Interpretation of Accounts The following figures have been extracted from the final accounts of Fauci plc, a manufacturer of computer security devices, for the year ended 31/12/2020 - Leaving Cert Accounting - Question 5 - 2021

Return on capital employed (ROCE) can be calculated as follows:

$\text{ROCE} = \left(\frac{\text{Operating Profit}}{\text{Capital Employed}}\right) \times 100$

Where capital employed is calculated by adding the ordinary shares and preference shares to the retained profits:

$\text{Capital Employed} = 200,000 + 100,000 + 71,000 = 371,000$

First, determine the operating profit:

$\text{Operating Profit} = \text{Net Profit} + \text{Dividends Paid} = 39,000 + 13,000 = 52,000$

Now we can compute ROCE:

$\text{ROCE} = \left(\frac{52,000}{371,000}\right) \times 100 = 14.02\%$

The earnings per share (EPS) can be calculated as:

$\text{EPS} = \frac{\text{Net Profit} - \text{Dividends}}{\text{Number of Ordinary Shares}} = \frac{39,000 - 13,000}{200,000} = 0.13\text{ per share}$

Given the price earnings ratio (P/E) is 12, we find the market price as:

$\text{Market Price} = \text{EPS} \times ext{P/E} = 0.13 \times 12 = 1.56$

Dividend cover is calculated by the formula:

$$\text{Dividend Cover} = \frac{\text{Net Profit}}{\text{Dividends Paid}} = \frac{39,000}{13,000} = 3.$$$

This means the net profit covers the dividends paid three times.

Interest cover is found using the formula:

$\text{Interest Cover} = \frac{\text{Operating Profit}}{\text{Interest}}$

Where Operating Profit is $39,000$ and Interest is $20,000$:

$\text{Interest Cover} = \frac{39,000}{20,000} = 1.95$

Overall, shareholders would likely be satisfied due to improved return on capital employed at $9.07\%$, higher than last year's rate. The dividend cover ratio indicates dividends are sustainable. However, the declining return on equity does raise concerns, but the company shows potential for future profitability due to increasing market confidence, as evidenced by stable earnings per share.

High gearing indicates a high level of debt compared to equity, which can lead to several disadvantages:

1. Increased Financial Risk: Higher repayments could strain the company's resources.
2. Less Financial Flexibility: Companies with high debt may find it challenging to secure additional financing if needed.

1. Increase Equity Financing: Issuing more shares can increase equity and reduce reliance on debt.
2. Use Retained Earnings: The company can reinvest profits instead of paying them out as dividends, thus increasing its equity base.