Interpretation of Accounts The following figures have been extracted from the final accounts of Equip Ltd., a manufacturer of sports equipment, for the year ended 31/12/2004 - Leaving Cert Accounting - Question 5 - 2004

The opening stock can be derived from the cost of sales and average stock. Given:

$\text{Cost of sales} = \text{Sales} - \text{Gross Profit}$

And knowing that gross profit can be calculated as:

$\text{Gross Profit} = \text{Sales} - \text{Costs of Goods Sold} = 950,000 - 740,000 = 210,000$

Thus,

Average Stock = (Opening Stock + Closing Stock) / 2

Assuming the closing stock is €110,000:

$\text{Cost of Sales} = 740,000 \implies \text{Average Stock} = \frac{740,000}{8} = 92,500\n$

Rearranging gives:

$\text{Opening Stock} = 2 \times Average Stock - Closing Stock = 2 \times 92,500 - 110,000 = 75,000€$

To find the earnings per share (EPS), use:

$\text{EPS} = \frac{\text{Net Profit after Preference Dividends}}{\text{Number of Ordinary Shares}}$

The net profit after preference dividends is:

Net Profit = €72,000 - €16,000 (8% of 200,000 preference shares) = €56,000

With 400,000 ordinary shares:

$\text{EPS} = \frac{56,000}{400,000} = 0.14€$

To calculate the period to recoup the share price, use:

$\text{Period} = \frac{\text{Market Price}}{\text{Earnings per Share}}$

Given the market price is €2.08 and EPS is 0.14:

$\text{Period} = \frac{2.08}{0.14} \approx 14.86 \text{ years}$

The dividend cover is calculated by

$\text{Dividend Cover} = \frac{\text{Net Profit after Preference Dividends}}{\text{Ordinary Dividend}}$

Using: Net Profit after Preference Dividends = €72,000 - €16,000 = €56,000 and Ordinary Dividend = €36,000:

$\text{Dividend Cover} = \frac{56,000}{36,000} ext{ approx } 1.55 \text{ times}$

Perform an analysis of performance focusing on profitability and dividend policy. Highlight that the return on capital employed is an important indicator of financial health. Discuss the growth in earnings per share, how it reflects profitability and also indicate the changes in dividend cover as an important shareholder return metric.

The decrease in gross profit percentage can be explained by:

1. Increased Cost of Goods Sold: Higher production or procurement costs may have eroded margins.
2. Decreased Sales Prices: If sales prices decreased to maintain sales volume, it would directly impact profit margins.
3. Increased Operating Expenses: Rising fixed or variable costs can eat into gross profits.
4. Lower Sales Volume: A significant drop in sales volume could mean fixed costs are spread over fewer sales, lowering the percentage.
5. Inventory Write-Downs: Any write-downs on obsolete stock would reduce the gross profit recorded.