【正确答案】Note: references to 2009 and 2010 should be taken as being to the years ended 30 September 2009 and 2010 respectively. Profi tability: Income statement performance: Hardy’s income statement results dramatically show the effects of the downturn in the global economy; revenues are down by 18% (6,500/36,000 x 100), gross profi t has fallen by 60% and a healthy after tax profi t of $3·5 million has reversed to a loss of $2·1 million. These are refl ected in the profi t (loss) margin ratios shown in the appendix (the ‘as reported’ fi gures for 2010). This in turn has led to a 15·2% return on equity being reversed to a negative return of 11·9%. However, a closer analysis shows that the results are not quite as bad as they seem. The downturn has directly caused several additional costs in 2010: employee severance, property impairments and losses on investments (as quantified in the appendix). These are probably all non-recurring costs and could therefore justifi ably be excluded from the 2010 results to assess the company’s ‘underlying’ performance. If this is done the results of Hardy for 2010 appear to be much better than on fi rst sight, although still not as good as those reported for 2009. A gross margin of 27·8% in 2009 has fallen to only 23·1% (rather than the reported margin of 13·6%) and the profi t for period has fallen from $3·5 million (9·7%) to only $2·3 million (7·8%). It should also be noted that as well as the fall in the value of the investments, the related investment income has also shown a sharp decline which has contributed to lower profi ts in 2010. Given the economic climate in 2010 these are probably reasonably good results and may justify the Chairman’s comments. It should be noted that the cost saving measures which have helped to mitigate the impact of the downturn could have some unwelcome effects should trading conditions improve; it may not be easy to re-hire employees and a lack of advertising may cause a loss of market share. Statement of fi nancial position: Perhaps the most obvious aspect of the statement of fi nancial position is the fall in value ($8·5 million) of the non-current assets, most of which is accounted for by losses of $6 million and $1·6 million respectively on the properties and investments. Ironically, because these falls are refl ected in equity, this has mitigated the fall in the return of the equity (from 15·2% to 13·1% underlying) and contributed to a perhaps unexpected improvement in asset turnover from 1·6 times to 1·7 times. Liquidity: Despite the downturn, Hardy’s liquidity ratios now seem at acceptable levels (though they should be compared to manufacturing industry norms) compared to the low ratios in 2009. The bank balance has improved by $1·1 million. This has been helped by a successful rights issue (this is in itself a sign of shareholder support and confi dence in the future) raising $2 million and keeping customer’s credit period under control. Some of the proceeds of the rights issue appear to have been used to reduce the bank loan which is sensible as its fi nancing costs have increased considerably in 2010. Looking at the movement on retained earnings (6,500 – 2,100 – 3,600) it can be seen that the company paid a dividend of $800,000 during 2010. Although this is only half the dividend per share paid in 2009, it may seem unwise given the losses and the need for the rights issue. A counter view is that the payment of the dividend may be seen as a sign of confi dence of a future recovery. It should also be mentioned that the worst of the costs caused by the downturn (specifi cally the property and investments losses) are not cash costs and have therefore not affected liquidity. The increase in the inventory and work-in-progress holding period and the trade receivables collection period being almost unchanged appear to contradict the declining sales activity and should be investigated. Although there is insuffi cient information to calculate the trade payables credit period as there is no analysis of the cost of sales fi gures, it appears that Hardy has received extended credit which, unless it had been agreed with the suppliers, has the potential to lead to problems obtaining future supplies of goods on credit. Gearing: On the reported fi gures debt to equity shows a modest increase due to income statement losses and the reduction of the revaluation reserve, but this has been mitigated by the repayment of part of the loan and the rights issue. Conclusion: Although Hardy’s results have been adversely affected by the global economic situation, its underlying performance is not as bad as fi rst impressions might suggest and supports the Chairman’s comments. The company still retains a relatively strong statement of fi nancial position and liquidity position which will help signifi cantly should market conditions improve. Indeed the impairment of property and investments may well reverse in future. It would be a useful exercise to compare Hardy’s performance during this diffi cult time to that of its competitors – it may well be that its 2010 results were relatively very good by comparison. Appendix: An important aspect of assessing the performance of Hardy for 2010 (especially in comparison with 2009) is to identify the impact that several ‘one off’ charges have had on the results of 2010. These charges are $1·3 million redundancy costs and a $1·5 million (6,000 – 4,500 previous surplus) property impairment, both included in cost of sales and a $1·6 million loss on the market value of investments, included in administrative expenses. Thus in calculating the ‘underlying’ fi gures for 2010 (below) the adjusted cost of sales is $22·7 million (25,500 – 1,300 – 1,500) and the administrative expenses are $3·3 million (4,900 – 1,600). These adjustments feed through to give an underlying gross profi t of $6·8 million (4,000 + 1,300 + 1,500) and an underlying profi t for the year of $2·3 million (–2,100 + 1,300 + 1,500 + 1,600). Note: it is not appropriate to revise Hardy’s equity (upwards) for the one-off losses when calculating equity based underlying fi gures, as the losses will be a continuing part of equity (unless they reverse) even if/when future earnings recover.