Analysis of Company's Financial Performance

The assignment provided is an analysis of a company's financial performance over several years. The report includes calculations of liquidity ratio, profitability ratio, and return on equity (ROE) to assess the company's ability to meet current obligations, manage expenses, and generate profits. The results show that the company's liquidity position is not good, with increasing expenses leading to reducing profitability and ROE. It is recommended that the company reduce its expenses and monitor financial performance to identify necessary changes for improvement.

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1. a) Profit and cash Flow and their Difference .........................................................................1
b) Working capital and the meaning of receivables, inventory and payables.............................2
c) Changes in working capital affect cash flow .........................................................................2
2) Application of concepts to Uber Tools Ltd ...........................................................................3
3) Steps that should be taken to improve company's cash flow through better working capital
management................................................................................................................................4
PART 2............................................................................................................................................4
1. a) Elements of financial performance.....................................................................................4
b) Calculation of Ratios..............................................................................................................5
c) Application of result based on result ......................................................................................6
2) Analyse and recommendation for assessing the financial performance of business .............7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Business finance refers to the way the business can acquire funds for its operations. It
involved the money and credit involved in the business. It is required to make provision of funds
so that it can be used whenever the funds are required in business. This assignment will include
the Uber tools Ltd that owns and operated a factory in Newmarket producing powers tools. The
company’s last year turnover was £400 Million. Further, this assignment will provide
understanding about profit and cash flow and how these two are different. Also, it will explain
information about changes in working capital and its effect on cash flow along with financial
performance of the company on the basis of financial ratios.
PART 1
1. a) Profit and cash Flow and their Difference
Profit of the company provide understanding about the revenue earned by the company
during a financial year. Profitability of the company is determined on the basis of preparing the
income statement which provides understanding about the profits earned by company through its
business activities (Burns and Dewhurst, 2016). The company’s profit is the net income earned
by firm by deducting the operating and trading expenses from the sales. Without adequate profit,
a firm cannot survive in the long run (What's more important, cash flow or profits, 2018). Cash
flow refers to the cash inflow and outflow through the operating, financing and investing
activities performed by company.
Difference between profit and cash flow
Profit Cash Flow
 It is the money left over the sales by
subtracting the cost.
 It represents the money from different
activities which consist of operating,
financing and investing.
 Timing in acquiring cash is different
because sometimes the cash is not
received by customers due to delay
payments (Jordà, Schularick and
Taylor, 2016).
 It is calculated before the money is
received.
1

 It is based on cash basis of accounting  It is an accrual concept (Finance,
2015).
b) Working capital and the meaning of receivables, inventory and payables
Working capital is the money which is available within the firm from performing its day-
to – day operations. It is used to calculate the liquidity of the firm on the basis of its working
capital requirement. It is calculated by subtracting the current liabilities from the current assets. It
includes the account receivables, payables and inventory (Bendell and Doyle, 2017). Balance
sheet is used to identify the amount of working capital. Balance sheet is prepared to measure the
position and liquidity of the company by comparing assets and liabilities of the firm.
Account receivables: It is shown in the current assets of the balance sheet. This account
shows the amount which is due from the customers that purchased the goods on credit.
Account payables: It is an account which is shown on the liabilities side and provides
information about the amount which is unpaid to the suppliers or vendors of company for
purchasing the goods and services on credit (Canales, 2016).
Inventory: It is the amount of goods which is present with the company for selling and it
includes three stages which consist of raw material, work in progress and finished goods
(Inventory, 2018). It is recorded in current asset section as it is held with the company for less
than one year.
c) Changes in working capital affect cash flow
Working capital of the company have their impact on the cash flow because if there are
any changes in the working capital it will be reflected through the cash flow. Changes in working
capital affect the cash flow from operations.
The following are the changes which will affect the cash flow:
 Increase in assets: If there is any increase in the assets, the cash flow from operations
will decrease.
 Decrease in assets: If the assets side of the balance sheet is decreasing, then the cash
flow from operations will increase.
 Increase in the balance of liability: There is a direct relation between the cash flow and
liabilities which means increase in liabilities will result in increase of cash flow from
operations (Kraemer-Eis and et.al., 2018).
2

 Decrease in liability: If there is decrease in the balance of liabilities, then there will be
decrease in the cash flows from operations.
2) Application of concepts to Uber Tools Ltd
Uber Tools Ltd have earned profits in the last year of about £36 million which
means the company after subtracting its expenses from the incomes is able to earn profit of
this amount which means the company is profitable. The cash flow for the Uber Ltd is the
amount of the cash inflow and outflow from the various activities such as Operating,
investing and financing activity.
cash flow statement of Uber Ltd
particular Amount (£)M
operating profit 36
Operating activity
sales 400
change in working capital (350-250) 100
net cash flow from operations 500
Investing activity -20
Less: Investment in design company -18
Less: Advance fee
-38
net cash flow from investing activity
Financing activity 0
net cash flow (positive) 98
From the above calculation it has identified that this company have more inflows than its
outflows which is profitable for the business. Moreover, there is change in working capital
which is shown in the operating activity that shows there is an increase in liabilities which means
there is an increase in cash flow as well and thus it is added in the operating activity.
3

The account receivables are the customers of this company which are D & R DIY Ltd
and BricoFrance SA, these are accounts which are shown on the assets side of balance sheet.
Also, the liabilities of the company are amounting of £350 million which has been increased
from £250 million and will be reflected in the cash flows.
There is a dispute between the BricoFrance SA and the company and it is required that
the company must maintain the inventory level of about £35 million after the dispute is sorted.
Also, the company paid advance fee to a designing company and invested a sum of £20 million
which is investment for the company and thus it is shown as an investment activity. The
company’s management might affect its financial results as there is no dispute with the main
customer due to which the company’s sales may get affected due to which the profitability of the
firm will also get affected.
3) Steps that should be taken to improve company's cash flow through better working capital
management
Working capital of Uber Tools Ltd = current assets – current liabilities
account receivable - debts
= 12- 350 = -338
Uber tools Ltd., in order to improve its cash flow must resolve the dispute with its
customer that is BricoFrance SA which will assist them in increasing the good relations with the
customers to pay the amount in order to maintain its positive working capital. It is required that
the company should managed its inventory level in order to increase its current assets to have
positive working capital which will in turn will assist in managing the working capital
requirement of firm. Also, the debts of the company are increased from £250 million to £350
million which means the liabilities of the company has been increased which will reduce the
working capital. Thus, it is required that the firm must meet its debt obligation to improve its
cash flow. It is required that the shareholders must invest more money in the company in order to
meet the debt's obligation of company (Scholes, 2015). It can be analysed that the working
capital of the company is negative and in order to manage that, it is required to improve the cash
flow of company. It is also needed to increase the cash inflow for the firm through increasing its
current assets.
PART 2
4

1. a) Elements of financial performance
The financial performance of the company is determined by preparing the financial
statement which consists income statements and balance sheet. Income statement consist of
incomes and expenses for a specific period which are used to determine the profitability of the
business. Profits earned by company assist in identifying the financial performance of firm on
the basis of increase or decrease in profitability by company the net profit earned during the
period by the last year profits (Kraemer-Eis and et.al., 2018). Moreover, the financial position of
company is determined on the basis of the statement of financial position which consist of
elements such as assets and liabilities. Assets are owned and controlled by the company and
have their future value and also they can be used for meeting the financial obligation of
company. Liabilities are the obligation of company which are required to paid in the future.
Equity is amount which is left by the company after subtracting its liabilities from their assets.
b) Calculation of Ratios
Calculation of Ratios for Madagascar Industries
Ltd
particular formula 20X9 20X0 20X1
sales 360 396 459
sales growth(%)
sales current – sales previous/sales
current*100 nil 10 16
Gross profit 230 252 272
Gross profit ratio(%) GP/ sales *100 64 64 59.26
Operating profit 108 101 49
Operating profit ratio
(%) OP/ sales*100 30 25.51 10.68
current liabilities 29 48 102
Non-current liabilities 186 252 360
Total debt 215 300 462
shareholder funds 304 347 344
5

gearing ratio (%)
total debt/ (total debt + shareholder
fund) 41.43 46.37 57.32
finance expense 9 12 16
Interest coverage
ratio(times) Operating profit / finance expense 12 8.4 3.1
current assets
cash 14 35 0
inventory 14 36 43
trade receivables 36 43 50
total 64 114 93
current liabilities
short term debt 0 0 37
trade payables 14 17 14
interest payables 7 9 22
taxes payables 7 22 29
Total 28 48 102
liquidity ratio Current assets / current liabilities 2.29 2.38 0.91
net profit 79 72 26
return on equity (%) net profit / shareholders fund 26 20.7 7.6
return on capital
employed (%)
Operating profit/(total debt +
shareholder fund) 20.8 15.6 6.1
c) Application of result based on result
From the above calculation it has been identified that different ratios which assist in
identifying the financial performance and position of the firm. It has been identified from the
sales growth ratio which provide understanding that the sales of the company are growing in the
different years (Burns, 2016). It is identified that sales have been grown by 10 % in year 20X0
and 16 % 20X1. Also, the gross profit ratio which is determined by dividing the gross profit by
sales for that period (Ylhäinen, 2017). The result shown by the gross profit provide
understanding that in the year 20X9, the gross profit was 64 which was same in the year 20X0
6

and after in the year 20X1 the gross profit reduced which shows the gross profitability is
reduced.
From the operating profit ratio which is identified by dividing the operating profit by
sales of that year. It is identified that the operating profit of the company is reduced over the
years which is not beneficial for the firms as it will lead to reduction the performance of
company. Furthermore, from the calculation it is identified about the gearing ratio which shows
relation between the debts and equity to identify the liquidity position of firm. Another ratio
which is related to interest coverage ratio shows the ability of the operating profit to cover the
interest expense of firm. It is shown that in the year 20X9, the operating profit can be used 12
times for covering the interest expense. Whereas in the year 20X0, the operating profit can be
used 8.4 times for covering interest expense and in the year 20X1 it can cover the interest
expense by 3.1 times.
From this, it can be interpreted that the interest coverage ratio is decreasing over the year
which is not beneficial for the company. From the calculation of Liquidity ratio which shows the
relation between the current assets and current liabilities and the ability of the current assets to
meet the current obligation of firm. The liquidity ratio in the year 20X9 was 2.29 which
increased to 2.38 in year 20X0 which shows the current assets are capable to meet the current
obligation of companies in these period. But in the year of 20X1 the liquidity ratio come to 0.91
which is less than the ideal ratio of 1:1 Which means the current assets of company cannot meet
the current obligation which is not good for the company.
Another ratio which is calculated is return on equity which shows the amount of return on
the capital invested in the firm which is reducing over the years and thus the returns for the
company on their equity are reducing. The return on capital employed ratio is calculated to
determine the amount of return on the capital employed in business which is also reducing over
the period. The change in the ratio is due to increase or decrease in the elements present in the
income or balance sheet statement which shows that the company is performing bad over the
years as per shown through the ratios.
2) Analyse and recommendation for assessing the financial performance of business
The financial performance of the company can be assessed through the use of ratios
which are identified through the information used from the income statement and balance sheet.
It is analysed that the company is increasing its sales over the period which is beneficial for the
7

firm but due to increase in expenses over the period as resulted into the decrease in profitability
of firms. So, it is recommended to company to reduce its expenses and cost to increase the
profitability of business which will help the firm in improving their financial performance.
It is analysed that the company’s current liabilities are more that its current assets due to
which the liquidity position of the company is not good which is reflected through the liquidity
ratio which shows that the company ability to meet the current obligation is reducing over the
years. The company’s financial performance is not good as per the ratios calculated as it shows
that the expenses for the company are increasing over the years which results into reducing in
their profitability. Also, the return on the equity is reducing over the years which shows the poor
financial performance of company. So, it is recommenced to board that the company must
reduce its expenses and should monitor the company's financial performances on the basis of
ratios to identify the changes which are required in the company to improve the financial
performance of firm.
CONCLUSION
From this assignment, it has concluded that business finance is required to perform the
various operations of organisation. It has provided information about the profit and cash flow
and the difference between them which shows that the profit is related to the revenue generated
by the business whereas cash flow involved the cash inflow and outflow for the period.
Moreover, the study has shown understanding about working capital and the effect on cash flow
due to changes in working capital that shows if the relation of assets and liabilities with cash
flow. This assignment has shown calculation of ratios on the basis of information provide in the
income statement and balance sheet.
8

REFERENCES
Books and journals
Bendell, J. and Doyle, I., 2017. Healing capitalism: five years in the life of business, finance and
corporate responsibility. Routledge.
Burns, P. and Dewhurst, J. eds., 2016. Small business and entrepreneurship. Macmillan
International Higher Education.
Burns, P., 2016. Entrepreneurship and small business. Palgrave Macmillan Limited.
Canales, R., 2016. From ideals to institutions: Institutional entrepreneurship and the growth of
Mexican small business finance. Organization Science. 27(6). pp.1548-1573.
Finance, B., 2015. Business Finance.
Jordà, Ò., Schularick, M. and Taylor, A. M., 2016. The great mortgaging: housing finance,
crises and business cycles. Economic Policy. 31(85). pp.107-152.
Kraemer-Eis, H. and et.al., 2018. European Small Business Finance Outlook: December 2018.
(No. 2018/53). EIF Working Paper.
Scholes, M. S., 2015. Taxes and business strategy. Prentice Hall.
Ylhäinen, I., 2017. Life-cycle effects in small business finance. Journal of Banking &
Finance. 77. pp.176-196.
Online
Inventory. 2018. [Online]. Available through:
<https://www.accountingtools.com/articles/2017/5/13/inventory>
What's more important, cash flow or profits. 2018. [Online]. Available through:
<https://www.investopedia.com/ask/answers/111714/whats-more-important-cash-flow-
or-profits.asp>
9