PGBM12 Accounting and Financial Management Assessment January 2019 cohort

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PGBM12 Accounting and Financial Management Assessment January 2019 cohort

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Contents
Part A:..............................................................................................................................................4
Part A.1: Report for board of Bitmap plc........................................................................................4
Introduction......................................................................................................................................4
Ratio Analysis of Bitmap Plc..........................................................................................................4
Profitability Ratios Analysis........................................................................................................4
Gross Profit Ratio.....................................................................................................................4
Return on Capital Employed....................................................................................................5
Liquidity Ratio Analysis..............................................................................................................6
Current Ratio............................................................................................................................6
Quick Ratio...............................................................................................................................6
Gearing Ratio Analysis................................................................................................................7
Debt to equity ratio......................................................................................................................7
Asset utilization ratio analysis.....................................................................................................8
Inventory Turnover Ratio in days............................................................................................8
Asset Turnover ratio.................................................................................................................8
Investor’s potential analysis.........................................................................................................9
Dividend per share....................................................................................................................9
Earnings per share..................................................................................................................10
Conclusion.................................................................................................................................10
Part A.2: Working capital cycle of Bitmap plc..............................................................................10
Part B: Capital budgeting and managing finance..........................................................................12
Part B.1: Application of capital budgeting investment appraisal techniques to the given scenario
.......................................................................................................................................................12
Part B.2: Critical Evaluation of the Key Benefits and Limitations of Different Investment
Appraisal Techniques....................................................................................................................17
a. The Payback Period................................................................................................................17
b. The Discounted Payback Period............................................................................................17
c. The Accounting rate of return................................................................................................18
d. The Net Present Value...........................................................................................................18

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Part B.3: Evaluation of Suitable Sources of Finance for funding this investment........................18
Part C:............................................................................................................................................20
Part C.1: Budget and its Relation with Strategic Objectives and Strategic Plans.........................20
Part C.2: Critical Evaluation of the Budgeting process and Interlinking of Various Budgets......20
References......................................................................................................................................22

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Part A:
Part A.1: Report for board of Bitmap plc
Introduction
The main purpose of report is to evaluate financial performance of Bitmap Plc for year
2016 and 2017 through use of ratio analysis as the most significant financial tool. The five most
important categories of ratio analysis that are used to evaluate the financial performance of
Bitmap Plc are profitability, gearing, liquidity, asset management and investors potential.
Ratio Analysis of Bitmap Plc
Particulars Bitmap plc
2016 2017
Amount in £000
Current Assets £ 4,150.00 £ 5,160.00
Current Liabilities £ 1,100.00 £ 1,500.00
Inventories £ 1,800.00 £ 2,360.00
Gross Profit £ 9,100.00 £ 12,200.00
Net Revenue/Sales £ 18,000.00 £ 23,000.00
Cost of goods sold £ 8,900.00 £ 10,800.00
Operating Profit Margin £ 5,100.00 £ 6,800.00
Net Profit Margin £ 3,220.00 £ 4,060.00
Debts (ALL) £ 2,000.00 £ 3,500.00
Shareholders’ Equity £ 12,000.00 £ 15,760.00
Total Assets £ 15,500.00 £ 20,360.00
Capital Employed £ 14,400.00 £ 18,860.00
Average Inventory £ 1,800.00 £ 2,080.00
Dividend Payments £ 200.00
£
300.00
Retained profit for the year £ 3,020.00 £ 3,760.00
Number of equity shares 10000 10000
Profitability Ratios Analysis
Gross Profit Ratio
This ratio measures gross profit earns by company on percentage of total sales revenue.
Formula: Gross Profit margin/Net sales or sales revenue (Brigham and Michael, 2013)
Particulars Bitmap plc

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Profitability Ratio 2016 2017
Gross Profit 50.56% 53.04%
2016 2017
49.00%
49.50%
50.00%
50.50%
51.00%
51.50%
52.00%
52.50%
53.00%
53.50%
Gross Profit Ratio
Percentage
Above bar graph reflects the gross profit percentage earned by Bitmap Plc during years
2016 and 2017. Through analyzing the above graph it can be said that there had been increasing
trend in gross profit ratio.
Return on Capital Employed
Return on capital employed is important for management point of view as it reflects the
percentage of profit earned on the total capital invested. Capital investment includes equity share
capital, retained earnings and non-current liabilities.
Formula: Net Profit after tax/ (Total assets-Current liabilities)
Particulars Bitmap plc
Profitability Ratio 2016 2017
Return on Capital Employed 22.36% 21.53%
2016 2017
20.00%
20.50%
21.00%
21.50%
22.00%
22.50%
23.00%
23.50%
Return on Capital Employed
Percentage
This ratio has been decreased in year 2017 as compared to year 2016 despite an increase
in net profit after tax. The main reason behind decrease in capital employed ratio was due to

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increase in overall capital invested in business. Although Bitmap provide very good percentage
of return on capital employed.
Liquidity Ratio Analysis
Current Ratio
This ratio is very important indicator of overall liquidity position of the company. It
measures ability of the company to pay the short time liabilities as they fall due through use short
term assets.
Formula: Current assets/Current Liabilities (Damodaran, 2011)
Particulars Bitmap plc
Liquidity Ratios 2016 2017
Current Ratio 2.77 4.69
2016 2017
0.00
1.00
2.00
3.00
4.00
5.00
Current Ratio
Times
Current ratio of 2.77 times indicates Bitmap plc has enough current assets to pay for
current liabilities for future year. This ratio has increased in year 2017 to 4.69 times reflects very
strong liquidity position of company. One thing that must be take care here that company has
enough working capital in year 2017 which it can utilized for expansion of sales.
Quick Ratio
This ratio is similar to current ratio but it is absolute measure of liquidity position as it
does not consider inventory and prepaid expenses as short term assets. Inventory is not referred
as quick assets because they cannot be easily converted into cash and cash equivalent.
Formula: (Current assets-Inventory)/Current liabilities
Particulars Bitmap plc
Liquidity Ratios 2016 2017
Quick Ratio 1.57 2.55