Assignment on Financial analysis and decision-making

Financial Decision Making

Executive summary
Financial analysis and decision-making is the practice that provides for evaluating the
projects, businesses, budgets and the main aspects relating to finance for the purpose of
identifying the suitability and the performance. The present report is based on Easylight Plc
company which deals in Airlines where its primary geographical region of business is England
and Scotland. The company has created a strong platform in the year 2017 & 2018 and planning
for making the investment or the expansion in France. The strategy of the company is to create
its well-known presence in the existing markets and to become as the short-haul airline company
of the Europe. In relation to the financial analysis of this company, the study has thrown a deep
insights towards its financial statements that is income statement, cash flow and the balance
sheet with adequate market segment analysis. Moreover, it also focuses on the investment
appraisal methods that has been used by the company for choosing the project and the sources
through which it can raise funds with taking into account the non-financial factors that are
important for gaining success from the project.

TABLE OF CONTENTS
Executive summary..........................................................................................................................2
INTRODUCTION...........................................................................................................................1
PART-1............................................................................................................................................1
1.1 Statement of profit and loss account......................................................................................1
1.2 Statement of financial position..............................................................................................2
1.4 Analysis of market segment...................................................................................................5
PART-2............................................................................................................................................5
2.1. a Management forecast.........................................................................................................6
2.1. b Investment appraisal tool...................................................................................................6
2.2 Sources of raising finance......................................................................................................8
2.3 Non-financial factors that has to be considered in respect of the expansion.......................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial decision-making refers to the process which is been responsible for taking all
types of decisions relating to the stockholder's equity and the liabilities of an entity along with
the issue of the bonds. It concerns with the decisions regarding the borrowings and the allocation
of the funds that are been required for making the investment decisions. It is been considered as
the most crucial decisions that is to be made by the managers in relation to the financing-mix of
an enterprise. It involves the decisions regarding the procurement of funds, its optimum
utilization and the gaining larger returns. The present study is based on Easylight Plc, a leading
airline company of UK and delivering higher returns to its shareholders. Furthermore, the study
includes an assessment of business performance of an entity by interpreting the income , balance
sheet and the cash flow statement. Moreover, the report also throws a deep insights towards the
investment appraisal tool, sources of the finance and the non -financial factors that are taken into
account at the time of making analysis.
PART-1
1.1 Statement of profit and loss account
Profitability ratio analysis
Particulars Calculation 2017 2018
Gross Profit 3031 3211
Net profit 443 541
Sales revenue 4527 4686
Earnings before interest and tax or
operating profit 583 690
GP ratio Gross profit / sales * 100 67% 69%
NP ratio Net profit / sales * 100 10% 12%
OP ratio Operating profit / sales 100 12.88 14.72
Interpretation : Profitability ratio define the efficiency of the company that how it able
to increase the profit and generate high revenue (Profitability Ratio Analysis, 2018). The gross
profit ratio shows that how a company able to manage the inventory by controlling the cost and
manufacture the goods and services to pass the cost of product to the end user or customer. The
higher gross profit ratio present higher growth of Easyflight plc company. According to the
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above table it can be concluded that the net profit ratio is increasing 10% to 12% which implicate
that they are able to pay the debt of the company and maintain the growth in the market. It can be
concluded that at the end of the year 2018 the operating profit ratio reach to 14.72% which
indicate that due to the loss of sales of PPE the profit is decreased in 2017 but 2018 they prepare
proper strategy and plan to increase their operating profit.
Solvency ratio analysis
Particulars Calculation 2017 2018
Long-term debt 1654 1676
Shareholder's equity 2172 2588
Debt-equity ratio Long-term debt / shareholders equity
0.7615
101289
0.6476
043277
Interpretation : Solvency ratio used to measure the ability of the company to meet the
long term requirement (Calculate the Solvency, Liquidity, and Viability of your Firm, 2019). The
debt equity ratio helps to analyse the efficiency of the company to use the equity against the debt.
The debt equity ratio of Easyflight plc company decreases from 2017 to 2018 which indicate that
they adopt the different policies and strategies to control the debt. The debt of the company is
increases. They have to apply the different budgeting tools and regulate the liability of the
company to control the debt.
1.2 Statement of financial position
Liquidity ratio analysis
Particulars Calculation 2017 2018
Current assets 1382 403
Current liabilities 576 538
Inventory 121 154
Prepaid expenses
Quick assets 1261 249
Current ratio Current assets / current liabilities
2.3993
055556
0.7490
70632
Quick ratio
Current assets - (stock + prepaid
expenses)
2.1892
361111
0.4628
252788
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Interpretation : Liquidity ratio help to determine the ability to pay the bills on time. The
current ratio and quick ratio help the company to maintain the current assets and liability. As per
the above table it can be concluded that current ratio is decreasing from 2.39 to .74 because of
the decreasing current assets. The ideal current ratio of the company is 2:1 but in 2018 the
current ratio is .74:1 which indicate that they have to manage the current assets in the
organisation to meet the short term obligation and increases the cash level in the company. The
quick ratio of the company is also below to the ideal ratio 1:1 which indicate that they require
maintaining quick assets and current liabilities.
Efficiency ratio analysis
Particulars Calculation 2017 2018
Average Inventory 121 154
Turnover or sales revenue 4527 4686
Average total assets 4402 4802
Average fixed assets 3020 4399
Receivables or debtors 200 206
Creditors or payables 523 495
Cost of good sold 1496 1475
Stock turnover ratio (In times)
12.363
636363
6
9.5779
220779
Total assets turnover ratio
1.0283
961836
0.9758
433986
Fixed assets turnover ratio
1.4990
066225
1.0652
421005
Receivables or debtors turnover ratio
(in days) (Debtors * 365) / Credit sales
16.125
469405
8
16.045
667947
1
3

Creditors turnover ratio (in days) (Creditors * 365) / COGS
127.60
360962
57
122.49
152542
37
Interpretation : Efficiency ratio is used to analyse that the company is able to manage
the current assets and current liability. As per the above calculation total asset turnover ratio
represent the efficiency of the company to generate revenue from the assets. The assets turnover
ratio is decreasing because the revenue of the company increases lesser in compare to the total
fixed assets. The Easyflight plc company has to adopt different promotional techniques to
increases the sales and also have to control their expenses.
1.3 Statement of cash flow
Cash flow ratio analysis
Particulars Calculation 2018
cash flow from operating activities 464
net sales 4686
average total liabilities
current year liability + previous year
liability / 2 3337
net sales 4586
Current liabilities 538
operating cash flow ratio
0.86245
35316
cash flow margin ratio
10.1177
496729
cash flow from operation/average total
liabilities
13.9047
048247
Interpretation : cash flow ratio are used to analyse the ability of t eh company to pay the
debt and check the solvency of company. The operating cash flow ratio present that how
effectively Easyflight plc company pay the bills. It indicates that company has to increase the
cash flow from operating activities and control the expenses to meet the current liability. It also
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helps to increase the value of Easyflight plc company in market and attract more and more
customer.
Operating cash cycle
Particulars Calculation 2017 2018
Inventory turnover ratio
9.7559
089905
11.995
305164
3
account receivable turnover ratio
6.8642
725476
16.045
667947
1
operating cycle ratio
(365/Inventory turnover ratio) + (365 /
account receivable turnover ratio) 90 days 53 days
Interpretation : Operating cash cycle refers to the total time needed by the company to
put the cash in operating activities and further return the cash into the companies cash account
(What is the operating cycle?, 2019). In 2017 Easyflight plc company pay convert the cash into
the account in 90 days while in 2018 it converts cash into account within 53 days. It indicates
that the current policy of the company is quite beneficial and now they are able to manage the
performance.
The dividend policy of the company reflect that they are able to gain the profit and share
the profit with their shareholders. In 2017 they pay the 22.57% dividend to their shareholders
and in 2018 they increase the dividend to 23.11% because of the sound position of company.
Eastflight are right to pay the dividend in 2018 because company perform well in the market and
by paying dividend to shareholders in encourage them to invest more in company and gain
higher profit.
1.4 Analysis of market segment
From the market segment analysis it has been stated that revenue of Easylight Plc is
higher in England as compared to France and Scotland. This means that the company must focus
on its marketing efforts in France as the revenue and the gross profit gained in France is of the
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lowest amount. However, the ratio is depicting that gross profit margin of England is higher as
compared which indicates that Easylight must emphasize on the managing the cost of sales in
England and in France and Scotland it must focus on modifying the pricing strategy rather than
the sales. This is because the cost of sales in England is highest in comparison to other countries.
Similar is the case with net profit margin, as in England it is generating the lowest profits
percentage because its operating cost are very high so it must focus on keeping control over its
cost. On the other hand, in France its profit margins are highest because in that country its
operating cost are lowest. Easylight Plc must adopt a skimming pricing strategy in order to gain a
large market share which in turn will enable the firm in gaining larger profits and operating cost
strategy in England by reducing the outsourcing cost, operating cost, determining inefficiencies
and keeping control over the expenses.
PART-2
2.1. a Management forecast
For making the expansion into France, the management team of the Easylight plc has
made a forecast which shows that as year passes the amount of the revenue and the contribution
will be increases as it has efficiently managed its variable cost. Investment appraisal technique
will be help the company in making accurate forecasting with appropriate estimation of the
revenue and the variable cost.
2.1. b Investment appraisal tool
Payback period- It refers to the method that determines the time period that is been
needed for recovering the initial investment that is been made within the project (Throsby, 2016).
It is capital budgeting method that is been used for computing the length of the time that is been
required in order to reach back to the cost that has incurred within the investment through using
successive inflows of cash.
Advantages Disadvantages
It is the simplest and the easiest method to
understand and compute the results.
The main limitation of this technique is that it
ignores the concept called time value of
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This investment appraisal method is very
helpful in analysing the risk that means to
identify the time period for which the
investment will remain at risk (Awojobi and
Jenkins, 2016).
Easylight Plc by using this method could be
able to measure the liquidity of a particular
proposal.
money.
It doesn't take into account the amount of the
cash flows that incurred after the period of
Payback.
It doesn't show the liquidity position of an
enterprise and only reflects an ability of
proposal in returning an initial outlay.
It also not counted as the suitable method in
measuring profitability of an overall project as
it emphasize on the time factor.
Interpretation- From the evaluation of the payback period tit has been interpreted that in
7 years and 11 months, the project will be recovering the amount of the initial outlay (Alkaraan,
2015). As stated, shorter the payback period, better is the viability of the proposal so with respect
to this project it could be reflected that the payback period of this project is long as maximum 7
years of the payback period is desirable in order to select the project.
Accounting rate of return- It referred as the percentage return that is been expected on
the asset or the investment in comparison to cost of the initial investment (Sims, Powell and
Vidgen, 2015). It is the most useful metric for evaluating the profitability that the project will be
generating in the future.
Advantages Disadvantages
It is very simple and the straightforward
method in computing the outcomes.
It mainly focuses on the accounting of the
operating income. Investors and the creditors
make use of the operating income for
evaluating performance of the management.
This method does not consider the concept of
time value of money.
It does not remain consistent over the useful
life of the proposal. This makes the project
looking as desirable for the one period and
undesirable for another.
Accounting rate of return method focuses only
on the operating income instead of the cash
flows, which act as most important to measure
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cash inflows so that accordingly further
investment could be made in the other
profitable proposal.
Interpretation- From the calculation it has been indicated that the project will be
generating 11.4% as profits which is considered as the good percentage of an income. Higher the
rate of return, higher the project is profitable so the project is desirable for Easylight Plc as it is
generating high rate of return.
Net present value- This appraisal method determines the present value of the cash
inflows and the outflows for the future period with inclusion of the initial outlay (Elmassri,
Harris and Carter, 2016). It is been referred as the capital budgeting technique for establishing
the type of the project that is likely to choose in order to earn larger profits.
Advantages Disadvantages
This method considers the risk and the
profitability aspect of the proposal as highest
priority.
It is the technique which helps Easylight Plc in
maximizing is value in the overall market.
Net present value provides for considering
both before and the after cash flows over the
useful life of the proposal.
This method gives high importance to time
value of the money factor.
NPV is not useful at the time when a project
selected by Easylight Plc are of an unequal life.
This results in making the incorrect decisions.
It is counted as the most difficult method as it
involves the concept relating time value and
faces difficulty in computing the discount rate
(Harris and et.al., 2016).
It does not facilitate accurate decision-making
in case the investment amount of the project is
not equal.
Interpretation- As per the calculation made it has been analysed that the project is viable
because it is been ascertaining positive net present value which in turn reflects that the project is
profitable and Easylight company could choose this project.
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2.2 Sources of raising finance
Equity financing- It refers to the method that provides for raising capital through selling
the stock of the company to the investors. This financing method is appropriate for Easylight Plc
because it does not create any interest related obligation on the company (Locatelli, Invernizzi
and Mancini, 2016). In exchange for the investment made by the shareholders receives the
holding or the ownership interest in respect of company's shares.
Advantages Disadvantages
Equity funding is been considered as the
committed source of raising the finance for the
intended proposals as the investors will have to
be paid dividend only in case the company will
be earning profits and not in case of loss.
No service cost has to be realized by Easylight
Plc in relation to interest payments or
repayment obligation.
Under this financing, investors expects as the
company will be delivering value which in turn
enables the organization in executing and
exploring the growth ideas within the business.
It assists in bringing the valuable skills,
experience and the contracts into the proposed
project of Easylight Plc (Carbo‐Valverde,
Rodriguez‐Fernandez and Udell, 2016) . This
helps in making key strategic decisions.
Investors are having the vested interest within
the success of the business that is the growth,
value and its profitability.
Investors also provides for follow-up funding
in case the project grows in the future.
Raising the finance through equity funding
seems to be very costly, demanding and time-
consuming. This may take away the focus of
the management from core activities of
Easylight Plc.
It provides for the dilution of the ownership of
an entity as the investors hold the ownership to
the proportion of their investment made.
Easylight Plc must have to distribute the share
of the profits to the investors as the dividend
amount.
Regular information regarding the state of
affairs of the company has to be communicated
to the investors. This leads to affect the
confidential information of the firm.
Complex legal and the regulators issues has to
be complied by an organization at the time of
raising the finance.
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Term loan- It is the type of the finance that is been raised from the bank for a particular
amount which contains a specific schedule either as the floating or the fixed rate of interest
(Furlanetto, Ravazzolo and Sarferaz, 2017). It requires a substantial payment for reducing the
amount of the payment and the entire cost of loan. In exchange for the funds raised from the
loan, company has to meet the interest obligation.
Advantages Disadvantages
It is considered as the most cheapest source in
terms of raising the finance as fixed rate of the
interest is payable and does not involve any
other obligations towards the bank as in case of
equity financing.
The interest amount that is payable on the loan
is tax-deductible which resulted as the taxation
benefit.
As term loan are represented as the debt
financing, the shareholders interest does not
get diluted.
It results in developing obligation on Easylight
Plc in relation to the payment of the interest
and the principal amount.
In case the firm fails in meeting its obligation
raises the question on liquidity position of an
entity and in turn affects its credit rating.
It also accounts for increased financial risk on
the company and also includes restrictive
covenants that are been imposed by the bank
which in turn affects the smooth functioning of
the business.
2.3 Non-financial factors that has to be considered in respect of the expansion
Future legislation- By meeting with the future and the current legislation requirements,
Easylight Plc could gain a successful expansion in compliance with all the rules and the
regulation as provided by government. This leads the firm in growing its business ethically and
sustainably.
Industry standards- At the time of expanding it is vital for the firm to match with the
industry standards of the country in which the company is deciding for diversifying.
Management team- Ensuring that the team is highly skilled, experienced and
knowledgeable. They must be having the capability in handling the challenges that might arise
with suitable decision-making. For attaining success from the expansion it is necessary for the
company to develop a best management team having a common direction.
Relationship-
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Market environment- Assessing the external environment is a major non-financial factor
that is to be taken into consideration by Easylight Plc for expanding its business into other
market as it directly affects the functioning of the business (Ahmed and Manab, 2016).
Analysing the market helps the firm in understanding the preferences of the customers and in
knowing the culture that is been adopted in the country so that products are been produced
accordingly.
Business reputation- For making expansion into the new market it is important for
Easylight Plc in creating a value of its business into the marketplace as it has been stated that the
business with the strong brand name has the capability in attaining a leading position in the
market. This in turn enhances the reputation of the business across the world.
Future trends- Making the detailed analysis of project regarding its growth potential in
the future is crucial and an important non-financial factor that Easylight Plc must have to
consider before going for the expansion in the new market (Awojobi and Jenkins, 2016). This
helps the company in planning for effective forecasting so that any uncertainty could be met if
any occurs in the near future.
CONCLUSION
From the above report it has been concluded that financial decision-making plays an
important role for Easylight Plc in making the long range planning and the decisions that results
the firm in attaining growing success in the long term with sustainability and stability. Financial
analysis of the company helps in facilitating the useful information to shareholders in making the
best possible decisions. It enables the company in assessing its financial performance and the
position of an enterprise. In order to maximize the wealth of the shareholders and in making
strategic decisions, it is important for Easylight Plc to make use of the investment appraisal
technique. It also helps in selecting the most viable and the profitable project for the company. It
has been recognized by the report that non-financial factors in relation to environment,
governance and social information is considered as essential in order to improve the risk
management and in gaining competitive edge against the rivalry. It also assists Easylight Plc in
strengthening its position in market ethically.
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REFERENCES
Books and Journals
Ahmed, I. and Manab, N. A., 2016. Influence of enterprise risk management success factors on
firm financial and non-financial performance: A proposed model. International Journal of
Economics and Financial Issues. 6(3). pp.830-836.
Alkaraan, F., 2015. Strategic investment decision-making perspectives. In Advances in mergers
and acquisitions (pp. 53-66). Emerald Group Publishing Limited.
Awojobi, O. and Jenkins, G. P., 2016. Managing the cost overrun risks of hydroelectric dams:
An application of reference class forecasting techniques. Renewable and Sustainable
Energy Reviews. 63. pp.19-32.
Carbo‐Valverde, S., Rodriguez‐Fernandez, F. and Udell, G. F., 2016. Trade credit, the financial
crisis, and SME access to finance. Journal of Money, Credit and Banking . 48(1). pp.113-
143.
Elmassri, M. M., Harris, E. P. and Carter, D. B., 2016. Accounting for strategic investment
decision-making under extreme uncertainty. The British Accounting Review. 48(2). pp.151-
168.
Furlanetto, F., Ravazzolo, F. and Sarferaz, S., 2017. Identification of financial factors in
economic fluctuations. The Economic Journal. 129(617). pp.311-337.
Harris, E.P. and et.al., 2016. Theorising strategic investment decision-making using strong
structuration theory. Accounting, auditing & accountability journal. 29(7). pp.1177-1203.
Locatelli, G., Invernizzi, D. C. and Mancini, M., 2016. Investment and risk appraisal in energy
storage systems: A real options approach. Energy. 104,. pp.114-131.
Sims, J., Powell, P. and Vidgen, R., 2015. Investment appraisal and evaluation: preserving tacit
knowledge and competitive advantage. International Journal of Business and Systems
Research. 9(1). pp.86-103.
Throsby, D., 2016. Investment in urban heritage conservation in developing countries: Concepts,
methods and data. City, Culture and Society. 7(2). pp.81-86.
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Online
What is the operating cycle?. 2019. [Online]. Available through:
<https://www.accountingcoach.com/blog/what-is-the-operating-cycle>
Calculate the Solvency, Liquidity, and Viability of your Firm. 2019 [Online]. Available through:
<https://www.thebalancesmb.com/cash-flow-ratios-for-analysis-393116>
Profitability Ratio Analysis. 2018. [Online]. Available through:
<https://www.thebalancesmb.com/profitability-ratio-analysis-393185>
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