Question 3

Atlas Foods Plc. is a catering establishment which also owns shops and cafes. Due to
increased competition the company has recently experienced declining profitability. In order to
ascertain whether this is a sector-wide problem the directors wish to investigate this trend. As
a result, they have acquired average ratios for the sector. Some of these equivalent ratios are
shown below.

Sector averages for the year ended 31 December 2023:

Return on capital employed 18.6%
Operating profit margin 8.6%
Net asset turnover 2.01
Inventory holding period 4 days
Debt to equity 80%

The following information has been extracted from the draft financial statements of Atlas Foods
Plc. for the year ended 31 December 2023:

Extract from the Statement of profit or loss for the year ended 31 December 2023:

£’000
Revenue 201,600
Cost of Sales (140,000)
Gross Profit 61,600
Operating expenses (35,280)
Profit from operating 26,320

Extract from the Statement of financial position as at 31 December 2023:

£’000
Non-current assets 110,000
Inventory 7,920
Equity:
Equity shares of £1 each 34,000
Revaluation surplus 10,800
Retained earnings 20,960
65,760
Non-current liabilities: 10% bank loan 28,800

Other relevant information to Atlas Foods Plc:

(i) In 2022, Atlas Food Plc. acquired a popular brand name. At 31 December 2023, the
brand represented 20% of non-current assets. The remaining 80% of non-current
assets comprises the property from which Atlas Foods Plc operates and its shops
and cafes. This property is owned by Atlas Foods Plc. and has no directly associated
finance. The property was revalued in 2020.


(ii) In January 2024, it was decided to discount some slow-moving seasonal inventory
which had a selling price of £3m. Under normal circumstances these would have a
gross margin of 20%. The inventory was sold in January 2024 for 50% of what it had
cost to produce. The financial statements for the year ended 31 December 2023
were authorised for issue on 15 March 2024.

Required:

(a) To adjust for the information on discounted inventories in note (ii) above, and
calculate the 2023 sector average equivalent ratios for Atlas Foods Plc.
(9 marks)

(b) Using the information calculated in (a) above, assess the financial performance and
position of Atlas Foods Plc. for the year ended 31 December 2023 in comparison
with the sector average ratios.
(11 marks)