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Retain the shares as investment or dispose them off.

Mr. Leftright has 500 shares in Sigma Limited. He observed a fall in the dividend of the company. He is confused. Advice him through a proper analysis of the financial statement, whether he should retain the shares as investment or dispose them off. The following are the income statement and the balance sheet of the company.
Income Statement Amount Amount
Sales and other Income 19,000 15,000
Less: Expenses
Operating and other expenses 15,400 11,400
Depreciation 700 650
Interest 1850 1750
17,950 13,800

Profit for the year 1,050 1,200
Taxes 500 200
Profit after taxes 550 1,000
Proposed dividend 200 400

Balance Sheet Amount Amount
Sources of funds
Share capital@ Rs. 10 each 4,200 2,600
Reserves and Surplus 7,550 1,200
12.5% Convertible Debentures - 500
16% Secured Loans 10,100 8,700
15% Unsecured Loans 1,000 3,300
22,850 16,300

Application of Funds
Fixed Assets 14,800 11,200
Less: Depreciation 2,700 2,000
12,100 9,200
Advance on a/c. of WIP 1,000 200
13,100 9,400

Inventories 8,600 7,100
Debtors 1,400 550
Cash and Bank 850 680
Loans and Advances 3,000 1,600
Total Current Assets 13,850 9,930
Less: Current Liabilities 4,100 3,030
Net Working Capital 9,750 6,900
22,850 16,300

Please advise him using Ratio Analysis.

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Explanation/Analysis
Sales and other income grew by 26.67% whereas GP declined from 24% to 18.95%. Growth is sales and other income might have appeared because of increase in other income against which the gross margin was less. RONW ...

Solution Summary

On the basis of this critical analysis of profitability and liquid position of the company it appears that the shares of the company may turn out to be a growth share. However, it is necessary to look into the overall condition of the industry, its cyclical and profitability trend, etc.

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