Financial Performance Analysis of Madagascar Industries Limited

The assignment provides a detailed analysis of the financial performance of Madagascar Industries Limited, including an examination of its cash flow statement, working capital management components, and financial ratios. The report discusses the importance of working capital management and how it affects cash flow. It also calculates and interprets various financial ratios to assess the company's financial health.

BUSINESS FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................1
PART – 1.........................................................................................................................................1
1. Explaining:..............................................................................................................................1
a. Meaning of Profit and Cash flow and how they differs..........................................................1
b. Meaning of Working capital along with inventory, receivables and payable.........................2
c. Changes in working capital affect Cash flow. ........................................................................3
2. Company manage is affecting its financial results..................................................................3
3. Steps taken for improving the cash flow of company through better working capital ..........3
management................................................................................................................................3
PART – 2.........................................................................................................................................4
1. Explaining financial ratio........................................................................................................4
b. Calculating ratio of each year.................................................................................................6
c. Interpretation...........................................................................................................................7
2. Recommendations for financial performance improvement...................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business finance is a term which refers to cash, funds, money, capital and credit amount
employed in the business organization for carrying on any business operations. Business finance
is related to procurement and effective utilization of money or funds resources to carry out
business operations effectively and efficiently. The report will discuss about UberTools Ltd. And
Madagascar Industries Limited. UberTools Ltd. Is a company which is engaged in producing
power tools and is thinking of expanding its business to produce chainsaws. The report will
further discuss about the meaning of profit and cash flow and the way in which differs form each
other. Further, the report will discuss meaning of working capital along with inventory,
receivables and payables. The report will emphasize on assessing the impact of changes in
working capital on cash flow. It will also provide financial ratio calculation and how it is
interpreted. At last the report will discuss how financial performance of Madagascar Industries
Limited can be assessed and improved.
PART – 1
1. Explaining:
a. Meaning of Profit and Cash flow and how they differs.
Profit – The word profit is also known as Gaining. Profit is thus a defined as the
monetary or financial gain which is considered as the difference between the amount of money
earned and the expenses incurred. Profit is the income or gain which is earned from trade or
business activity remaining after total costs and expenses are deducted from the total sales
revenue of the business. It is used as a measure for assessing the success and growth of a
business organization (Reid and Myddelton, 2017).
Cash Flow -The term Cash flow is defined as the amount of cash, money, funds that is
moving in and out of a business organization. Thus, the term cash flow is the difference between
the amount of cash, funds available with the company at the beginning of a period and the
amount available at the end of a specified period (Reid and Myddelton, 2017). The cash flow
helps in preparation of cash flow statement which depicts about the cash uses by the operating,
investing and financing activities of the business organization for the specified period of time
(Reid and Myddelton, 2017).
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Difference between Profit and Cash flow is as follows:
S. No. Basis Profit Cash flow
1 Calculation It is calculated after deducting
all the business related
expenses.
It is calculated by making total of
Operating, Investing and
Financing activities of business.
2 Objective It helps in assessing the
profitability status of company.
It helps in ascertaining the
liquidity as well as solvency
position of the business.
3 Preparation It is ascertained by comparing
sales revenue for current year
with previous year.
It is prepared with the help of
Income Statement and Balance
sheet.
b. Meaning of Working capital along with inventory, receivables and payable.
Working Capital – The term Working capital is defined as the funds, cash or money
available with the company for meeting its day-to-day business operational activities or other
obligations (Pais and Gama, 2015). Working capital helps in measuring the company's liquidity,
solvency, operational efficiency and capabilities of the business organization. It is the difference
between the company's current assets and its current liabilities.
Inventory – The term Inventory is defined as an accounting term which refers to the stock
or products or goods that are available with the company for carrying on its business and trade
activity. Inventory can be held by company in form of Raw materials, Work in progress and
Finished goods for meeting customer's expectations by making sales (Pais and Gama, 2015).
Receivables - Receivables also known as Accounts receivable. Thus, Accounts receivable
is the total amount of money owed to a company because of goods and services provided by the
company on credit basis (Pais and Gama, 2015).
Payables - When a company bought or purchases goods or stocks on credit basis, then the
company has to pay its invoices back within in a specified or short period of time. It is
sometimes also known as Accounts Payable (Pais and Gama, 2015).
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c. Changes in working capital affect Cash flow.
Working Capital is defined as the net amount of funds, cash or money which is available
with the company to meet or for paying its short-term expenses related to business operations
(Pais and Gama, 2015).
Cash flow depicts the movement of cash and funds in and out of the business organization for a
specified period of time.
Changes in working capital affect Cash flow in following way:
1. The positive working capital is a situation when the company is having current assets more
than current liabilities which depicts that the company is financially sound and strong as a result
it will bring Positive impact on cash flow (Pais and Gama, 2015). It indicates that the liquid
assets of company are increasing enabling it to cover its short-term liabilities, pay expenses and
provide a good return to its shareholders.
2. Negative working capital means the current liabilities exceeds the current assets of the
company. It can be due to company having a large cash payment related to purchase of products
from its suppliers, vendors. It indicates company has to struggle for making payment and also
has negative cash flow because of low profit generation (Pais and Gama, 2015).
2. Company manage is affecting its financial results.
In case of UberTolos Ltd. The company is producing power tools and is thinking of
expanding its business in new product development i.e. chainsaws for which it has acquired a 3
year license and has make an investment of £20 million with an advance fees of £18 million to
design company. Here the company after making payment and investment, is not able to generate
gain or return on capital employed.
Also, the inventory management of the company is not effectively managed. The
company should adopt good inventory valuation method for valuing its inventory and assessing
the level of stock held by company (Pais and Gama, 2015).
3. Steps taken for improving the cash flow of company through better working capital
management.
The company should adopt following measures for improving the cash flow of company
through better working capital management:
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1. Perform Budgeting and Forecasting function – The company should always prepare a
budget or forecasting function by making strong business strategies and plans for meeting
future business operations.
2. Debtors collection period – The company should focus on the efficient, effective and
timely collection of customer debts to remain liquid and solvent. It should focus on
decreasing the debtors' collection period by getting easy collection of money due form its
customers (Pais and Gama, 2015).
3. Payable period – The company should always emphasizes on increasing the payable
period so as to keep cash or cash-equivalents with itself for meeting day-to-day expenses
(Pais and Gama, 2015).
PART – 2
1. Explaining financial ratio.
1. Sales growth – The term Sales growth is defined as a measure which defines the ability of
company and its employee to increase sales of its product and services over a fixed
period of time. It is defined as the amount of sales increased in terms of revenue as
compared to a previous year. Sales growth is always considered as a positive factor for
every business organization as it depicts the company's survival and profitability.
Because of sales growth it has impact on increase in dividends for shareholders & high
share price (Lakshan and Wijekoon, 2017).
2. Gross profit margin – The Gross profit margin helps in evaluating the company's
financial performance, position as well as health. It is calculated as the amount of money
remaining after making all deduction related to the cost of production & cost of goods
sold. It is the profit amount which is left after meeting all business and cost expenses
(Lakshan and Wijekoon, 2017).
3. Operating profit margin – The Operating profit margin defines the way of measuring the
company's profitability position. It indicates that how much revenue amount is left after
making all the expenses related to costs of goods sold and operation of business. The
operating profit margin is thus that amount of revenue which a business earns by
conducting its business related operating activities (Lakshan and Wijekoon, 2017).
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4. Gearing - Gearing is used to measure the level of financial leverage a company has
employed into its business organization. It also represents the funding amount as
contributed by the lenders in comparison with funds contributed by shareholders. It is a
fundamental analysis ratio of a firm's level of long-term debt as compared to its equity
capital. Gearing ratio measures the extent by which it can be assess how much business is
funded by equity capital in comparison with debt funds (Lakshan and Wijekoon, 2017).
5. Interest coverage ratio- The interest coverage ratio helps in determining that how easily
the company's ability to pay its interest related expenses arises because of the outstanding
debt with the available earnings of business. The interest coverage ratio is type of
financial ratio which measures the company's ability in meeting it expenses related to
interest payments on time (Lakshan and Wijekoon, 2017).
6. Liquidity ratio – The word Liquidity describes the extent of a company by which the
current assets can be easily bought from the market or converted into cash without having
any impact on the price of asset. The liquidity factor measures the ability of every
company that how it will meet the short term financial obligations or other obligation due
within one year with the amount of liquid assets available (Lakshan and Wijekoon,
2017).
7. Return on equity – The word Return on Equity basically means the normal rate of return
that the shareholders or other stakeholders holding company's shares or stock receives on
the part of their shareholdings. A Return on Equity is a measure which assess the ability
of business organization in generating income or profit from the equity capital available
(Lakshan and Wijekoon, 2017).
8. Return on capital employed – It measures the company's operational efficiency and
profitability with the amount of capital employed. In simple meaning it measures that
how much a company is able to generate profit from capital invested (Lakshan and
Wijekoon, 2017).
b. Calculating ratio of each year.
Particulars Formula 2019 2020 2021
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Sales 360 396 459
Sales growth (Sales Y2- Sales Y1)/
Sales Y1 - 10% 15.91%
Gross profit 230 252 272
Sales 360 396 459
Gross profit margin Gross Profit/ Sales 63.89% 63.64% 59.26%
Operating profit 108 101 49
Sales 360 396 459
Operating profit
margin
Operating Profit/
Sales 30.00% 25.51% 10.68%
Total debt 29 48 102
Shareholders fund 304 347 344
Gearing
Total debt/ (Total
debt + shareholder
funds)
8.71% 12.15% 22.87%
Operating profit 108 101 49
Finance expenses 9 12 16
Interest coverage ratio Operating profit/
Finance expenses 12 8.42 3.06
Current assets 65 114 94
Current liabilities 29 48 102
Liquidity ratio Current assets/
Current Liabilities 2.24 2.38 0.92
Net Profit 79 72 26
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Shareholders fund 304 347 344
Return on equity Net profit/
Shareholders funds 25.99% 20.75% 7.56%
Operating profit 108 101 49
Total debt 29 48 102
Shareholders fund 304 347 344
Return on capital
employed
Operating profit/
(Total debt +
Shareholder Fund)
32.43% 25.57% 10.99%
c. Interpretation
1.Sales growth – The sales of Madagascar Industries Limited is increasing from 10% to 15.91%
from year 2020 to 2021. The sales of company are increasing thereby creating revenue for the
company and also for its stakeholders as the customers are liking its product and services and
creating more demand (Lakshan and Wijekoon, 2017).
2. Gross profit margin – The gross profit of Madagascar Industries Limited is decreasing form
63.89% to 59.26% from year 2019 to 2021 which defines that the company is having less
revenue remaining after meeting all its cost expenses or the direct expenses related to sales, Cost
of goods sold is very high as compared to sales revenue.
3. Operating profit margin - The operating profit margin of Madagascar Industries Limited is
decreasing form 30% to 10.68% from year 2019 to 2021. It means the company is having high
operating expenses as compared to sales revenue (Lakshan and Wijekoon, 2017). The another
reason for decrease in operating profit margin can be decline in sales.
4. Gearing - It describes the financial ratio which compares the equity or capital part of the
owner with the borrowed funds of the company. The gearing ratio of company is increasing
which means that company is having high debt financing (Lakshan and Wijekoon, 2017).
5. Interest coverage ratio – From 12% the interest coverage ratio of company has decreased to
3.06%, which shows that company will have difficulties in generating the cash for pay its interest
related expenses.
6. Liquidity ratio – This ratio indicates that how many times the company can pay its current
debt with the helps of its liquid assets. The liquidity ratio of company is decreasing to 0.92 which
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has to be improved to above 1, so that it don't have to sell assets for meeting its short-term debt
expenses (Lakshan and Wijekoon, 2017).
7. Return on equity – The ratio of return on equity is decreasing from 25.99% to 7.56%.
Decreasing return is because low profit generation because of low sales turnover.
8. Return on capital employed – The return is decreasing against which the company has to take
preventive measures for improving return on capital employed by reducing its cost expenses,
increasing sales and sales revenue (Lakshan and Wijekoon, 2017).
2. Recommendations for financial performance improvement.
1. Increase in Revenue – Madagascar Industries Limited should focus on increasing its sales
thereby increasing the sales revenue (Epstein, M.J., Buhovac, and et.al., 2015). The
company has to focus on improving the quality of its product, services as well as
performance of business operations.
2. Debt Ratio remain low – The debt is considered as one of the most important aspect of
company. The company should maintain a mix of debt equity and should be financial
leveraged (Epstein, M.J., Buhovac, and et.al., 2015).
3. Profitability ratio – The company should always focus on maximization of profit and
customer satisfaction along with minimum cost of production. The company should
always emphasize on increasing profit with better quality product.
4. Current ratio & liquidity – The company should have more current as well as liquid
assets in comparison with the current liabilities (Epstein, M.J., Buhovac, and et.al., 2015).
It helps in assessing the liquidity and solvency position of the company.
5. Operating expenses – The term expense related to cost incurred for carrying on any
business or trade activity. Every company should focus on minimizing its cost expenses
related to business operation and cost of goods sold (Epstein, M.J., Buhovac, and et.al.,
2015).
CONCLUSION
From the above report it can be concluded that finance is considered as important factor
for every business organization in carrying on any business operations. The report has discussed
about the concept of profit and cash flow statement. It has also provided the comparison between
profit and cash flow. The report has also discussed the importance of working capital
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management with inventory, accounts receivables and accounts payables meaning. This report
has provided that how any change in the business item of working capital has impact on cash
flow of the company. Furthermore, the report has provided calculation of financial ratios of
Madagascar Industries Limited along with its interpretation and meaning. Also, the report has
disclosed that how a company can manage and assess its financial performance with the help of
financial statement and financial ratios.
REFERENCES
Books and Journals
Epstein, M.J., Buhovac, and et.al., 2015. Managing social, environmental and financial
performance simultaneously. Long range planning. 48(1). pp.35-45.
Kraemer-Eis, H., Botsari, and et.al., 2018. European Small Business Finance Outlook: June
2018 (No. 2018/50). EIF Working Paper.
Lakshan, A.I. and Wijekoon, W.M.H.N., 2017. The use of financial ratios in predicting corporate
failure in Sri Lanka. GSTF Journal on Business Review (GBR). 2(4).
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Pais, M.A. and Gama, P.M., 2015. Working capital management and SMEs profitability:
Portuguese evidence. International Journal of Managerial Finance. 11(3). pp.341-358.
Reid, W. and Myddelton, D.R., 2017. Cash flow statement. In The Meaning of Company
Accounts (pp. 16-16). Routledge.
Rodrigues, L. and Rodrigues, L., 2018. Economic-financial performance of the Brazilian
sugarcane energy industry: An empirical evaluation using financial ratio, cluster and
discriminant analysis. Biomass and bioenergy. 108. pp.289-296.
Shackle, G.L.S., 2017. Expectation, enterprise and profit: The theory of the firm. Routledge.
Stripling, E. and Baesens, B., 2018. Building profit-sensitive classifiers for maximum profit. In
European Conference on Operational Research (EURO 2018), Date: 2018/07/08-
2018/07/11, Location: Valencia (Spain).
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book
Chapters. pp.109-169.
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