Page 26 - CIMA May 18 - MCS Day 1 Suggested Solution

CIMA MAY 2018 – MANAGEMENT CASE STUDY

the year. Menta also has substantial cash and equivalent balances in excess of C$325m at each
reporting date.

There is insufficient information to enable calculation of working capital ratios for Menta. This
should not be a significant issue as Menta is not a trading or manufacturing enterprise, and nor
does it generate a significant proportion of its revenue from making sales on credit. Similarly,
inventories are likely to consist of fuel, components for repairs and maintenance of vehicles and
administrative supplies such as office stationery, tickets etc.

Long term loans outstanding were reduced by C$171m during 2017, resulting in a reduction in the
gearing ratio from 33% in 2016 to 15% in 2017. This partial repayment of long‐term debt may
have been achieved by having strong cash‐generating activities in terms of fare‐paying customers
and subsidies received. It is also possible that the loan redemption was achieved by a share
exchange as there was an increase in share capital/share premium of C$162.6m during the year.

On the one hand Menta seems to have high cash balances which could be used to reduce debt
and interest commitments further. On the other hand, the existing debt levels appear quite
moderate and very affordable and Menta could consider increasing its debt if needed for future
investment.

Segment analysis
Note: within the segment analysis reference to ‘Eurozone’ refers to the Eurozone excluding Centralia unless
otherwise stated.

The geographical segment information shows that Menta’s largest market is the Central
Eurozone, including Centralia, which consists of 62 operating units, covering a range of rural, city
and inter‐city bus services. Centralia contributed 69% of total revenue (72% in 2016), with the rest
of the Eurozone contributing a further 12% of total revenue (14% in 2016). There was revenue
growth in both Americas and Asia, which collectively accounted for 19% of total revenue in 2017
(14% in 2016).

In terms of operating profit, there was a significant fall in the proportion of total operating profit
contributed by both the Americas and the Eurozone in 2017 – down to a combined 15% from
25.5% in 2016. The Western International region consists of 8 operating units that provide inter‐
city bus services. The proportion of total operating profit contributed by Centralia increased
slightly from 71% to 72%.

There was a significant increase in the proportion of total operating profit contributed by Asia –
up to 11% in 2017 from 3.5% in the previous year. The Eastern International region comprises 11
operating units which are primarily city bus services.

In terms of revenue generated by service type, the proportion of total revenue generated from
rural bus services fell from 26.8% in 2016 to 23.5% in 2017. Rural bus services also contributed a
reduced proportion of total operating profit over the same period, from 20.3% to 13.7%. This may
be a reflection of a reduction in the subsidies available for providing these services, or withdrawal
of services by Menta.

70 KAPLAN PUBLISHING