Crowncare
appears to be able to afford these payments from a profitability perspective, but Crowncare has
very limited cash balances, with just over V$0.876m in 2018, a small increase in the 2017 balance
of V$0.794m.

Financial position
The liquidity position of Crowncare appears weak with a current ratio of 0.47:1 for 2018, albeit
with an improvement from 0.46:1 in 2017. The quick ratio remained constant at 0.36:1 for both

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