Earnings per share, a rights issue and the quality of Verdala Foods' growth
Verdala Foods plc reported profit after tax of €2,340,000 for the year ended 31 December 2024 against €1,950,000 for 2023, and the chair's statement announces 'a 20% increase in profits'. The 2024 figure includes a €600,000 post-tax profit on the disposal of a freehold property; there were no comparable one-off items in 2023.
Share capital at 1 January 2024 was 4,000,000 ordinary shares of €1. On 1 July 2024 the company made a rights issue of 1 new share for every 4 held, at €2.40. The market price immediately before the issue was €3.00.
Extracts from the statements show: inventories €5,400,000 (2023: €2,900,000), trade receivables €6,100,000 (2023: €2,800,000), trade payables €2,050,000 (2023: €1,300,000), revenue €24,000,000 (2023: €17,100,000), and net cash from operating activities €410,000 (2023: €2,100,000). Cost of sales was €18,000,000 (2023: €12,800,000). The company operates in a competitive retail food market with tight margins.
1. Calculate basic earnings per share for 2024 and the restated comparative for 2023, showing the rights issue adjustment.
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Step 1 - theoretical ex-rights price (TERP)
Value of 4 shares at market price: 4 × €3.00 = €12.00 Plus cash from 1 new share: €2.40 Value of 5 shares after issue: €14.40 TERP = €14.40 / 5 = €2.88
Step 2 - adjustment (bonus) factor
€3.00 / €2.88 = 1.0417. The rights issue contains a bonus element because the shares were issued below market price, so the pre-issue shares must be scaled up as if the bonus element had always existed.
Step 3 - weighted average number of shares for 2024
| Period | Shares | Factor | Months | Weighted |
|---|---|---|---|---|
| 1 Jan – 30 Jun | 4,000,000 | 1.0417 | 6/12 | 2,083,333 |
| 1 Jul – 31 Dec | 5,000,000 | 1.0000 | 6/12 | 2,500,000 |
| 4,583,333 |
Basic EPS 2024 = €2,340,000 / 4,583,333 = 51.1c
Step 4 - restated 2023 comparative
4,000,000 × 1.0417 = 4,166,667 shares; €1,950,000 / 4,166,667 = 46.8c
The current-year shares are not adjusted from 1 July because they were actually in issue and the cash was genuinely received; only the bonus element is backdated.
2. Assess whether the announced 20% growth fairly reflects Verdala Foods' performance, using adjusted EPS and the working capital data.
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Headline versus per-share growth
Total profit rose 20%, but EPS rose from 46.8c to 51.1c - only 9.2%. The gap exists because the rights issue increased the share count by 25% from 1 July. Profit belongs to more shareholders, so per-share growth, the measure that matters to an investor, is less than half the headline claim.
Stripping out the one-off
Underlying profit = €2,340,000 − €600,000 = €1,740,000. Underlying EPS = €1,740,000 / 4,583,333 = 38.0c, against 46.8c restated for 2023 - a fall of about 18.8%. On a like-for-like basis the business shrank, and the €600,000 disposal gain of a property is not repeatable: selling an asset cannot be a growth strategy.
Cash and working capital
Operating cash flow fell from €2,100,000 to €410,000 while profit rose; cash conversion is only 17.5% of profit. The ratios explain where the money went:
- Inventory days: 5,400/18,000 × 365 = 109 days (2023: 83 days)
- Receivable days: 6,100/24,000 × 365 = 93 days (2023: 60 days)
- Payable days: 2,050/18,000 × 365 = 42 days (2023: 37 days)
The operating cycle stretched by about 34 days in a market described as tight-margin food retail. Revenue grew 40%, but it appears to have been bought with extended credit and stock-building, and suppliers are being paid more slowly relative to the increase in activity - a classic warning sign. There is a real risk of obsolete or short-dated food inventory and of receivables that will not be collected.
Conclusion
The 20% claim is not supportable. Underlying EPS fell, cash generation collapsed and the balance sheet is absorbing the growth. The chair should report the underlying figure and explain the working capital position.
3. The finance director argues that 'ratios are objective, so the analysis above speaks for itself'. Identify the limitations of the ratio analysis in this case and what additional evidence a user should demand.
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Ratios are arithmetically objective but interpretively fragile, and this case shows several limits.
One-off items distort the trend. Averaging or comparing a year containing a €600,000 disposal gain with one that does not is comparing unlike things; ratios built on unadjusted profit mislead unless the underlying figures are used.
Year-end window dressing. Inventory and receivable days are measured at a single date. A company can pull forward despatches, delay write-offs or factor receivables just before the year end. A 109-day inventory holding for perishable food is implausible as a steady state, which suggests either stock that should be written down or a year-end distortion.
No segment or product data. Verdala may sell several lines; a company-wide inventory day figure cannot show whether the build-up is in one product or across the board. The analysis cannot identify the cause, only the symptom.
Accounting policy and estimation effects. Depreciation rates, provisioning and revenue cut-off vary between entities, and the food retail sector benchmark may not match Verdala's mix.
No non-financial or market context. Customer concentration, competitor pricing, store closures and the reason for the property sale are invisible to ratios.
Averages hide distribution. A 93-day receivable average may conceal a small number of large overdue accounts.
What to demand: the cash flow statement in full, an aged receivables and inventory analysis, a reconciliation of profit to operating cash flow, segmental disclosure, the prior four to five years for trend, details of the property disposal and the intended use of the proceeds, and the auditor's key audit matters. Ratios are a starting point for questions, not the answer.