Question

Miland group (Sydney) is considering taking over ABC Construction located in New Castle in order to expand its construction operation. Below are ABC’s key financial figures for the past two years.

ABC Construction Income

Statement Extract

Account	2015	2016
Sales	230,000	320,000
Cost of Sales	115,000	165,000
Wages	30,000	45,000
Transport	25,000	35,000
Marketing	15,000	20,000
Total Costs	185,000	265,000
Profit	45,000	55,000

ABC Construction Balance Sheet Extract 30 June 2016

Current Assets	30,000
Non-Current Assets	120,000
Current Liabilities	15,000
Non-Current Liabilities	70,000
Net Assets	65,000

1. Conduct the vertical and horizontal analysis for ABC Construction by filling out the template below.

Account	2015	2016	Difference ($)	Difference (%)	Percentage of sales
					2015	2016
Sales	230,000	320,000
Cost of Sales	115,000	165,000
Wages	30,000	45,000
Transport	25,000	35,000
Marketing	15,000	20,000
Total Costs	185,000	265,000
Profit	45,000	55,000

2. Calculate and interpret the results for current ratio and debt to equity ratio.

3. What is your advice to Miland group on this acquisition?

Answer 1

Answer) – 2)

As shown above current ratio is satisfactory (2:1), which indicate current assets twice as large as current liabilities. It shows that the company is financial sound. Debt to equity ratio is also satisfactory (1.31:1) which shows that the company is aggressive in financing its growth with debt.

Answer) - 3)

I firmly believe Miland group should takeover ABC Construction in order to expand its construction operations.  With satisfactory current ratio and debt to equity ratio ABC construction will help Miland to achieve its objective. Horizontal and vertical analysis also shows that the company is doing well in every aspect. Sales , wages and total cost percentage increased   which means company is aggressively financing its growth. Because of that profit is decreased in current year but will be high in future.