Interpretation of Accounts The following figures have been extracted from the final accounts of Shannon plc, a company involved in the construction industry for the year ended 31/12/2013 - Leaving Cert Accounting - Question 5 - 2014

Return on Capital Employed (ROCE) is calculated using the formula:

$\text{ROCE} = \frac{\text{Profit before interest} \times 100}{\text{Capital employed}}$

From the provided data:

• Profit before interest = €695,000
• Capital employed = €792,000

Substituting these values:

$\text{ROCE} = \frac{695,000 \times 100}{792,000} = 8.21\%$

Earnings per share (EPS) is calculated as follows:

$\text{EPS} = \frac{\text{Net profit after profit dividend}}{\text{Number of ordinary shares}}$

Given:

• Net profit after dividend = €47,000 - €5,000 = €42,000
• Number of ordinary shares = 350,000

Thus:

$\text{EPS} = \frac{42,000}{350,000} = 12\text{ cent}$

Dividend yield is calculated using the formula:

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

Where:

• Dividend per share = €10
• Market Price = €130

Thus:

$\text{Dividend Yield} = \frac{10 \times 100}{130} = 7.69\%$

The period to recoup price is calculated using the following formula:

$\text{Period to Recoup Price} = \frac{\text{Market Price}}{\text{Dividend per share}}$

Where:

• Market price = €130
• Dividend per share = €10

Thus:

$\text{Period to Recoup Price} = \frac{130}{10} = 13\text{ years}$

When advising the bank regarding a loan of €350,000 at an interest rate of 9%, we should assess the company's profitability and liquidity ratios. The company's ROCE of 8.21% indicates profitability is less than the interest rate, which raises concerns about the company’s ability to meet interest repayments.

Additionally, the liquidity ratio (current assets/current liabilities) should reflect whether the firm can cover short-term obligations. If the liquidity is below 1:1, it signals potential cash flow issues, suggesting that granting an additional loan may worsen financial instability. Furthermore, the annual interest owed on a company loan would be:

$\text{Annual Interest} = 350,000 \times 0.09 = €31,500$

Liquidity refers to the company’s ability to meet short-term debts as they fall due. The acid test ratio is a good indicator of short-term financial health. If liquid assets are less than current liabilities, it indicates liquidity issues.

On the other hand, solvency is about the long-term financial sustainability of a company. It assesses the company’s ability to attract and manage long-term debts, demonstrated by its ability to settle total debts with total assets. A solvent company should have total assets exceeding total liabilities, ensuring that it is equipped to handle long-term obligations.