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Introduction to Financial Analysis: Assignment

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Added on  2019-12-17

Introduction to Financial Analysis: Assignment

   Added on 2019-12-17

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Introduction to Financial Analysis: Assignment_1
Table of ContentsINTRODUCTION................................................................................................................................3TASK A................................................................................................................................................31 Presentation of Performance to the Board.....................................................................................3i) Liquidity Ratios...................................................................................................................3ii) Profitability Ratios..............................................................................................................5Iii) Gearing ratio......................................................................................................................6iv) Asset Utilisation................................................................................................................7V) Investor Potential Ratio......................................................................................................82 Calculation of Working Capital Cycle...........................................................................................8TASK B................................................................................................................................................91 Demonstrating the viability of investment by applying Investment Appraisal Techniques..........9a) The Payback Period.............................................................................................................9B) The Accounting Rate of Return..........................................................................................9C) Net Present Value.............................................................................................................10D) The Discounted Payback Period......................................................................................11e) The Internal Rate of Return...............................................................................................112 Critical evaluation of the investment appraisal techniques.........................................................12TASK C..............................................................................................................................................131 Application and critical evaluation of Budgeting........................................................................132 Critical evaluation of Break even Model.....................................................................................15CONCLUSION..................................................................................................................................16RECOMMENDATIONS....................................................................................................................16REFERENCES...................................................................................................................................17APPENDIX........................................................................................................................................182
Introduction to Financial Analysis: Assignment_2
INTRODUCTION Finance is the lifeline of the business. Financial analysis refers to critically evaluatingbalance sheet through Ratio analysis. Various benchmarks or set criteria are utilised for examiningthe financial statements. The selected company for the project is Prime town PLC, being engaged inthe manufacturing process of refrigeration equipment. The performance of an organisation ismeasured by asset utilisation, liquidity, profitability, gearing and investor potential. Working capitalis a cycle for Prime Town PLC is evaluated to determine the time taken to convert the current assetsand current liability into the liquid form of cash. Further, more investment appraisal techniques areused to assess the viability of the project and decisions based thereon to whether accepting or rejectit. Budgeting is an important financial tool applied for short term decision making and planning toassess the obligations arising or cash flow generated. Moreover, Break even Model is criticallyevaluated to better understand the applicability in different businesses.TASK A1 Presentation of Performance to the BoardTo: Board of Prime Town PLCFrom: Financial AnalystRespected Board MembersThis is to bring to the notice of Management that for evaluating the performance of Prime townPLC, various ratio analyses are performed, and results are presented here below.i) Liquidity Ratios Liquidity ratios indicate the liquidity of the business assets in respect to its currentobligations. It is analysed by different ratios.Current Ratio: Current Ratio refers to proportion of current assets of the business to itscurrent liabilities. It depicts the eligibility of current assets to pay off the current obligationsof Business (Lasher, 2013).3
Introduction to Financial Analysis: Assignment_3
The current ratio of Primetown PLC was better in 2014 as compared to 2015. Moreover, in2015 current ratio of firm declined from 2.05 to 1.92. However, current assets are covering thecurrent liabilities completely. Therefore, it can be said that company has good liquidity. The majorreason behind lowering the current ratio is an increase in current assets and current liabilitieshowever rise in current assets is more than current liabilities. However cash and cash equivalentsare nil in 2015 as compared to 1295 at the end of 2014.Quick Ratio: Quick ratio depicts the ability of quick assets to repay its current liabilitiesimmediately. Quick assets exclude inventory as it will take the time to convert inventoryinto cash and cash equivalents. This implies that in the absence of inventory, a company canrepay its liabilities.The quick ratio in 2014 was better in comparison to the same in 2015. It depicts that quickassets in 2014 were more than in 2015 such as .87. The ability to repay current obligations hasreduced due to unavailability of cash in the year 2015. Also the significant rise in inventory is thereason for the decline in Quick ratio. In the year of 2015, company had more current assets whichcan easily be converted into cash. Hence, rather than maintaining high cash within the firm in4
Introduction to Financial Analysis: Assignment_4
access of average limit company needs to focus on investing money in other options which areavailable to it. ii) Profitability Ratios Profitability of the business indicates the profitability of the business in comparison to itsrevenues over the period of one year. It depicts the profit portion of sales during the year.Operating Profit Ratio: Operating profit ratio indicates the operating margin or spread leftafter considering the direct expenses related to production.Operating profit ratio has been significantly declined despite the fact that sales have raised from£182, 70,000 to £241, 00,000. This decline is due to the remarkable rise in Administration expensesand bad debts. Administration expenses and bad debts have increased twice in 2015 whichadversely impact the operating profits. Therefore, the emphasis is to be laid on collection fromvarious debtors on a timely basis and also controlling the administration expenses.Net Profit Ratio: Net Profit ratio indicates the proportion of net profit after deducting allthe direct and indirect expenses from the revenues or sales. Net profit ratio was adversely affected in 2015 due to the significant increase in the interestpayable as the loan stock has risen for £87, 00,000 in 2014 to £146, 50,000 in 2015. However,revenue increased in 2015 so increasing expenditure level is one of the main causes due to which5
Introduction to Financial Analysis: Assignment_5
net profit decreased from 31.17% to 20.56%. Controlling Measures should be taken to reduce theexpenses. Hence, due to having higher expenses and tax liability net profit margin of Prime townplc decreased significantly. Thus, company is required to make changes in the existing strategic andpolicy framework. Return on capital employed and return on shareholders’ equity From the above mentioned table it has been analyzed that ROCE of Prime Town Plc decreased from23% to 18%. On the other side, measure of return on shareholders’ equity also show decreasingtrend in the performance level. Hence, decreasing performance level or trend presents that in theyear of 2015 business unit failed to generate high net profit margin from the money invested byshareholders. Iii) Gearing ratioGearing ratios is the measure of determining the financial leverage of the firms. It depictsthe ratio of borrowed funds to the shareholder's equity in the firm. Debt Equity Ratio: Debt equity ratio indicates the proportion of debt to equity of the firm. It indicates that how the assets of the business are financed by debt and how much by using equityfund.6
Introduction to Financial Analysis: Assignment_6

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