Delta Roofing Company Limited manufactures roofing sheets in Ghana. They have been in the business for almost 20 years. Their main competitors over the last decade has been Relta Roofing. An investor has tasked you as a financial analyst to determine which of the two companies will be ideal for investments.
The following information from the financial statements of both companies have been provided:
Delta Roofing: Their total assets are worth GH¢3,500,000 while they have a working capital of GH¢4,200,000. Their liabilities stand at GH¢5,000,000 while retained earnings amount to GH¢800,000. Earnings Before Interest and Tax amount to GH¢6,500,000. Sales total GH¢8,300,000 while the market value of equity is GH¢7,000,000.
Relta Roofing: Their total assets are worth GH¢4,700,000 while they have a working capital of GH¢3,200,000. Their liabilities stand at GH¢4,000,000 while retained earnings amount to GH¢900,000. Earnings Before Interest and Tax amount to GH¢6,100,000. Sales total GH¢9,300,000 while the market value of equity is GH¢7,500,000.
Using Altman’s z-score for manufacturing companies, advice the investor on which of the two companies offer a safer investment opportunity.
b) List five limitations of Financial Statement Analysis