The financial statements and ratios of Walker Ltd, a manufacturer and retailer of plastic products, need to be analyzed to evaluate the company's performance and position for an investor considering purchasing shares. Walker Ltd has seen sales growth but rising costs have lowered some profitability ratios slightly though they remain close to industry benchmarks, and the company's debt repayment and strong cash flows suggest further growth potential. Overall the investor is recommended to purchase shares given the favorable ratios, industry outlook, sales growth and cash flows.

1.  The following financial statements of Walker Ltd
were prepared in accordance with New Zealand
GAAPs. Walker Ltd is a diversified enterprise with
its main interests in the manufacture and retail of
plastic products.
 The financial statements of Walker Ltd need to be
analysed. An investor is considering purchasing
shares in the company. Relevant ratios need to be
selected and calculated and a report needs to be
written for the investor. The report should evaluate
the company’s performance and position

2. 2005 2006 Horizontal
Analysis
$000 $000 $000 $000
Current Assets
Bank 33.5 41.0
Accounts receivable 240.8 210.2
Inventory 300.0 370.8
574.3 622.0 108
Non-current assets
Fixtures & fittings (net) 64.6 63.2
Land & buildings (net) 381.2 376.2
445.8 439.4 99
Total assets 1,020.1 1,061.4 104
Current Liabilities
Accounts payable 261.6 288.8
Income tax 60.2 76.0
321.8 364.8 113
Non-current liabilities
Loan 200.0 60.0 30
Shareholders Funds
Paid-up ordinary capital 300.0 334.1
Retained profit 198.3 302.5
498.3 636.6 128
Total liabilities & equity 1,020.1 1,061.4 104

3. 2005 2006 Horizontal
Analysis
$000 $000 $000 $000
Sales 2,240.8 2,681.2 120
Less Cost of goods sold 1,745.4 2,072.0 119
Gross profit 495.4 609.2 123
Wages & salaries 185.8 275.6
Rates 12.2 12.4
Heat & light 8.4 13.6
Insurance 4.6 7.0
Interest expense 24.0 6.2
Postage & telephone 9.0 16.4
Depreciation -
Buildings 5.0 5.0
Fixtures & fittings 27.0 276.0 32.8 369.0 134
Net profit before tax 219.4 240.2 109
Less Income tax 60.2 76.0 126
Net profit after tax 159.2 164.2 103

4. 2005 2006
$000 $000 $000 $000
Cash flow from operations
Receipts from customers 2,281 2,711.8
Payments to suppliers & employees (2,050) (2,460.4)
Interest paid (24) (6.2)
Tax paid (46.4) (60.2)
Net cash flow from operating activities 160.6 185
Investing activities
Purchase of non-current assets (121.2) (31.4)
Net cash used in investing activities (121.2) (31.4)
Financing activities
Dividends paid (32.0) (40.2)
Issue of ordinary shares 20.0 34.1
Repayment of loan capital -__ (140.0)
Net cash outflow from financing activities (12) (146.1)
Increase in cash & cash equivalents 27.4 7.5

5.  Credit purchases for the year 2006 were $2,142,800.
 General prospects for the major industries in which Walker is
involved look good with a forecast glut of oil set to reduce
the cost of production and world demand for plastic
remaining strong.
Benchmarks:
 There are no exact benchmarks for Walker Ltd because it is a
diversified company. The following are average indicators
that relate to the plastic retailing and manufacturing
industries for the year 2006.
◦ Gross profit margin 25%
◦ Net profit margin 7%
◦ Inventory turnover 6 times
◦ Debt/equity ratio 0.6 : 1
◦ Return on Assets 12%
◦ Return on Equity 20%

6.  Important note: The calculations of the ratios in this illustration did not use “averages” for total assets,
equity and inventory. The 2005 and 2006 year end figures were used and this is a slight variation to the
formulas provided.
Profitability Benchmarks 2005 2006
ratios:
Gross Profit Margin Industry 25% 22% 22.7%
Net Profit Margin Industry 7% 7.1% 6.1%
Return on Assets 12% 15.6% 15.5%
Return on Equity Industry 20% 32% 26%
Asset Management Benchmarks 2005 2006
ratios:
Inventory Turnover Industry 5.8 times 5.58 times
6%
Asset Turnover Not given 2.2 2.53

7. Liquidity ratios: Benchmarks 2005 2006
Current Ratio Ideal standard 2:1 1.78:1 1.70:1
Acceptable standard
1:1
Quick Ratio Ideal standard 2:1 0.85:1 0.69:1
Acceptable standard
1:1
Days Payable Standard 30 days Credit purchases not 49.19 days
available
Financial Structure Benchmarks 2005 2006
ratios:
Debt/Equity Industry 0.6:1 1.05: 1 0.67:1
Standard benchmark
1:1
TIE Standard benchmark: 10.14 times 39.74 times
Between 3 and 5.
Below 3 risky. Above
5 very favorable

8.  For the investor considering the purchase of shares in the
company, the return they will earn is the key financial factor
but an overall evaluation of the company’s performance and
position is also important to get a better picture of how well
the company is actually doing.
 ROE in 2006 is 26%. Whether or not this is attractive depends
on the perceived riskiness of this investment and other
alternatives available but this return is certainly more
attractive than current bank interest rates.
 ROE has decreased by 4% but the company’s ROE at 26% is
still better than the industry average of 20%
 Riskiness of business is being reduced by the significant
repayment of loan in 2006.

9.  Profitability
◦ The NP% and ROA ratios show a small downward trend in %
over the 2 year period. ROE% ratio show a more significant
decrease but is still better than the industry average.
◦ Gross Profit Margin is slightly unfavourable at about 2.3%
below the industry benchmark of 25%.
◦ The horizontal analysis information show that Sales have
increased by 20%. However operating costs have increased
by 34%.
 Asset Management
◦ IT has gone down slightly from 5.8 to 5.58 times.
◦ IT is still close to the industry benchmark of 6 times.
◦ AT has increased showing more sales being generated from
asset usage

10.  Liquidity
◦ Current ratios of 1.78:1 (2005) and 1.70: 1 are at
above acceptable levels but below ideal level.
◦ Quick ratios appear more of a concern being
below acceptable levels in both years and even
more so in 2006 (0.69:1).
◦ Raises some concerns over the liquidity of the
business and inventory management (although IT
ratio only shows a slight decline in 2006).
◦ Days Payable is a concern as there may be poor
debt payment management.

11.  Financial Structure
◦ Although slightly higher than D/E industry benchmark
(0.67:1), business has become less risky due to the
significant repayment of loan in 2006.
◦ TIE is extremely good for the business at 39.74 times (well
above 5 the standard benchmark).
 Cash flow situation
◦ Strong cash flow from operating activities (increased from
160,600 to 185,000).
◦ Spending under investing activities suggest more growth.
◦ Repayment of debt under financing activities imply
restructuring of business to have more equity funding
rather than debt funding.

12. Given:
1) the strong forecast for the industry (ie general prospects
looking good and world demand for plastic products
remaining strong),
2) the sales growth in this business,
3) acceptable ratios as they are quite close to the industry
averages,
4) good cash flows from operating activities and
5) favorable ROE, although it has decreased, it is still better
than the industry average ROE.
=> it is recommended that the investor purchase shares in
the Walker Ltd company.