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The May 2017 Operational Case Study introduces us to Ashworth Lea, a luxury sports car manufacturer. In this article, VIVA Financial Tuition will walk you through the main financial statements given in the pre-seen materials by CIMA. We'll look at some of the most telling movements over the last year as well as analysing some of the key ratios.
We start with Ashworth Lea's Statement of Profit or Loss for 2016. Straight away we're disappointed to find that revenues have declined by 2.6% since 2015. This is especially disappointing given the fact that the global car industry saw an increase of 5% in new car sales between 2015 and 2016. At least cost of sales have declined at a faster rate of 5% which means that Ashworth Lea's gross profit has in fact increased from M$380 million to M$390 million. The gross profit margin (gross profit/revenue) is healthy at 32.6% in 2016 but as we move down the Statement of Profit or Loss the other profit margins start to shrink to almost nothing at all. Administrative expenses are a trouble spot rising M$21 million in one year. You may recall in the pre-seen that Ashworth Lea's administrative systems are almost 20 years old which may mean this work is taking far longer than it should and is taking away from the bottom line. Finance costs have tripled indicating an increasing debt obligation which we see on the balance sheet. Overall, a net profit margin (net profit/revenue) of just 0.4% is nothing to celebrate and Ashworth Lea needs to find ways to reduce some of its expenses soon and ideally, boost revenues.
The big investment of M$181 million in intangible assets on the Statement of Financial Position hints at a company preparing for the future. It's likely Ashworth Lea has been investing in software, intellectual property, trademarks etc related to the two big trends sweeping the motor industry - self-driving cars and alternative energy sources. There is a hint that the company's plant and facilities need to be updated with depreciation on PPE running ahead of Ashworth Lea's ability to replace and update those non-current physical assets. It's good to see that cash has increased 22% over the year. A lot of that increase is down to the effect of adding back depreciation to the net profit figure which we see in the Statement of Cash Flows. The fact that trade payables have increased by M$46 million also bolsters the cash position but Ashworth Lea needs to take care that it does not damage its relationship with suppliers by lagging payments for too long. It's interesting to see that all of the net profit of M$5 million has been retained rather than paid out to shareholders. The combined long-term debt and short-term borrowings have increased by M$147 million over the last year meaning that gearing (long-term debt/equity) now stands at 63% (it was 46% in 2015). It is with this increase in debt that Ashworth Lea has financed the investment in intangibles. The company is taking a risk on these new technologies and one hopes for Ashworth Lea's sake that the gamble results in improving revenues and profits. The fact that the company's interest coverage ratio (operating profit/interest expenses) has declined from a very healthy 15.0 in 2015 to just 3.3 in 2016 is worrying.
We see the huge impact that depreciation has on profit figures in this industry when we turn to the Statement of Cash Flows. M$189 million is added back to the net profit figure of M$7 million which greatly helps to bolster the cash flows from operating activities to to M$230 million. The increase in trade payables affects cash positively to the tune of M$46 million. The cash generated from operating activities is used up quickly though by way of the big investments in property, plant and equipment (necessary in an asset-intensive industry) and intangibles especially. The fact that these investments exceed the cash generated from operations means that the gap is funded by long-term and short-term loans.
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