Interpretation of Accounts The following figures have been extracted from the final accounts of Robinson plc, a company involved in the home renovation and insulation industry for the year ended 31/12/2019 - Leaving Cert Accounting - Question 5 - 2020

To calculate the interest cover, we use the formula:

$\text{Interest Cover} = \frac{\text{Profit before Interest and Tax}}{\text{Interest}}$

The profit before interest and tax is €120,000, and interest is €16,000:

$\text{Interest Cover} = \frac{120,000}{16,000} = 7.5$

The Return on Shareholders' Funds is calculated using the formula:

$\text{Return on Shareholders' Funds} = \frac{\text{Net Profit} - \text{Preference Dividend}}{\text{Shareholders' Funds}} \times 100$

The net profit for the year is €104,000, with preference dividends of €12,000 and shareholders' funds of €582,000:

$\text{Return on Shareholders' Funds} = \frac{104,000 - 12,000}{582,000} \times 100 = 15.81\%$

To find the market price based on the price earnings ratio (P/E ratio), we use:

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

Given the P/E ratio is 6, and Earnings per Share is calculated as follows: $\text{Earnings per Share} = \frac{\text{Net Profit}}{\text{Number of Ordinary Shares}} = \frac{104,000}{460,000} = 0.2261 \approx 0.23$

Now substituting in the P/E ratio formula:

$6 = \frac{\text{Market Price}}{0.23} \Rightarrow \text{Market Price} = 6 \times 0.23 = 1.38$

The dividend yield is calculated with the formula:

$\text{Dividend Yield} = \frac{\text{Dividend per Share}}{\text{Market Price per Share}} \times 100$

From the data:

• Dividends paid: €48,000
• Number of Ordinary Shares: 460,000

Thus: $\text{Dividend per Share} = \frac{48,000}{460,000} = 0.1043 \approx 0.10$

And from the earlier market price calculation: $\text{Market Price per Share} = 1.38$

Then: $\text{Dividend Yield} = \frac{0.10}{1.38} \times 100 \approx 7.25\%$

The shareholders would not be satisfied with the overall performance and state of affairs of the company for several reasons:

Profitability

• The Return on Capital Employed has decreased slightly to 9.8%, indicating inefficiencies in resource usage.
• The Return on Shareholders' Funds of 15.81% is low compared to expectations.

Dividend Policy

• The dividend per share has diminished slightly from €0.10 to €0.09, raising concerns about income reliability for shareholders.
• The Dividend Yield stands at 7.25%, which, while reasonable, is less appealing compared to other investments.

State of Affairs

• The liquidity position has weakened as indicated by the current ratio declining slightly, making timely payments a concern.
• Gearing has improved; however, the firm remains somewhat heavily reliant on debt, which poses risks during market fluctuations.

Investment Policy

• Current investments are valued significantly below acquisition costs, indicating potential management inefficiencies.

Prospects

• Sector uncertainty due to economic factors may affect housing renovations adversely. Overall, shareholders may perceive future growth prospects as limited.

A faster stock turnover can enhance profitability in several ways:

Reduced Holding Costs

• Lower inventory levels mean reduced costs associated with storage, insurance, and deterioration risk.

Increased Cash Flow

• Faster sales mean quicker cash generation, which can be reinvested in other profitable ventures or reduce debt.

Improved Inventory Management

• A faster turnover rate indicates better inventory management, which ensures that the stock remains relevant and minimizes unsold outdated products.

Competitive Advantage

• Businesses able to turn over inventory quickly can be more responsive to market changes, thus capturing a larger market share.

Overall, improving stock turnover creates a more efficient operation that significantly contributes to increased profitability.