The following financial statements of Walker Ltdwere prepared in accordance with New ZealandGAAPs. Walker Ltd is a diversified enterprise withits main interests in the manufacture and retail ofplastic products.

The financial statements of Walker Ltd need to beanalysed. An investor is considering purchasingshares in the company. Relevant ratios need to beselected and calculated and a report needs to bewritten for the investor. The report should evaluatethe company’s performance and position

2005 2006 Horizontal

Analysis

$000 $000 $000 $000

Current Assets

Bank 33.5 41.0

Accounts receivable 240.8 210.2

Inventory 300.0 370.8

574.3 622.0 108

Non-current assets

Fixtures & fittings (net) 64.6 63.2

Land & buildings (net) 381.2 376.2

445.8 439.4 99

Total assets 1,020.1 1,061.4 104

Current Liabilities

Accounts payable 261.6 288.8

Income tax 60.2 76.0

321.8 364.8 113

Non-current liabilities

Loan 200.0 60.0 30

Shareholders Funds

Paid-up ordinary capital 300.0 334.1

Retained profit 198.3 302.5

498.3 636.6 128

Total liabilities & equity 1,020.1 1,061.4 104

2005 2006 Horizontal

Analysis

$000 $000 $000 $000

Sales 2,240.8 2,681.2 120

Less Cost of goods sold 1,745.4 2,072.0 119

Gross profit 495.4 609.2 123

Wages & salaries 185.8 275.6

Rates 12.2 12.4

Heat & light 8.4 13.6

Insurance 4.6 7.0

Interest expense 24.0 6.2

Postage & telephone 9.0 16.4

Depreciation -

Buildings 5.0 5.0

Fixtures & fittings 27.0 276.0 32.8 369.0 134

Net profit before tax

219.4

240.2 109

Less Income tax 60.2 76.0 126

Net profit after tax 159.2 164.2 103

2005 2006

$000 $000 $000 $000

Cash flow from operations

Receipts from customers 2,281 2,711.8

Payments to suppliers & employees (2,050) (2,460.4)

Interest paid (24) (6.2)

Tax paid (46.4) (60.2)

Net cash flow from operating activities 160.6 185

Investing activities

Purchase of non-current assets (121.2) (31.4)

Net cash used in investing activities (121.2) (31.4)

Financing activities

Dividends paid (32.0) (40.2)

Issue of ordinary shares 20.0 34.1

Repayment of loan capital -__ (140.0)

Net cash outflow from financing activities (12) (146.1)

Increase in cash & cash equivalents 27.4 7.5

Credit purchases for the year 2006 were $2,142,800. General prospects for the major industries in which Walker is

involved look good with a forecast glut of oil set to reducethe cost of production and world demand for plasticremaining strong.

Benchmarks: There are no exact benchmarks for Walker Ltd because it is a

diversified company. The following are average indicatorsthat relate to the plastic retailing and manufacturingindustries for the year 2006.◦ Gross profit margin 25%◦ Net profit margin 7%◦ Inventory turnover 6 times◦ Debt/equity ratio 0.6 : 1◦ Return on Assets 12%◦ Return on Equity 20%

Important note: The calculations of the ratios in this illustration did not use “averages” for total assets, equity and inventory. The 2005 and 2006 year end figures were used and this is a slight variation to the formulas provided.

Profitability

ratios:

Benchmarks 2005 2006

Gross Profit Margin Industry 25% 22% 22.7%

Net Profit Margin Industry 7% 7.1% 6.1%

Return on Assets 12% 15.6% 15.5%

Return on Equity Industry 20% 32% 26%

Asset Management

ratios:

Benchmarks 2005 2006

Inventory Turnover Industry

6 %

5.8 times 5.58 times

Asset Turnover Not given 2.2 2.53

Liquidity ratios: Benchmarks 2005 2006

Current Ratio Ideal standard 2:1

Acceptable standard

1:1

1.78:1 1.70:1

Quick Ratio Ideal standard 2:1

Acceptable standard

1:1

0.85:1 0.69:1

Days Payable Standard 30 days Credit purchases not

available

49.19 days

Financial Structure

ratios:

Benchmarks 2005 2006

Debt/Equity Industry 0.6:1

Standard benchmark

1:1

1.05: 1 0.67:1

TIE Standard benchmark:

Between 3 and 5.

Below 3 risky. Above

5 very favorable

10.14 times 39.74 times

For the investor considering the purchase of shares in thecompany, the return they will earn is the key financial factorbut an overall evaluation of the company’s performance andposition is also important to get a better picture of how wellthe company is actually doing.

ROE in 2006 is 26%. Whether or not this is attractive dependson the perceived riskiness of this investment and otheralternatives available but this return is certainly moreattractive than current bank interest rates.

ROE has decreased by 4% but the company’s ROE at 26% isstill better than the industry average of 20%

Riskiness of business is being reduced by the significantrepayment of loan in 2006.

Profitability◦ The NP% and ROA ratios show a small downward trend in %

over the 2 year period. ROE% ratio show a more significantdecrease but is still better than the industry average.

◦ Gross Profit Margin is slightly unfavourable at about 2.3%below the industry benchmark of 25%.

◦ The horizontal analysis information show that Sales haveincreased by 20%. However operating costs have increasedby 34%.

Asset Management

◦ IT has gone down slightly from 5.8 to 5.58 times.◦ IT is still close to the industry benchmark of 6 times.

◦ AT has increased showing more sales being generated fromasset usage

Liquidity◦ Current ratios of 1.78:1 (2005) and 1.70: 1 are at

above acceptable levels but below ideal level.

◦ Quick ratios appear more of a concern beingbelow acceptable levels in both years and evenmore so in 2006 (0.69:1).

◦ Raises some concerns over the liquidity of thebusiness and inventory management (although ITratio only shows a slight decline in 2006).

◦ Days Payable is a concern as there may be poordebt payment management.

Financial Structure◦ Although slightly higher than D/E industry benchmark

(0.67:1), business has become less risky due to thesignificant repayment of loan in 2006.

◦ TIE is extremely good for the business at 39.74 times (wellabove 5 the standard benchmark).

Cash flow situation◦ Strong cash flow from operating activities (increased from

160,600 to 185,000).◦ Spending under investing activities suggest more growth.◦ Repayment of debt under financing activities imply

restructuring of business to have more equity fundingrather than debt funding.

Given:1) the strong forecast for the industry (ie general prospects

looking good and world demand for plastic productsremaining strong),

2) the sales growth in this business,3) acceptable ratios as they are quite close to the industry

averages,4) good cash flows from operating activities and5) favorable ROE, although it has decreased, it is still better

than the industry average ROE.

=> it is recommended that the investor purchase shares inthe Walker Ltd company.