Page 25 - CIMA May 18 - MCS Day 1 Suggested Solution

SUGGESTED SOLUTIONS

Analysis

All references to 2017 / 2016 are referring to the years ending 31 December 2017 / 31 December 2016
respectively.

Note that calculations for average inventory days, average receivables’ collection period and average
payables’ credit period have not been performed due to non‐availability of sufficient information. This is
considered further within the analysis which follows.

Financial performance
The revenue of Menta increased by 5.0% in 2017 compared to the previous year with operating
profit and pre‐tax profit increasing by 14.8% and 16.4% respectively 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 Menta’s weaker competitors ceased trading during the year.

Both the operating profit margin and pre‐tax profit margin increased by approximately three
percentage points from 2016 to 2017, with the 2017 margins at 35% and 34.4% respectively.

Menta’s return on capital employed (ROCE) fell from 93% in 2016 to 77.7 in 2017. Although there
was an increase in operating profit from 2016 to 2017, 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 share capital/share premium and
retained earnings.

From 2016 to 2017, there was a 26% decrease in non‐current asset utilisation which fell from 3.11
times to 2.29 times. In a similar manner to ROCE, growth in revenue was more than offset by an
increase in non‐current assets during the period under review.

However, there is evidence that new assets have been acquired during the year as the carrying
value of PPE has increased from C$1,147.3m to C$1,667.95m, even if the increase is due in part to
retranslation of foreign subsidiaries’ non‐current assets from 2016 to 2017.

A calculation of the dividend paid in 2017 identifies that a dividend of C$618.5m was paid by
Menta in 2017, which represent approximately 54% of the profit after tax for the year. Menta
appears to be able to afford these payments from a cash perspective as it has considerable cash
and equivalent balances of over C$300m at both the start and at the end of the year.

Financial position
The liquidity position of Menta appears adequate with a current ratio of 1.12:1 for 2017, albeit
with a slight fall from 1.18:1 in 2016. The quick ratio remains healthy, even though it fell slightly
from 1.14:1 to 1.07:1 during the same period. Menta is undoubtedly assisted in this by the nature
of its operations – passengers pay in advance or at the point of making a journey, so there are
relatively small minimal trade receivables’ balances outstanding other than, perhaps, subsidies
due but not yet received. At 31 December 2017, trade receivables accounted for 5% revenue for

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