Reference no: EM133129642

Question - Company Parker Ltd wants to increase its efficiency and effectiveness but especially its profitability and performance. For this reason, the management of the company is evaluating to purchase company Bolton Ltd that is a supplier of raw materials to Parker Ltd. They, in fact, estimate that if Bolton Ltd will be part of the group the profitability would improve in the next few years.

 

In year 2021 company Parker Ltd reported the following ratios:

 

Gross Margin 28%

 

Operating margin 6%

 

ROCE 10%

 

Inventory days 25 days

 

Receivable days 35 days

 

Payable days 40 days

 

Below are the summarised financial statements for Bolton Ltd.

 

Income Statements Bolton Ltd for years 2019, 2020 and 2021

 

	2019	2020	2021
Sales	16,064	16,080	1,6200
Cost of sales	11,248	11,652	12,072
Gross Profit	4,816	4,428	4,128
Expenses	3,752	3,772	3,496
Operating profit (PBIT)	1,064	656	632
Interest	96	104	120
Profit before tax	968	552	512
Tax	184	132	104
Profit after tax	784	420	408
Dividends	0	0	0
Preference	64	72	72
Ordinary	108	128	140
Retained profit for year	612	220	196

 

Statement of Financial Position Bolton Ltd for years 2019, 2020 and 2021

 

	2019	2020	2021
Non-current assets
Land	2,500	2,500	2,500
Property, plant & equipment	3,880	3,740	4,216
Total Non-current Assets	6,380	6,240	6,716
Current assets
Inventory	216	360	544
Receivables	968	1,040	1,072
Cash at bank	240	168	72
Total Current Assets	1,424	1,568	1,688
Total assets	7,804	7,808	8,404
Capital
Ordinary shares £1	2,400	2,400	2,400
Preference shares £1	800	800	800
Share premium	96	134	200
Retained profits	2,206	2,426	2,622
Total capital	5,502	5,760	6,022
Non-current liabilities
Long term loan 10%	960	1040	1200
Total Non-current liabilities	960	1040	1200
Current liabilities
Accounts payable	414	538	596
Tax	184	132	104
Other current liabilities	744	338	482
Total Current liabilities	1,342	1,008	1,182
Total Capital and Liabilities	7,804	7,808	8,404

 

Required -

 

1. Calculate for Bolton Ltd the following ratios: Gross Margin; Net profit Margin; ROCE; Inventory days; Receivable days; Payable days.

 

2. Comment on each ratio calculated above in (a) and its implications and if the purchase of Bolton can be evaluated as a good investment for Parker Ltd.