Page 24 - MCS August Day 1 Suggested Solutions

CIMA AUGUST 2018 – MANAGEMENT CASE STUDY

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

Note that calculations for gearing have been based on the assumption that the non‐current
liabilities represent long‐term loans outstanding.

Financial performance

The revenue of Montel fell slightly by 0.8% to F$32,265m, but there was a growth in operating
profit and pre‐tax profit increasing by 9.9% and 10.8%. The improvement in profitability has
resulted from a reduction in selling, general and administrative expenses.

Both the operating profit margin and pre‐tax profit margin improved by from 2017 to 2018 with
the 2018 margins at 10.15% and 8.7%.

Montel’s return on capital employed (ROCE) rose slightly from 3.11% in 2017 to 3.40% in 2018.
Although there was an increase in operating profit from 2017 to 2018, there was also a slight
increase in capital employed over the same period. There was a increase in long‐term loan
finance, along with an increase in retained earnings. There was no increase in the combined total
of share capital/share premium from 2017 to 2018.

From 2017 to 2018, there was a small decrease in non‐current asset utilisation, with Montel
generating revenue of F$0.36 for each F$1 invested in non‐current assets (F$0.37 in 2017).
Revenue fell very slightly by 0.8%, whilst there was a small increase in non‐current assets.

A calculation of the dividend paid in 2018 identifies that a dividend of F$1,754m was paid by
Montel in 2018, which represent approximately 75% of the profit after tax for the year. Montel
appears to be able to afford these payments from a cash perspective as it has cash and equivalent
balances of over F$850m at both the start and at the end of the year.

Financial position
Montel has a current ratio of 6.38:1 for 2018, albeit with a slight fall from 6.86:1 in 2016.
However, on closer examination, inventory represents approximately 60% of current assets in
both 2018 and 2018. The acid test ratio of 2.28:1 (2.56:1 in 2017) appears to indicate that Montel
has sufficient access to liquid resources to meet liabilities as they fall due.

Montel’s inventory holding period of 150 days (145 days in 2017) appears to be unduly long and
should perhaps be investigated further if possible. It may be that part of the inventory is old or
obsolete and has not been written down as required by IAS 2 Inventories. There may be poor
materials requisitioning and purchasing policies which could be reviewed and improved.

The receivables collection period remained reasonably constant at 31 days for 2018 (32 days in
2017), representing approximately 8.6% of revenue for 2018. Although there was a small increase
in the payables payment period from 24 days to 26 days in 2017, this should not be a cause for
concern.

68 KAPLAN PUBLISHING