Financial Analysis and Performance

This assignment delves into the realm of corporate finance by analyzing various models and ratios employed to evaluate a firm's performance. It explores the relationship between financial health, non-financial indicators, and overall success. The analysis draws upon academic research and practical applications, demonstrating how these tools can be used to make informed business decisions.

FINANCE IN SME
CONTEXT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Q1. Critical analysis of Trainline’s performance over 2013-2016 using ratio analysis..............3
QUESTION 2..................................................................................................................................7
Preparing estimated cash budget for TrainLine for the period of 2017 to 2019..........................7
QUESTION 3..................................................................................................................................9
Critically evaluate the sources of finance in SOFP and techniques to evaluate investment
proposal........................................................................................................................................9
QUESTION 4................................................................................................................................11
Discuss the extent to which the entrepreneurial ecosystem has been responsible for the
development of Trainline...........................................................................................................11
QUESTION 5................................................................................................................................11
Critical discussion of ethical consideration that must be taken into account for IPO issuance.11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
As per European definition, Small and medium sized enterprise has been defined as a
corporation who employ less than 250 person and whose total turnover did not exceed the
maximum level of 50 million Euro. They play an important role in the growth of the economy as
they contribute towards the GDP, generate employment and satisfy consumer need. In order to
execute their day-to-day functions, SMEs require funds and utilize it in an efficient manner for
effective and proper financial management. Trainline is a small business unit that deliver various
services i.e. railway ticket, distribution and other ancillary facilities to the consumers. The
proposed report here emphasizes upon the performance evaluation and financial status analysis
of Trainline. Moreover, it will also looks upon variety of financial sources and discuss the ethical
consideration that firm needs to taken into consideration at the time of IPO issue.
Q1. Critical analysis of Trainline’s performance over 2013-2016 using ratio analysis
Ratio analysis is a great technique that is often used by number of financial managers to
evaluate and analyse the success of business operations and financial position at the end of the
period. There are number of ratios that are categorized into profitability, efficiency, liquidity &
solvency as well. With the given scenario, Trainline’s performance is analysed underneath:
Profitability ratios: This ratio are regarded as business performance evaluation ratio
which assists a firm to determine the success of regular operations.

Gross profit margin(GPM): It is used to examine that whether Trainline has
generated good return on sales by mark-up or not. In 2015, it goes to the highest level of
68% which was 64.72% in 2012 and after came down to 65.95% in 2015. Decreased GM
is a poor sign because of sudden and drastic increase in cost by 21.72%, whilst, turnover
gone up by 14.39% because Trainline acquired Captain Train which is a leading ticket
retailing firm. Therefore, managers must pay focus in this area and make right pricing
mechanism and rationalized cost measures to maximize GPM (Najjar, 2013).
Net profit margin (NPM): In 2013, it gone up to 37.61%, thereafter, it reflects a
continuous downward trend to 24.47% in 2016. High administrative cost is the most
important reason behind this because in 2016, YOY growth in it was founded to 29.19%.
Further, interest revenues of the firm also declined by 43.45% in 2015 and after, it gone up
by 15.43% in 2016. Less ratio is a sign that Trainline’s profitability performance came
down which arise the need of rationalized cost measures needs to be taken for profit
maximization (Ahmed and Manab, 2016).
Liquidity ratio: It considers that whether Trainline managed their working capital (WC)
effectively or not to repay their short-term obligations.
Current ratio: It measures that whether establishments have sufficient current
assets or not to meet out their payment to current obligations. In 2013, it gone to 1.86
from 1.59 shows greater availability of short-term assets but thereafter, dropped to 1.18.
Again, in 2015 gone up to 1.41 and came down to 1.21 in the end. It clearly reflects that

Trainline do not have enough assets i.e. inventory, cash & its equivalent & receivables to
make their deferral payments on time (Lartey, Antwi and Boadi, 2013). Henceforth, WC
strategies and cash management plans needs to be devised by the firm.
Efficiency ratios: This ratios are helpful to examine that firm has significantly
utilized their resources or not to generate high revenues.
Assets turnover ratio: It measures the effectiveness and efficiency in assets
utilization. In 2014, it gone up from 0.49 times to 0.69 times and afterwards, came down
to 0.61 times. In accordance with the results, adverse movement in the ratio reflects that
managers did not utilized their assets in an effective and proper way for getting maximum
turnover.

Inventory turnover ratio: Unlike above, this ratio only measures the efficiency of
the business to perfectly utilize their stock or inventory balance. Above graph clearly
reflects the consistent upward trend as it got improved from 610.33 to 1478.19 which
depicts that inventory utilization efficiency of the Trainline has been maximized. It
clearly shows quick conversion or transformation of goods into sales to get higher
turnover (Islam, Alam and Hossain, 2014).
Solvency position: It is directly related to the long-term financial position which
examine the capital structure decisions to repay long-term obligations of the business on correct
time.
Interest bearing ratio: It quantifies the capability of a business to bear fixed monetary
burden in the terms of interest on borrowed capital. In the year 2013, it reduced to 4.76 times
after increased to 5.36 & 6.44 times and in the final year, dropped to 5.63 times. It clearly
indicates that in the last accounting year, Trainline was comparatively less able to get additional
borrowings because their capability to bear the fixed interest obligations came downward. Less
net earnings is the main reasons behind such decreased capacity of the business (Kaplan and
Atkinson, 2015).

QUESTION 2
Preparing estimated cash budget for TrainLine for the period of 2017 to 2019
Cash budget is the statement which helps to the firm in order to determine and assess
future financial data by taking base to the past financial years. When past financial performance
of the business entity has increasing trend then in the future also it will grow. The respective
statement of assessing financial performance includes mainly two headings such as incomes as
well as outcomes. By comparing both the aspects management is able to know that there is a
situation of cash deficit or surplus in the firm (Trejos and Wright, 2016). When net cash balance
at the end of year then it shows that TrainLine is able to manage expenses to increase profit. On
the other side, when cash incomes are lower as compare to disposals then TrainLine is unable to
perform well in the overall industry. Further, in accordance to financial performance of
TrainLine from the fiscal year 2013-2016 cash budget is to be prepared for further accounting
period. Projected or estimated cash budget over the period from 2017 to 2019 for the TrainLine
is stated as below:
Cash Budget
Particulars
2017 (Amount
in £)
2018 (Amount
in £)
2019 (Amount
in £)
Cash incomes or inflows
Sales or revenue in a year 148020 162822 179105
Amount which received from
debtors 153121 - -
Summation of cash incomes or
inflows 301141 162822 179105
Cash Disposals or outflows
Administrative costs and expenses 64443.8 67665.9 71049.2
Accounts payables 162990 - -

Summation of cash disposals or
outflows 227434 67665.9 71049.2
Net cash balance (deficit /
surplus) 73707.7 95156.5 108055
Add: Cash balance at the
beginning of the year 44408 118116 213272
Cash balance at the end of year 118116 213272 321328
Interpretation
From the above mentioned table of cash budget it can be interpreted that sales of the
TrainLine increases by 10% at every year which shows that company is able to sale more
number of rail tickets. On the other side expenses of the TrainLine are also raised in same
accounting period but with the 5% rate only. Hence, it clearly indicates that level of expenses
and revenue both will increase in the future years but with the lower and higher growth rate. It is
a clear indication of growing the TrainLine in the industry where it exists and operates currently
(Damodaran, 2016). It can be depicted from the cash budget that revenue of the TrainLine are
increases over the year which are worth of £148020, £162822 and £179105 in the FY 2017, 2018
and 2019 respectively. On the other hand side when talking about expenditures then its level also
enhance which is worth of £227434, £6766.5 and £71049.2 for the same periods. It can be
analysed that total expenses are lower as compare to total incomes which is the most profitable
situation for the company like as TrainLine.
In addition to this, net cash balance at the end of every year is positive and having
increasing trend which shows that performance of TrainLine will be better in the future. On the
basis of above table it can be clearly visualized that TrainLine will generate return or net cash
balance in the year 2017 worth of £73707.7 which is better and shows that management has
effective control on the expenses (Cash Budget, 2013). Further, in the next year i.e. 2018 cash

balance increases and reaches up to £95156.5 due to having effectual strategies to attract
customers for purchasing rail tickets sell by it. It can be forecasted from the respective cash
budget that TrainLine’s cash balance will be enhance from £95156.5 to £108055 which describes
that selling of train tickets will be increase up to greater level. Overall it can be said that the
company TrainLine’s performance will be profitable and increasing trend in the every FY from
2017 to 2019.
QUESTION 3
Critically evaluate the sources of finance in SOFP and techniques to evaluate investment
proposal
With the stated case scenario, it can be seen that in the year 2012, it can be seen that in
the year 2012, Trainline’s total equity capital & reserve was 95,715, out of which, total share
capital was reported to 35882, share premium reserve was 44,249 and retained profits were
15,584. However, there was no debt taken by Trainline to meet out their financial need. It may be
because of high cost of debt, instability in corporate earnings, volatile market demand etc.
Thereafter, in 2013, it goes upward to 135,585 because of higher retained profits worth 55,454.
Afterwards, it shows a huge decline in the total equity as it came to 41967, 76821 and 56158
respectively because repayment of capital to the investors out of the share premium reserve.
Trainline’s capital structure consists of only the equity capital may be due to high cost of
borrowings on debt capital.
This structure of the firm cannot be considered efficient because firm did not incorporate
debt funds in the business and financed only through equity capital. Undoubtedly, debt brings
fixed financial burden to the entity by charging a fixed rate of interest, but still, it brings wide
range of benefits also. One of the most important benefit that debt capital provides is taxation
benefits. Trainline can utilize debt funds and get taxation advantages on the interest payment
made periodically accordance with the debt covenants (Bhowmik and Saha, 2013). In UK,
taxation regulatory body, HMRC (Her Majesty Revenue & Custom) give taxation relief to the
Trainline on the interest charged which minimizes taxation payment and drive larger return.
Another benefit associated with the borrowed capital is it does not transfer any controlling right
to the lenders & financial institutions, as a result, business control can be secured in the owner’s

hand without any dilution. In this way, they can devise plans, formulate corporate strategies and
expansion strategies by their own, In contrast, equity capital did not require fixed payment of
dividend, still, there are no taxation benefits associated and at the same time, investors are
invited in the board meetings, hence, their voting power can alter the decisions.
In business planning, many times, companies have to invest money in long-term financial
projects. In accordance with the given scenario, managers are interested in investing money in a
new project, but they are concerned regarding its viability. It can be easily tested by applying
capital budgeting tools and techniques. In the earlier times, investors were risk-averse, therefore,
they desire to put money in such a project which will get back the initial investment quickly.
Payback period is the best way to identify the time duration in which initial investment can be
get back promptly (Baum and Crosby, 2014). However, as the method did not consider time
value, therefore, discounted payback period has been developed to overcome its drawback.
Again, it has been criticised because it ignores totally the post-pay back cash flows, therefore,
Trainline can use accounting rate of return to find out the actual profitability percentage that will
drive favourable profit to an entity. However, criticism of the method states that it did not
consider actual cash flows and use profit figures to determine the profit percentage.
However, now-a-days, net present value (NPV) gains superior priority among investors
because it discounts the expected cash inflows at a given rate and subtracts the total of it from the
initial outlay. High as well as positive NPV drive good return to the organization whereas
negative NPV shows enviable project (Götze, Northcott and Schuster, 2015). There is only one
criticism of it that is it use fixed cost of capital for whole the project life which is not considered
accurate & realistic in the dynamic corporate world. In addition, IRR (Internal rate of return) is
another method which reflects the cost of capital at where discounted cash inflows & beginning
cost outlay will be equal.
From the comparative evaluation, it becomes clear that Trainline must use NPV technique
to assess and evaluate project viability and adjust risk by considering the time-value.

QUESTION 4
Discuss the extent to which the entrepreneurial ecosystem has been responsible for the
development of Trainline
Ecosystem has an integral and key role in every company which helps in business process
in terms of several financial aspects. In the current scenario the company such as TrainLine
which provides online rail tickets to the customers and going to expand firm. For expansion of
business it requires huge amount of money which is raised from various sources of finance.
Entrepreneurial ecosystem provides various financial supports and managing it in proper and
adequate manner to make it’s financial health very strong (Antras and Foley, 2015). The
respective system provides finance to the TrainLine through venture capitalists, angel investors
and other financing sources. Apart from this, the ecosystem of entrepreneurial has a main
characteristic that it helps to the management of company in order to tolerate failure and risks
occur at the workplace. When the firm is highly able to tolerate and manage risk in better way
then it becomes profitable which is one part of ecosystem.
The overall entrepreneurial ecosystem is based on the regulatory and authority body
which is government of the country. The government formulates different rules and regulations
as well as laws for operating in the industry. When the TrainLine will employ such laws then it
able to provide better services to the customers. Being a service industry’s business organisation
it needs to provide higher quality of services by which it can attract more consumers (Ehrhardt
and Brigham, 2016) Hence, it can be said that with the help of better laws, rules and regulations
the management of TrainLine is highly able to increase level of sales and profit. Further,
ultimately the business will develop up to higher level in the overall segment.
QUESTION 5
Critical discussion of ethical consideration that must be taken into account for IPO issuance
Ethics are the necessary and key aspect of each and every business organisation which
helps to it in order to create better image in eyes of buyers as well as corporations. All the
entities take care of ethics at the workplace by which it can easily achieve objectives and targets.
When the firm is going to take any kind of decisions or making strategies then always takes into

consideration to the ethics. In context to such aspect, when TrainLine going to issue its shares
using Initial Public Offerings (IPO) then it has to take care various ethical consideration. When
the company go for IPO process then it needs to provide each and every kind of information
which is useful for the investors because it will be a parameter for taking investment decisions
for the shareholders (Fracassi, 2016). In order to this, the management of TrainLine should keep
in mind various ratios like as earning per share, price earning ratio etc. Because when the firm
has higher return, profit and such ratios then it can provide positive and better return to the
shareholders.
Apart from this, the TrainLine company has to show and provide a prospectus which
includes firm’s vision, financial performance, level of profitability etc. which helps to assist the
investors in order to invest money or not. When financial health of the TrainLine is higher and
strong then more number of shareholders attracts towards it. With help of financial performance
it able to know that company is how much able to generate profit at the end of an accounting
period. On the basis of this, potential investors are easily able to assess value of return by
considering level of profit. Base of assessing future return is profit because higher the yield leads
to provide more dividend amount to them. Moreover, while issuing shares through IPO the
management of TrainLine should provide all the terms and conditions regarding trading of shares
and return on the money which is invested in it. Furthermore, the TrainLine requires to appoint a
particular manager who is able to manage and regulate overall stock and shares in appropriate
way (Perkowski and Prömel, 2016). With this to all the investors are given equal and same
opportunities to each and every shareholders and investors. By considering such analysis of
ethical considerations it can be said that TrainLine needs to use such terms and aspects while
issuing share in stock market through IPO.
CONCLUSION
It can be articulated from the current project that, financial performance of the TrainLine
is not better in the industry and performing poor. Profitability as well as liquidity both the
aspects of financial are reduced which shows that it not able to generate better profit. Further, the
company should make strategies to attract customers and control over the expenses which are
incurred to produce services. On the basis of cash budget it can be depicted that in the future

financial years i.e. from 2017 to 2019 net cash balance and performance enhances consistently. It
can be said that various financing sources are helpful for the firm in business expansion. Beside
this, entrepreneurial ecosystem is highly helpful for the TrainLine for business development in
the industry up to greater extent.

REFERENCES
Journals and Books
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Marginalised. Springer India. 5(2). pp.61-71
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Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.