Financial Analysis and Investment Appraisal

This assignment delves into the significance of ratio analysis for business performance evaluation. It discusses various ratio analysis methods, including current ratio analysis, and highlights their importance in measuring firm performance. Additionally, it examines investment appraisal methods such as Net Present Value (NPV) and Payback Period to assess project viability and profitability. The document concludes by emphasizing the crucial role of both ratio analysis and investment appraisal in guiding business decisions.

ACCOUNTING & FINANCE FOR MANAGERS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Quesiton 1........................................................................................................................................1
(b) Best company.......................................................................................................................10
©Poor performing company and reocmendation.......................................................................10
Question 2......................................................................................................................................10
Capital investment decision making process.............................................................................10
Main metods of investment appraisal........................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15
Figure 1Profit ratio of the firms.......................................................................................................1
Figure 2Gross profit ratio................................................................................................................2
Figure 3Calculation of ROE using net income................................................................................3
Figure 4Net asset ratio.....................................................................................................................4
Figure 5Interest coverage ratio........................................................................................................5
Figure 6Current ratio value of business firms.................................................................................6
Figure 7Liquidity ratio of the firm...................................................................................................7
Figure 8Gearing percentage in case of firms...................................................................................8
Figure 9Profit per employee............................................................................................................9
Figure 10Operating revenue per employee......................................................................................9
Table 1Profit margin ratio...............................................................................................................1
Table 2Gross profit ratio..................................................................................................................2
Table 3Calculation of ROE by using net income............................................................................3
Table 4Net assets turnover ratio......................................................................................................4
Table 5Interest coverage ratio.........................................................................................................5
Table 6Current ratio value of the firms...........................................................................................5
Table 7Liquidity ratio for the firms.................................................................................................6

Table 8Gearing percentage..............................................................................................................7
Table 9Profit per employee.............................................................................................................8
Table 10Operating revenue per employee.......................................................................................9

INTRODUCTION
Ratio analysis is the one of the common method that is used to evaluate firm
performnace. In the current research study ratio analysis of firms William Hills, Ladbrokes Coral
and Paddy Power is done and comments are made on their performnace. In secosnd part of the
report varied project evaluation approaches are analyzed deeply. In this way entire research is
carried out.
Quesiton 1
Table 1Profit margin ratio
Profit margin 2014 2015 2016
William Hill PLC 14.45 11.55 11.2
Ladbrokes Coral Group 3.21 -3.6
-
14.15
Paddy power betfair 18.89 15.67 0.79
1 2 3
-20
-15
-10
-5
0
5
10
15
20
25
14.45
11.55 11.2
3.21
-3.6
-14.15
18.89
15.67
0.79
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 1Profit ratio of the firms
Interpretation
Profit ratio reflect the proportion of sales that is covered by the profit that is earned by the
firm (BALAN, 2015). Mentioned ratio is taken in to account because by using same accurate
estimate of the profit that is earned by the firm can be made. It can be seen that William Hill
profit margin reduced to some extent from 14.45 to 11.2. On other hand, in case of Ladbrokes
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Coral Group profit value increased from 3.21 to 14.15 which indicate that mentioned firm is
earning good amount of profit in its business. In case of Paddy Power it can be seen that profit
ratio reduced from 18.89 to 0.79 and this means that low profit is earned in case of the business
firm. Thus, overall it can be said that firms have low control on expenses and due to this reason
less profit is earned by them.
Gross margin ratio
Table 2Gross profit ratio
Gross margin 2014 2015 2016
William Hill PLC 88.57 85.27 81.74
Ladbrokes Coral Group 0 0 85.4
Paddy power betfair 80.97 75.92 76.91
1 2 3
0
10
20
30
40
50
60
70
80
90
88.57 85.27 81.74
0 0
85.4
80.97 75.92 76.91
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 2Gross profit ratio
Interpretation
Gross profit ratio is considered for analysis purpose because by using same profitability
and firm direct cost control capacity can be measured in easy way (Brown and Nyonna, 2015).
From chart given above it can be seen that gross profit ratio value for William Hill decreased
from 88.57 to 81.74. Hence, this means that firm performance declined and to some extent it
loose its control on direct expenses in the business. In case of Ladbrokes Coral Group gross
profit ratio value is 85.74. Thus, it can be said that there is high gross profit ratio in case of
Ladbrokes then William Hill and former firm perform better the letter one. In case of Paddy
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Power it can be seen that gross profit ratio value is 80.97 in year 2014 and value of same is 85.4
in year 2015 which decreased to 76.91. Thus, it can be said that performance of Paddy power
decline sharply. Hence, it can be said that Ladbrokes perform better then other firms.
Calculation of ROE by using net income
Table 3Calculation of ROE by using net income
ROE using net income 2014 2015 2016
William Hill PLC 12.69 13.72 10.51
Ladbrokes Coral Group 10.47 1.12 -14.24
Paddy power betfair 37.45 212.57 -0.13
1 2 3
-50
0
50
100
150
200
250
12.69 13.72 10.5110.47 1.12
-14.24
37.45
212.57
-0.13
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 3Calculation of ROE using net income
Interpretation
It can be seen from the table that ROE value in respect to net income is decreasing in case
of William from 12.79 to 10.51. ROE ratio is taken in to account because it reflect return on
equity mean that return percentage that is generated by the firm on each unit of equity. Thus
from sharholder perspective this ratio is taken in to account for analysis purpose. In case of
Willam ratio value decline which reflect that firm is geenrating less return for the investors. On
other hand, in case of Ladbroles Coral ratio value declined from 10.47 to -14.24. This means that
mentioned firm also failed to generate return for its investors and does not give any sort of
positive return. In case of Paddy also same story is observed as value of ratio declined from
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37.45 to -0.13. Overall by considering profile of three years it can be said that Paddy Power give
sufficient amount of return to its investors.
Net assets turnover
Table 4Net assets turnover ratio
Net assets turnover 2014 2015 2016
William Hill PLC 0.81 0.95 0.8
Ladbrokes Coral Group 1.25 1.36 0.62
Paddy power betfair 2.22 3.94 0.33
1 2 3
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0.81 0.95 0.8
1.25 1.36
0.62
2.22
3.94
0.33
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 4Net asset ratio
Interpretation
Net asset turnover ratio reflect extent to which firm is effecienctly using assets in its
business to generate return (Chappuis, Ballesteros and Gacia, 2016). This ratio is taken in to
account because by using same effecinency level of the firm can be measured in proper manner.
In case of William Hill it can be observed that value of ratio decreased from 0.81 to 0.8 which
means that effeciency level of the firm reduced in terms of use of assets in the business. In case
of Ladbrokes Coral Group value of the ratio decresed from 1.25 to 0.62 and this reflect that firm
failed to make best use of asset and it need to improve its performance. In case of Paddy power
ratio value again declined from 2.22 to 0.33 and this means that all three firms performance
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declined in last year. It can be said that most of times Paddy Power perform better then other
firms.
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Interest coverage ratio
Table 5Interest coverage ratio
Interest coverage ratio 2014 2015 2016
William Hill PLC 5.76 5.47 4.51
Ladbrokes Coral Group 2.76 -0.08 -0.19
Paddy power betfair 978.34 61.7 2.64
1 2 3
-200
0
200
400
600
800
1000
1200
978.34
61.7 2.64
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 5Interest coverage ratio
Interpretation
Interest coverage ratio is another ratio which reflect firm capability to cover its interest
burden by using revenue amount (Chen, Gopi, Mao and Schneider, 2017). It can be observed that
in case of William Hill value of ratio decreased from 5.76 to 4.51. Similarly, in case of
Ladbrokes Coral Ltd value of ratio declined from 2.76 to -0.19. Hence, it can be said that firm is
not able to pay interest amount by using net income. In case of Paddy Power value of ratio
decreased from 978.34 to 2.64. On this basis it can be said that overall in terms of consideration
of all three years Paddy Power is in better condition then William Hill.
Current ratio
Table 6Current ratio value of the firms
Current ratio 2014 2015 2016
William Hill PLC 0.76 0.52 0.71
Ladbrokes Coral Group 0.59 0.65 0.33
Paddy power betfair 1.34 0.82 0.99
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1 2 3
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
0.76
0.52
0.71
0.59 0.65
0.33
1.34
0.82
0.99
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 6Current ratio value of business firms
Interpretation
Current ratio is the one of the most important method that is used to measure firm ability
t pay current liability by making use of current assets in the business (Current ratio what is the
current ratio, 2017). This ratio is used in the report in order to identify liquidity position of the
company. In case of William Hill it can be seen that value of ratio increased from 0.76 to 1.34
and this means that firm is able to pay current liabilities in time. On other hand, in case of
Ladbrokes Coral Group it is observed that value of ratio was 0.52 in year 2014 and same was
0.65 in year 2015 followed by 0.82 in year 2016. Hence, it can be said that firm improve its
performance to great extent but still can not pay all its short term liabilities by making use of
assets. In case of Paddy Power high plunge is observed in case current ratio. It can be seen that
value of ratio increased from 0.71 to 0.99. This reflect that after paying current liability nothing
will remain with the firm. Hence, William Hill perform better then other firms.
Liquidity ratio
Table 7Liquidity ratio for the firms
Liquidity ratio 2014 2015 2016
William Hill PLC 0.76 0.52 0.71
Ladbrokes Coral Group 0.59 0.65 0.33
Paddy power betfair 1.34 0.82 0.99
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1 2 3
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
0.76
0.52
0.71
0.59 0.65
0.33
1.34
0.82
0.99
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 7Liquidity ratio of the firm
Interpretation
Liquidity ratio is similar to the current ratio because it also reflect firm ability to pay
current liability by using liquid assets which are cash and marketable securities (Ertaş and
Karkacıer, 2016). It can be seen that in case of William Hill value of ratio elevate from 0.76 to
1.34. In same way, for Ladbrokes Coral value of ratio increased from 0.52 to 0.82. On other
hand, in case of Paddy Power value of ratio increased from 0.71 to 0.99. Hence, it can be said
that William is in better position then other firms.
Gearing percentage
Table 8Gearing percentage
Gearing % 2014 2015 2016
William Hill PLC 73.3 63.07 65.86
Ladbrokes Coral Group 140.9 93.19 96.75
Paddy power betfair 2.66 296.46 7.02
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1 2 3
0
100
200
300
73.3 63.07 65.86
140.9 93.19 96.75
2.66
296.46
7.02
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 8Gearing percentage in case of firms
Interpretation
Gearing percentage refers to the proportion that debt cover of equity. This ratio is taken
in to account in current resarch study in order to meausre firm capital structure (Fernandez,
Becerra and Chin, 2014). It can be seen from the chart that ratio value decreased to large extent
in case of William Hills from 73.3 to 2.66 which means that debt cover very low portion of
equity and firm is in good condition. On other hand, in case of Ladbrokes Coral gearing
percentage declined from 63.07 to 296.46 which means that debt is much high relative to equity
and it can be said that firm capital structure need restructuring. In case of Paddy Power ratio
value decreased from 65.86 to 7.02 which reflect that perform well. William is in better
condition then other firms.
Profit per employee
Table 9Profit per employee
Profit per employee 2014 2015 2016
William Hill PLC 15 12 11
Ladbrokes Coral Group 3 -3 -8
Paddy power betfair 27 25 2
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1 2 3
-10
-5
0
5
10
15
20
25
30
15 12 11
3
-3
-8
27 25
2
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 9Profit per employee
Interpretation
Mentioned ratio is used to evaluate profit earned on each employee. William relative to
other firms is earning good amount of profit in the business.
Operating revenue per employee
Table 10Operating revenue per employee
Operating revenue per
employee 2014 2015 2016
William Hill PLC 101 102 99
Ladbrokes Coral Group 84 84 58
Paddy power betfair 141 157 199
1 2 3
0
50
100
150
200
250
101 102 99
84 84
58
141
Chart Title
William Hill PLC Ladbrokes Coral Group Paddy power betfair
Figure 10Operating revenue per employee
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Interpretation
Operating revenue per employee is high in case of Paddy then other firms. Hence,
mentioend firm is in better condition then other firms.
(b) Best company
Best company is William Hills because its profitability and interest coverage ratio is high,
geairng percentage is balanced and profit per employee is high. Company have positive
investment opprotunity because cost and debt is in control in the business.
©Poor performing company and reocmendation
Poor performing companies are Ladbrokes Coral Group and Paddy Power and it is
recommended that these firms needs to control cost and debt in the busines. By doing so profit
can be increased because there will be less expenses and interest burden on the business firm.
Question 2
To
The General manager Date: 8-2-2018
Subject: Process of making capital decisions
Capital investment decision making process
 Identification of the project: In this stage varied projects are identified through which
company can earn good amount of profit in the business. In this stage managers need to
focus on number of things and need to ensure that only relevant one is only taken for
evaluation purpose (Gangur, 2016). Definition of project and screening: All projects in detail are defined and screening of
same is done quantiatively so as to meaure viability of project. Varied quantitative
factors can be considered like time by which project can be started after establishing all
relevant fixtures installations and completing formalities. Analzing and accepting: In this stage investment appraisal methods are applied on
cash flows and on basis of results specific project is selected (Mărginean and Bobescu,
2014). Thus, investment apprisal methods play an important role in project selection. Implementation: In this stage project is implemented that was selected in earlier stage
and in this regard varied calculations are performed. Monitoring: Project is monitored and all facts are evaluated in detail to make
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decisions.
 Post audit: After audit project performnce is meausred in this stage.
Main metods of investment appraisal
 DCF: In this method cash flows are developed and in this regard all project related
cash inflow and outflow amounts are taken in to consideration (Mathe and Xhumalo,
2014). By using PV factor PV of the project is computed.
 ARR: In this approach average return that project can generate is computed by taking
average of estimated cash flows. Average of cash flows is divided by investment
amount and in this way ARR is computed.
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 IRR: In this approach actual return that can be generated on project is computed by
using relevant formula (Narvydas, 2016).
 NPV: It is the approach in which present value of cash flows is computed and from
same initial investment amount is deducted. In this way viability of project is
computed.
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
 Payback period: By using this method duration in which project investment amount
can be covered from cash flows is identified. This tool reflect the time period after
which project will start generating profit for the firm.
CONCLUSION
On basis of above discussion it is concluded that there is significent importance of ratio
analysis method for the business firms. This is because by using same performance of the firm
can be measured in proper manner. Investment appraisal methods must be used by the firm to
meausre viability of the project and to select profitable one for the company.
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