Page 24 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

CIMA MAY 2019 – MANAGEMENT CASE STUDY

further information available on this issue and, given that it is a private company, the dividend
paid may be a reflection of trying to meet institutional investors’ expectations.

It is noted that there is disclosure of ‘net interest received’ which indicates that Jord has invested
its significant cash and equivalent balances, pending suitable capital investment or expansion
opportunities. Net interest received doubled to C$0.273m from 2017 to 2018.

Financial position
There was no issue of shares or revaluation of property, plant and equipment during 2018. Also,
Jord has no long‐term loan liabilities outstanding and there is no separate disclosure of any short‐
term‐loans and overdrafts within current liabilities.

It appears that Jord has invested in additional property, plant and equipment as the carrying
amount of non‐current assets has increased by more than C$5.0m, although there is no further
detail available regarding movements in the carrying amount of property, plant and equipment.
Given that there are no loan liabilities, it would appear that additions made in 2018 were cash
payments. Reference has already been made to the impact upon ROCE of the increase in non‐
current assets.

Given that Jord is profitable, and is operating at full capacity, it would be unlikely that there is any
impairment of assets. Similarly, there is no indication that there are any assets classified as held‐
for‐sale or any discontinued operations within the available information.

It is noted that the factory is now almost forty years old and is operating at full capacity. Whilst
there is evidence of investment in property, plant and equipment during 2018, Jord may need to
consider extending its premises, or even acquiring additional premises in a suitable location. If the
factory premises and plant was to be substantially extended or updated, Jord does have some
cash resources available to help finance this and, given that it has no loan liabilities outstanding,
should be able to raise suitable loan finance and/or increase its shareholding base, perhaps by a
stock market flotation or by a placing of shares with institutional investors.

The current and quick ratios both improved from 2017 to 2018, with the current ratio now
marginally over 1:1. The increase in current assets from C$39.3m to C$49.3m in 2018 was due
almost entirely to an increase in cash and equivalents. Current liabilities increase by just over
C$5.0m, due to an increase in the dividend payable and, to a lesser extent, an increase in the tax
liability. The reason for building up such cash reserves should be reviewed and evaluated.
Liquidity of the business would not appear to be an immediate concern.

Jord maintained consistent working capital ratios from 2017 to 2018, with the inventory holding
period at 43 days, receivables collection period at 26 days and payables payment period at 68
days. There was a reduction in the working capital cycle from 3 days in 2017 to 2 days in 2018. All
of the above indicate strong and effective management of all elements of working capital. They
reflect effective operation of a JIT system for requisition and use of materials, along with good
credit control of amounts due from customers.

74 KAPLAN PUBLISHING