Reference no: EM13343035
Peter Harris has been told that Tech Logistics plc is a fast growing company and he seeks your advice on whether or not to buy shares in the company. He has provided you with the following summarised information taken from the recent annual accounts of Tech Logistics plc:
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2011 (£'000)
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2010 (£'000)
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Income statement for the period:
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Revenue*
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27,400
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25,000
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Gross profit
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9,300
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7,300
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Net profit (after interest and taxation)
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890
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810
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Dividend
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500
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500
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Balance sheet:
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Non-current assets
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11,340
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10,860
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Inventories
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1,380
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1,300
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Trade receivables
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980
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810
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Cash at bank
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320
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400
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Current Liabilities/Trade payables
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3,140
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2,900
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Non-current liabilities
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1,620
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1,700
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Share capital (£1 shares fully paid)
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8,000
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8,000
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Retained earnings
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1,340
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860
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* Assume all sales and purchases are made on credit rather than cash payment.
The share price of Tech Logistics plc is currently 130 pence per share (110 pence in 2010) and it has been around this level for the past few months. The trade association to which Tech Logistics plc belongs compiles ratios taken from the annual accounts of its members, and from other sources, and you have obtained the following recent industry averages for some key ratios:
Gross profit margin - 50%
Current ratio - 2.50 times (or 2.50:1)
Acid test ratio - 1.90 times (or 1.90:1)
Average settlement period for trade receivables - 25 days
Average inventories turnover period - 30 days
Gearing ratio - 60%
Price/earnings ratio - 10 times
Question 1
Calculate the above ratios (a)-(g) for Tech Logistics plc for the 2010 and 2011 periods. Show how you have arrived at your answers, so your tutor can provide specific feedback if errors have been made.
Question 2
Comment on how the company's overall performance compares to the average for its industry, pointing out any significant features, assumptions and limitations of the information used to analyse the company's performance.
Question 3
On the basis of the data available, what advice would you give to Peter Harris? Consider the return that Peter could expect from owning the shares compared with leaving the money on deposit with the bank. What further information would you advise him to seek before deciding whether or not to buy shares in Tech Logistics Plc.?
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