Interpretation of Accounts The following figures have been extracted from the final accounts of Hebe plc, a manufacturer in the dairy industry - Leaving Cert Accounting - Question 5 - 2010

Cash purchases can be determined by the formula:

$$ext{Cash Purchases} = ext{Opening Stock} + ext{Purchases} - ext{Closing Stock}$$

Given that:

• Opening Stock = €60,000
• Closing Stock = €65,000
• Cost of Sales = €730,000 (calculated from given details)

Thus:

$$ext{Purchases} = ext{Cost of Sales} + ext{Closing Stock} - ext{Opening Stock} = 730,000 + 65,000 - 60,000 = 735,000$$

With trade creditors amounting to €77,000, and given the credit period, this translates to:

$$ext{Cash Purchases} = ext{Purchases} - ext{Cash Purchases (receivable)} = 735,000 - 462,000 = 268,000$$

The dividend cover can be computed as follows:

ext{Dividend Cover} = rac{ ext{Net Profit after Preference Dividend}}{ ext{Ordinary Dividend}} = rac{55,000 - 10,000}{45,000} = 1.00 ext{ times}

The market price can be calculated via:

ext{Market Price} = rac{ ext{Earnings per Share}}{ ext{Market Price}} = rac{10}{10} = 1.00 ext{ euro}

In calculating the dividend yield we apply:

ext{Dividend Yield} = rac{ ext{Dividends per Share} imes 100}{ ext{Market Price}} = rac{11.25 imes 100}{150} = 7.50 ext{ %}

Debenture holders would be concerned about:

1. Dividend Policy: Given that the dividend cover is low, it suggests that the company is paying out a significant portion of profits, which may not be sustainable.

2. Security - Real Value of the Assets: If the fixed assets do not have the promised value, the safety of their investment is jeopardized.

3. Profitability: With a return on capital of only 11.80%, compared to historical rates, there is cause for concern regarding future profitability.

4. Liquidity: The current ratio indicates potential liquidity issues, making it difficult to cover short-term liabilities.

5. Gearing: An increase in debt ratios may threaten the solvency of the company, raising questions about future repayment capabilities.

I would advise my friend not to invest in Hebe plc for the following reasons:

• Share Price: The share value shows a downward trend, undermining confidence in the stock.
• Dividends: Falling dividend yields indicate an unfavorable investment climate.
• Reserves: With a poor dividend cover ratio, the company isn't retaining enough profits for growth.
• Sector: The dairy industry is underperforming and carries substantial risks.
• Liquidity Issues: Potential problems in meeting short-term debts could impact performance further.

Investing in Hebe plc could pose more risk than reward based on current analysis.