Potential purchase of a business

Assignment Help Financial Accounting

Reference no: EM13184245

On hearing that you are undertaking a subject in accounting as a part of your degree you are approached by a friend, Michael Graham, to give him advice regarding the potential purchase of a business.

Michael grew up working in his parents' convenience store (The Family Mart) for many years and he understands the business well. He now has the opportunity to purchase 100% of the shares of Get 'N' Go Pty Ltd, which runs a similar convenience type store. Michael has been left enough money by his uncle to pay cash for the shares in the company. He has asked you to analyse the accounts of Get 'N' Go Pty Ltd and to advise him on whether to buy it. Another alternative is simply to invest the asking price of $2,000,000 in a 5 year term deposit at a local bank.

Additional Information:

The share capital of the business represents 100,000 ordinary shares (the company has not issued any preference shares) and they are not listed on the stock exchange, as it is a private company.
The price being offered for the business can only be used to calculate a proxy share price for the latest year as the price of the business may have been significantly different if it had been offered for sale in the other years.
Of the operating expenses, selling and administrative expenses account for the following:

2011: $168,000 2010: $168,000 2009: $210,000

The remainder of the operating expense is financial. The financial expense is wholly comprised of interest.

Get 'N' Go Pty Ltd paid its owners a dividend of $180,000 in 2009.
In late 2009 a major grocery chain store set up a new shop one street from the Get 'N' Go Store and this is reflected in the drop in sales in 2010.
For the purpose of this assignment ignore the taxation implications of Michael's investment.
On average 20% of Get 'N' Go's sales are made on credit.

REQUIRED:

1. Prepare a report for Michael Graham which analyses the profitability, liquidity and financial stability of Get 'N' Go Pty Ltd. Maximum 1,000 words.

2. As part of your report present a recommendation based upon your analysis as to whether you believe Michael should buy Get 'N' Go Pty Ltd. Maximum 250 words.

3. Explain some of the shortcomings/disadvantages you see in basing decisions purely on the results of financial statement analysis. What other actions which would add depth, insight and additional information could be taken when seeking to analyse a business entity? This section does not need to be addressed to Michael. Consider what you may have learned in other core courses such as marketing, economics, human resources, statistics, law etc. that may also impact on this type of decision.

Get 'N' Go Pty Ltd.

Comparative Income Statements

for the years ended 30 June 2011, 2010 and 2009.

(in thousands of $'s)

	2011	2010	2009
Net Sales	1,860	1,830	2,100
Cost Of Sales	1,320	1,320	1,500
Gross Profit	540	510	600
Operating Expenses	204	204	252
Operating Profit before Tax	336	306	348
Income tax expense	101	92	104
Operating Profit after Tax	235	214	244

Get 'N' Go Pty Ltd.

Comparative Balance Sheets

as at 30 June 2011, 2010 and 2009

(in thousands of $'s)

	2011	2010	2009
Assets:
Cash	192	168	240
Debtors	72	72	90
Inventory	146	140	170
Land and Buildings (net)	720	720	720
Other Non-Current Assets (net)	40	40	40
Total Assets	1,170	1,140	1,260

Liabilities:
Creditors	222	228	240
Short Term Borrowings	60	66	72
Accrued Expenses	12	18	12
Non-Current Liabilities	96	108	120
Total Liabilities	390	420	444
NET ASSETS	780	720	816

Equity:
Share Capital (100,000 shares)	600	600	600
Retained Profits	180	120	216
	780	720	816

The Family Mart Averages
Gross profit margin	30%
Profit after tax	15%
Current ratio	2.1:1
Average collection period	36 days
Inventory turnover	13 times
Equity ratio	62%
Asset turnover	4.5 times

Attachment:- Prepare a report for Michael Graham.xls

Reference no: EM13184245

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