Reference no: EM132646190
Galactic Inc. operates in the technology sector and due to the nature of its products, Galactic takes research and development very seriously. It is looking for ways to improve its products in terms of specification and cost. Galactic prepares its financial statements in accordance with International Financial Reporting Standards and is listed on its local stock exchange.
Galactic is considering acquiring one of its key suppliers to secure consistent and quality supplies and to capitalise on any research and development activities undertaken by it relating to new products or parts. Two entities are being investigated, X and Y. Each entity operates in a different country and is listed on its local stock exchange. Y supplies parts to a number of Galactic's competitors as well as Galactic and has a worldwide distribution network. X is known as an innovative entity and has had some recent publicity surrounding an innovative new product developed by a newly formed team of IT graduates.
Galactic's board has been presented with key financial data for Galactic, X and Y for the last trading period to facilitate its decision making.
Revenue : Galactic $700M; Company X $220M; Company Y $460M
Gross Profit Margin : Galactic 23%; Company X 19%; Company Y 26%
Profit for the year/revenue : Galactic 10%; Company X 11%; Company Y 12%
Gearing : Galactic 68%; Company X 25%; Company Y 40%
Non-Current Asset turnover : Galactic 0.7; Company X 1.2; Company Y 0.6
PE Ratio : Galactic 15.2; Company X 11.4; Company Y13.8
Problem (a) Analyse the information provided by the key financial indicators above and explain the impact that acquiring either of these entities could have on the Galactic group's business and financial statements.
Problem (b) Explain what further financial information might assist Galactic in its assessment of potential targets, X and Y.
Problem (c) Explain the limitations of using the financial ratios above as a means to compare X and Y. Provide THREE (3) reasons to support your answer.