Hewlett is a retailer company based in Greece

Hewlett is a retailer company based in Greece. It has been in operation for a number of years and mainly deals in
a wide range of customer products. The entity operates from a number of stores around the country. In recent
years, the entity has found it necessary to provide credit facilities to its customers in order to maintain growth
in revenue. As a result of this decision, the liability to its bankers has increased substantially. The statutory
financial statements for the year ended 30 June 2012 have recently been published and extracts are provided below,
together with comparative figures for the previous two years.
INCOME STATEMENTS FOR THE YEAR ENDED 30 JUNE
2010 2011 2012
€m €m €m
Revenue 1,850 2,200 2,500
Cost of sales (1,250) (1,500) (1,750)
Gross profit 600 700 750
Other operating costs (550) (640) (700)
Operating profit (PBIT) 50 60 50
Interest from credit sales 45 60 90
Interest payable (25) (60) (110)
Profit before taxation 70 60 30
Tax payable (23) (20) (10)
Profit for the year 47 40 20
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE

2010 2011 2012
€m €m €m
Assets
Property, plant and equipment 278 290 322
Inventories 400 540 620
Trade receivables 492 550 633
Cash 12 12 15
Total assets 1,182 1,392 1,590

Equity
Share capital 90 90 90
Reserves 282 292 282
372 382 372
Liabilities
Bank loans 320 520 610
Other interest bearing borrowings 200 200 320
Trade payables 270 270 280
Tax payable 20 20 8
Total equity and liabilities 1,182 1,392 1,590
Other information

(a) Dividends of €30m were paid in 2010 and 2011. A dividend of €20m has been proposed in 2012.

(b) The bank loans are unsecured. The maximum lending facility the bank will provide is €630m.

(c) Over the past three years, the level of credit sales has been;
Year ended 30 June 2010 2011 2012
€m €m €m
300 400 600

The company offers extended credit terms for certain products to maintain market share in a highly competitive
environment.

Given the steady increase in the level of bank loans which has taken place in the recent years, the company has
recently written to its bankers to request an increase in the lending facility. The request was received by the
bank on 15 October 2012; two weeks after the financial statements were published. The bank is concerned at the
steep escalation in the level of the loans and has asked for a report on the financial performance of Hewlett for
the last three years.
As a consultant management accountant employed by the bankers of Hewlett, prepare a report to the bank which
analyses the financial performance of the company for the period covered by the financial statements. Give
recommendations as to whether more credit should be provided to Hewlett

In analysing the company’s performance, you should;

• Calculate a range of relevant accounting ratios to critically evaluate the company’s performance.
Ratios should be calculated over three years. All workings and formulae used should be included in an appendix to
your report.

• In interpreting the ratios, provide a brief analysis of the company’s;
• Profitability,
• Liquidity position
• Whether it is efficiently managed
• Gearing position

Your analysis should include aspects of prior performance. You should also consider any external factors that may
affect the company’s performance within your analysis.

• Based on your analysis, provide reasonable recommendations as to whether the bank should increase
lending to the company.

• Discuss any limitations that could have hindered your analysis
Your report may take any form you wish, but you are aware of the particular concern of the bank regarding the
rapidly increasing level of lending.
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