Financial Management Analysis of ABC Retail Company

The report contains an overall financial analysis of ABC Retail Company for the past three years. It analyses its liquidity, profitability and solvency with the help of relevant ratios. Furthermore, it also concentrates on the calculation done for estimating the share price and market capitalization of ABC at the year end of 2018. Working capital management is also discussed in the report with the use of relevant ratios. At the last, the findings of the analysis are described in conclusion.

RUNNING HEAD: FINANCIAL MANAGEMENT
Financial management

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Contents
Introduction.................................................................................................................................................3
Requirement 1.............................................................................................................................................3
Part A......................................................................................................................................................3
Part B.......................................................................................................................................................3
Part C.......................................................................................................................................................4
Requirement 2.............................................................................................................................................5
Current ratio............................................................................................................................................5
Quick ratio...............................................................................................................................................5
Requirement 3.............................................................................................................................................6
Requirement 4.............................................................................................................................................6
Requirement 5.............................................................................................................................................7
Conclusion...............................................................................................................................................7
References...................................................................................................................................................8
Appendix.....................................................................................................................................................9

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Introduction
The report contains an overall financial analysis of ABC Retail Company for the past three years.
It analyses its liquidity, profitability and solvency with the help of relevant ratios. Furthermore, it
also concentrates on the calculation done for estimating the share price and market capitalization
of ABC at the year end of 2018. Working capital management is also discussed in the report with
the use of relevant ratios. At the last, the findings of the analysis are described in conclusion.
Requirement 1
Part A
In the below table the share price of ABC Retail Company is calculated by multiplying the P/E
ratio with the EPS reported at 30th June 2018.
Part A
30th June 2018
EPS (A) 0.02
P/E ratio (B) 7.66
Share price (A*B) $ 0.15
Part B
Market capitalization reflects the overall market value of the company and is calculated by
multiplying its current share prices with weighted average number of shares outstanding.
Part B
30th June 2018

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Share price (A) $ 0.15
Number of shares outstanding (B) 2050
Market Capitalization (A*B) $ 314.06
Working notes:
Calculation for number of shares
Earnings Before Interest and Tax $ 1,305.00
Interest Expense $ 1,247.00
Earnings Before Tax $ 58.00
Tax Expense $ 17.00
Net income $ 41.00
EPS 0.02
Number of shares (Net
Income/EPS) 2050
Part C
Price to earnings ratio reflects the willingness of the investors in respect of paying a certain
amount per dollar of earnings. It is also known as price-multiple which measures company’s
current stock prices with its earnings per share. In case of ABC Retail, the current P/E ratio is
7.66 which is lower than the industry average of 17.4 (Linked In. 2017). As it is below the
average it indicates that the shares of ABC are undervalued and the stock price trade lower. This
will give an opportunity to the investors to buy the stock at low price and sell it later on at higher
ones in order to book profit (Bragg, 2012).

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Requirement 2
Current ratio
It is one of the liquidity ratios which measures the capability of the firm to meet its short term
financial obligations with the use of its current assets. The standard ratio is 2:1 which means
every entity must have its CAs double of its current liabilities (Zainudin, Zainudin, Hashim and
Hashim, 2016).
Current ratio 2016 2017 2018
Current assets (A) 11171 12432 13533
Current Liabilities (B) 6238 4167 4047
CR (A/B) 1.79 2.98 3.34
The above table reflects an increasing trend in the current ratio of ABC Company. In 2016, it
was 1.79 which increased to 3.34 in 2018. This was due to the fact that the despite having low
cash balance, the company’s current assets has increased and are enough to meet its current
liabilities worth $4,047,000 during the year 2018. However, comparing with 2017, the liabilities
have been reduced which boosted up the ratio in the recent year.
Quick ratio
It is also a liquidity ratio which determines the financial health of the company. The only
difference is that it takes into account the most liquid assets of the firm which excludes inventory
and prepaid expenses. The ideal ratio is 1:1 and is required to be maintained by the firms
(Saleem and Rehman, 2011).
Quick ratio 2016 2017 2018
Quick assets (A) 4688 5236 5520
Current Liabilities (B) 6238 4167 4047

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QR (A/B) 0.75 1.26 1.36
Same trend has been noticed in quick ratio of ABC as it rose from 0.75 to 1.36 in recent year.
Moreover, the ratio is also higher than the set standard. This is because of the reduction in the
current financial obligations majorly contributed by company’s accounts payable. Along with
this, the assets of the company have also increased over the years.
Requirement 3
It is very important for any company to properly manage its working capital. It is that amount
which is required by every firm to fund is day to day activities and operations. Evaluation of
working capital management can be justified with the ratios like inventory turnover ratio,
collection ratio and current ratio. Inventory turnover is one of the efficiency ratios that
determines how quickly a company can convert its stock into cash and generate revenue
(Higgins, 2012). Referring to appendix, it can be said that the ITR of ABC was 5.74 times in
2017 which reduced to 5.34 times in 2018. This was due to a significant increase in company’s
average inventory from $6839.5 to $7604.5.
Similarly, the collection period of ABC also increased from 43 days to 46 days in 2018. This was
due to the reduction in receivable turnover ratio of the firm which ultimately affected its
collection ratio. As discussed above, the current ratio has been constantly increasing over the
three years along with the upsurge in company’s working capital. However, ABC still needs to
improve its WCM by focusing on reducing inventories and debtors.
Requirement 4
The profitability ratios are an indicator of the company’s financial performance during the year.
They guide the investors in taking correct decisions (Warren and Jones, 2018). It can be

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observed that the profit margin of ABC has reduced from 0.24% to 0.10% in 2018. Also it was at
0.12% in 2016, less than the prior year. This was due to the constant reduction in company’s net
income because of the high interest expense.
With the reduced net profit, the ROE and ROA also falls from 1.86% to 1.65% and 6.45% to
5.67 % in 2018 respectively. Despite having an increase in average assets and equity, the
company is not to offer high returns due to low profits (Refer Appendix).
Requirement 5
The solvency of the company deals with the evaluation of its capital structure and the extent of
debt taken by it during a specific time period. The interest coverage ratio shows the number of
time a firm has made interest payments (Vogel, 2014). In 2016, it was 1.12 times which further
reduced to 1.05 times in 2017 and 2018. This reduction was due to the fact that increase in
ABC’s EBIT was less than the upsurge in its interest expense. Along with this, the debt equity
ratio of the company has also shown a slightest reduction from 4.38 to 4.33. The ratio reflected
that the company had heavy loan liability as compare to its equity.
As far as lending the credit is concerned, it will be better not to grant any sort of loan to ABC as
it already has huge debt portion and is not able to make its interest payments quickly and timely.
Moreover, the net profit of the company has also reduced in the past years.
Conclusion
The above report concludes that the company has a strong liquidity position but it needs to
concentrate on enhancing its profitability and solvency position. It has to reduce its debt portion
by making its interest payments on time and relying more on equity. Also the company needs to
improve its ROE in order to give high returns to its shareholders.

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References
Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersy: John Wiley & Sons.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Linked In. (2017). Australian Retail Benchmark: Financial Ratio Assessment of ASX Listed
Retailers. [Online]. Available at: https://www.linkedin.com/pulse/australian-retail-benchmark-
financial-ratio-assessment-karthik-iyer
Saleem, Q. and Rehman, R.U. (2011). Impacts of liquidity ratios on
profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New
York: Cambridge University Press.
Warren, C. S. and Jones, J. (2018). Corporate financial accounting. USA: Cengage Learning.
Zainudin, E.F., Zainudin, E.F., Hashim, H.A. and Hashim, H.A. (2016). Detecting fraudulent
financial reporting using financial ratio. Journal of Financial Reporting and Accounting, 14(2),
pp.266-278.

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Appendix
Working capital management
201
6 2017 2018
Working capital (CA-CL)
493
3 8265 9486
Inventory turnover ratio 2017 2018
Sales (A) 39258 40592
Average inventory (B) 6839.5 7604.5
ITR (A/B) 5.74 5.34
Collection ratio 2017 2018
Days (A) 365 365
Receivable turnover ratio (B) 8.50 8.01
CR (A/B) 43 46
Profitability
ratios
Net profit margin 2016 2017 2018
Net profit (A) 92 46 41
Sales (B) 38222 39258 40592
NPM (A/B) 0.24%
0.12
% 0.10%

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Return on Equity 2017 2018
Net profit (A) 46 41
Average equity (B)
2467.
5 2489
ROE (A/B)
1.86
% 1.65%
Return on Assets 2017 2018
Net profit (A)
2467.
5 2489
Average assets (B) 38275 43911
ROA (A/B)
6.45
% 5.67%
Solvency ratios
Interest coverage ratio 2016 2017 2018
EBIT (A) 1208 1281 1305
Interest expense (B) 1077 1215 1247
ICR (A/B)
1.1
2 1.05 1.05
Debt Equity ratio 2016 2017 2018
Debt (A) 10764 10750 10815

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Equity (B) 2456 2479 2499
D/E ratio (A/B)
4.3
8 4.34 4.33