Financial Analysis and Ratios

This assignment requires an in-depth analysis of a company's financial performance using various financial ratios. The data provided includes revenues, gross profit margin, net profit margin, current assets, current liabilities, creditors, cost of sales, inventory turnover ratio, and assets turnover ratio for five consecutive years. Students are expected to interpret these figures and assess the company's profitability, liquidity, and efficiency over time.

FINANCE IN SME CONTEXT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Question 1: Critical analysis of Trainline’s performance using ratio analysis for 5 years..........3
Question 2: Critical evaluation of sources of finance and techniques for investment proposal. .7
Question 3 Sources of finance and investment of project............................................................8
Question 4 Entrepreneurial ecosystem and business development............................................10
Question 5 Ethical consideration for IPO..................................................................................11
CONCLUSION..............................................................................................................................12
REFERNCES.................................................................................................................................13
APPENDIX....................................................................................................................................15
Ratio analysis.............................................................................................................................15

INTRODUCTION
Finance is not only a crucial element required for the large business enterprises only, it is
equally important for the small and medium sized corporations as they need capital for the
continual of their regular operation, expansion and growth plans and taking the benefits of
market opportunities. Trainline is a small sized business that executes various operations such as
sale of railway tickets, distribution, information delivery and other ancillary services associated
with the railway journey. The present project will examine business performance and financial
status of the Trainline computing ratios for a period of 5 years. Moreover, budgeting is also an
essential element of financial planning for the purpose of forecasting, therefore, the report will
also prepare cash budgeting for the projection of future years cash position for 2017, 2018 &
2019. In addition to this, various financial sources will be critically evaluated and the techniques
for evaluation of investment proposal will be suggested to the Trainline. Lastly, ethical
consideration and ecosystem of the business will be analyzed for fulfilling environmental
responsibilities.
Question 1: Critical analysis of Trainline’s performance using ratio analysis for 5 years
Profitability performance:
2012 2013 2014 2015 2016
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
Gross profit and net profit ratio
profitability ratios (In %)
Gross profit ratio: In the year 2012, Trainline’s GPR was computed to 64.72% got
improved to 68% in the year 2015 due to grown turnover and effective direct cost control by the

firm. High GPR indicates that business performed excellent and generated greater return on their
total turnover (Islam, Alam and Hossain, 2014). In contrast, in the last year 2016, it turned down
to 65.95% due to higher increase in the cost of sale by 21.72% in comparison to the increase in
sales performance by 14.39% due to acquisition of Captain Train due a leading digital ticket
retailer. On the basis of it, it can be suggested to the Trainline to create optimum and excellent
pricing decisions for their tickets and create new revenue stream for achieving success.
Net profit ratio: This ratio measures net profitability performance of the Trainline
generated by exceeding the total sales over total payments made. In 2012, NPR was 32.12%
increased to 37.61% in the following year, and thereafter, it shows a consistent decline and in the
final year, it came down to 24.47%. YOY growth by administrative expenditures by 6.85%,
10.95% and 29.19% is the main reason behind lower net return to the firm (Goldmann, 2017). In
addition to this, in 2013, interest income gone up by 35.11% and thereafter it came down by
26.71%, 43.45% and in the last year, it shows a little bit improvement by 15.43%. Therefore, it
can be suggested to the Trainline to put excellent cost-controlling measures and better pricing
decisions for getting better yield.
Liquidity performance:
2012 2013 2014 2015 2016
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Current ratio
Current ratio: CR considers total current assets and current liabilities of the business to
measures Trainline’s capacity to short-term obligations. In 2013, it goes increase from 1.59 to

1.86 times, afterwards, came down to 1.21 in the end. Declined ratio indicates that the resource
availability in Trainline goes decline to make their short-term payments on the maturity date to
their suppliers (Lartey, Antwi and Boadi, 2013). It arise the need for the corporation to focus on
their liquidity position and raise current assets like inventory, receivables and cash & its
equivalent as well.
Efficiency ratios:
2012 2013 2014 2015 2016
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Assets turnover ratio
Assets turnover ratio: It quantifies that how effectively and successfully Trainline’s
managers and executives utilized assets to get higher revenues. In 2014, it has been increased
from 0.49 times to 0.69 times and thereafter, it has been declined to 0.61 times, lower ratio is an
adverse sign of managerial efficiency (Najjar, 2013). Henceforth, company needs to make
strategic planning and decisions regarding optimum resource utilization for getting greater
revenues.

2012 2013 2014 2015 2016
0.00
200.00
400.00
600.00
800.00
1000.00
1200.00
1400.00
1600.00
Inventory turnover ratio
In times
Inventory turnover ratio: It is used to determine the efficiency of stock utilization in a
business. In 2012, it was 610.33 got increased to 1478.19 in the last year which is good and
demonstrates that firm has effectively used their stock and converted quickly into sales to get
higher yield (Lartey, Antwi and Boadi, 2013).
Solvency ratio:
2012 2013 2014 2015 2016
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Interest bearing ratio
Interest bearing ratio: It measures the capacity of a firm to bear fixed financial burden
in terms of interest on their long-term borrowings. In 2012, it was computed to 5.47 times got
decreased to 4.76 in next year and afterwards, it gone up to 6.44 times in 2015, in contrast, in

2016, it dropped down to 5.63 times. Decreased ratio shows that firm’s capability to borrow
funds got decreased due to less return (Goldmann, 2017).
Question 2: Critical evaluation of sources of finance and techniques for investment proposal
In every business organization, capital structure decisions are extremely important for the
superior financial planning and management. CS decisions refer to the process of incorporating
both the long-term borrowings and shareholders equity for satisfying the financial requirement of
a business. From the financial statement of Trainline, it can be seen that it only makes use of
fluctuating source of capital in the form of equity capital to satisfy their capital requirement.
Proprietors fund comprises equity share capital, share premium and retained earnings as well. In
the year 2012, total share capital invested in the firm was 35,882,000 came down to 1,131,000 in
2016 demonstrates that company repaid their capital to their shareholders. Long-term liabilities
does not exists in the business which clearly indicate that Trainline do not use borrowed funds to
satisfy their funding requirement may be due to higher cost of capital because of high interest
rate, fixed burden and volatile earnings of the business.
Although, borrowed funds bring fixed obligations to the enterprises, still it also provides
several benefits which will be beneficial for the Trainline. Through getting loans from the banks,
Trainline can get tax benefits because interest obligations is a deductible item and on such,
HMRC (Her Majesty Revenues and Custom) provides tax benefits to the firm. Thus, it helps to
minimize tax obligations of a business and deliver them greater return (Bhowmik and Saha,
2013). In addition, there is another benefit associated with the long-term borrowing which is that
it does not dilute controlling rights to the lenders, therefore, they cannot take part in the business
functions and decisions. As a result, managers can protect business rights in their own hand and
make policies, decisions and strategic planning for the success achievement without any
interference of the lenders. Unlike this, interest benefit is not available on the equity capital
because dividend payment is not a tax deductible payment (Caglayan and Demir, 2014).
Moreover, shareholders are the owners, therefore, they have right to vote and take participation
in the business decisions. On the basis of the carried analysis, it can be suggested to the Trainline
to incorporate both the equity and borrowings to meet their long-term capital requirement and
minimize their cost of capital to exceed net profitability.

Trainline is a distributor of railway tickets and other ancillary services to the public and
as per the scenario, Trainline managers are looking to invest in a new investment project for the
growth of the business. Before investing into a long-term investment project, company is
required to assess the viability of the project because incorrect decisions may lead to failure
while successful decisions may bring growth. There are various techniques that can be utilized
by the financial manager divided into two, traditional versus modern.
Under the traditional techniques, through using payback period method, Trainline’s
administrative committee can determine the time period which project will take to recover their
invested capital. Although the method is very simple but ignoring post-payback return and time
value of the money is the main drawbacks of it (Götze, Northcott and Schuster, 2015). In order to
overcome second limitation, discounted pay-back period method has been developed which
consider the monetary value. Another technique is accounting rate of return which computes the
profitability percentage on beginning outlay but as it considers accounting return instead of cash
flows and avoids time-value, therefore, it is not founded appropriate.
On the contrary side, Net present value is a discounted technique that use discounting to
determine the present value of cash flows via (1/1+r)^n. The total present value of cash inflows
exceeding the beginning cost of capital is called NPV (Baum and Crosby, 2014). The main
downfall side of this technique is that it cannot be assured by the Trainline’s managers that cost
of capital remain constnt over the project life and affects the results, still, it is the best way or
method of capital budgeting because it makes proper adjustments regarding uncertain cash flows
by the means of discounting and provides net results (Götze, Northcott and Schuster, 2015).
Question 3 Sources of finance and investment of project
There are multiple sources of finance that are in the firm financial statements. Some of
these sources of finance are explained below.
 Equity: Equity is the one of the most important source that is widely used by the firms in
their business. Under this sources of finance any firm issue shares in the market. Under
this it bring IPO in the market up to specific value. For issuing shares in the market
business firm needs to take approval from the stock exchange. It is mandatory to sign a
documents with the stock exchange. On review of the firm financial statement it can be

observed that equity capital and reserves amount get changed at rapid pace. In some years
its value is increasing but in some years its value is decreasing (Baum and Crosby, 2014).
It can be observed that equity capital remain constant but amount of reserves get
changed. On this basis it can be said that equity and reserves are the one of the most
important source of finance for the business firm.
 Account receivables: It is the source of finance for the business firm. It can be observed
from the financial statement of the business firm that account receivables value is
increasing consistently. Thus, it can be estimated that every year amount financed from
the receivables increased in the business. Thus, it can be assumed that receivables are the
one of the important source of finance for the business firm.
 Current assets: Current assets include marketable securities which are commonly used
by the firm to finance its business. In order to meet short term fund requirements business
firm sold its securities in the market and meet its working capital requirements. Current
assets value is increasing consistently in the business. Thus, it can be said that firm
liquidity position is very strong and may improve in the upcoming time period.
In order to evaluate the project some of the most important methods can be used by the firms
in their business. Some of them are explained below.
Payback period: It is the method that is used to evaluate the project in terms of the duration
up to which firm have to wait for start earning profit on the project. The higher the value of
the payback period more the project is assumed viable by the firm. There are some merits
and demerits of the payback period method. The main merit of the payback period is that by
using same estimation of the time period can be made up to which firm will need to wait to
cover investment amount (Götze, Northcott and Schuster, 2015). The main demerit of this
method is that present value concept is not used in same and due to this reason it does not
measure viability of the project for current time period.
NPV: Net present value or NPV is the one of the most widely used method by the project
managers. This is because by using same project is evaluated in proper manner by the
business firm. In the NPV method discount factor is used and by using same present value of
the cash flows is computed and summed amount is deducted from the initial investment
value. There are some merits and demerits of the net present value method. One of the most

important plus point of using this method is that present value concept is used and by using
same value of the project in today date is computed. The only demerit of this method is that
calculation process is very lengthily and tough. Due to this reason one that does not have any
knowledge and background in the finance cannot use this method in systematic way
(Brealey, and et.al., 2012). The other negative point associated with this method is that if
wrong estimation will be made about the discount rate then in that case in wrong manner
present value of the project can be calculated which may lead to selection of wrong project
by the business firm.
IRR: IRR is the method that reflect the real rate of return that can be earned on the project.
More is the value of IRR project is assumed profitable by the business firm. Like other above
discussed methods there are some positive and negative points that are associated with the
IRR method. One of the main positive point of IRR is that by using same real rate of return
that will be generated by the project is computed. Negative point is that calculation process is
highly complex and every individual cannot perform calculation efficiently.
On analysis of all these methods it can be said that business firm must use NPV and IRR
method to evaluate the project. This is because NPV reflect the real value of the project that
remain after subtracting initial investment value from the sum of present value of cash flows.
On other hand, IRR reflect the real rate of return that can be gained on the project. Thus, it
can be said that both method NPV and IRR are best for evaluating any project.
Question 4 Entrepreneurial ecosystem and business development
Entrepreneurial ecosystem play an important role in growth of the business firm. This is
because the nations where ecosystem is good there are lots of opportunities that are available to
the business firms. Entrepreneurs by taking steps capitalize available opportunity. In most of the
nations of the world government takes varied steps in order to promote entrepreneurs to open
their new business. Under this sufficient amount of finance is made available to entrepreneurs.
Moreover, in plenty amount resources are provided to them in order to support manufacturing
activities of the business firm (Gitman and Zutter, 2012). On this basis it can be said that
entrepreneurial ecosystem play a great role in business development. Entrepreneurial ecosystem
to large extent is responsible for the business development of the Trainline. This is because firm
is operating in the sector on which there is due focus of the government in terms of growing a

business. Government have taken many steps that make business environment congenial for the
business firms. Thus, it can be said that entrepreneurial ecosystem to large extent play an
important role in development of Trainline as business.
Question 5 Ethical consideration for IPO
Company needs to consider several ethical considerations when it decides to go for IPO.
Ethical aspects are the key elements which in turn helps company in building effective image at
marketplace. Thus, Trainline has ethical responsibility to provide highly suitable and reliable
information to the investors. Moreover, with the aim to entice the decision making of large
number of investors companies sometime provide investors with false information regarding the
future growth and development. This is highly unethical and places adverse impact on the image
of business organization (Embrechts, Klüppelberg and Mikosch, 2013). Hence, Trainline is
required to issue prospectus after evaluating the each and every aspect in the best possible way.
Further, business unit should also issue or trade shares at fair value. Moreover, issuance of shares
at higher prices may result into rise in speculative activities or practices. Thus, by offering shares
at suitable prices business unit can ensure highly secured financial market and position. Along
with this, Trainline should offer equal chance of investment to each individual or investor.
Moreover, there are several investors who prefer to invest money in the shares of growing
business organization. Hence, by offering opportunities and providing information regarding IPO
to the general public business unit can enhance its goodwill. Further, by coordinating with green
show Management Company Trainline can monitor the performance of securities in an effectual
way. Besides this, it can be inferred that such team also provides direction to the firm about the
manner in which they need to make changes in equity aspects. Thus, by following all the above
mentioned ways business unit can meet ethical aspects to the significant level. There are some
other ethical factors that firm must take in to consideration like it must not launch its IPO in the
market when stock market is not performing well (Finance and Network, 2013). This is because
investors make an investment in the business firm on hope that they will earn good return on the
invested amount. Due to consistent downturn in the stock market pessimistic behavior comes in
the investors and due to this reason they start selling shares in the market. Due to this reason
shares values start falling from starting day after launch of IPO and investors lose money on

investment. It can be said that it is the ethical responsibility of the business firm to launch IPO in
the market on when there is probability that investor shares value will increase consistently.
CONCLUSION
On the basis of the performance analysis, it can be suggested to the Trainline manager to
make best pricing decisions, cost-controlling strategies, maximize current assets and optimally
use the assets business to improve business performance and financial status. However, from the
evaluation of financial sources, it has been suggested to the firm to utilize borrowings also in the
capital structure to manage their cost of capital. Under the investment appraisal evaluation, Net
Present Value has been suggested as the best way for evaluation of long-term investment
proposal to examine the viability of the project.

REFERNCES
Books and Journals
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Bhowmik, S.K. and Saha, D., 2013. Sources of Finance. In Financial Inclusion of the
Marginalised. Springer India. 5(2). pp.61-71
Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance.
Tata McGraw-Hill Education.
Caglayan, M. and Demir, F., 2014. Firm productivity, exchange rate movements, sources of
finance, and export orientation. World Development. 54(12). pp.204-219.
Embrechts, P., Klüppelberg, C. and Mikosch, T., 2013. Modelling extremal events: for
insurance and finance. Springer Science & Business Media.
Finance, E.H. and Network, C., 2013. The Eurosystem Household Finance and Consumption
Survey-Results from the First Wave. European Central Bank.
Gitman, L.J. and Zutter, C.J., 2012. Principles of managerial finance. Prentice Hall.
Goldmann, K., 2017. Financial Liquidity and Profitability Management in Practice of Polish
Business. In Financial Environment and Business Development. Springer International
Publishing. 10(3). pp.103-112
Götze, U., Northcott, D. and Schuster, P., 2015. Compounded Cash Flow Methods.
In Investment Appraisal. Springer Berlin Heidelberg. 14(2). pp.87-104.
Götze, U., Northcott, D. and Schuster, P., 2015. Selected Further Applications of Investment
Appraisal Methods. In Investment Appraisal. Springer Berlin Heidelberg. 11(4). pp. 105-
159).
Islam, K.A., Alam, I. and Hossain, S.A., 2014. Examination of Profitability between Islamic
Banks and Conventional Banks in Bangladesh: A Comparative Study. Research in
Business and Management. 1(1). pp.78-89.
Lartey, V.C., Antwi, S. and Boadi, E.K., 2013. The relationship between liquidity and
profitability of listed banks in Ghana. International Journal of Business and Social
Science. 4(3). pp.19-39.
Najjar, N.J., 2013. Can Financial Ratios Reliably Measure the Performance of Banks in
Bahrain?. International Journal of Economics and Finance. 5(3). pp.152.

Online
Trainline’s annual reports. 2016. [Online]. Available through:
https://www.freecompanyaccounts.co.uk/form/trainlinecom/AA/2016-03-05/118031332.
[Accessed on 15th March 2017].

APPENDIX
Ratio analysis
Trainline (Amount in GBP 000)
Particulars Formula 2012 2013 2014 2015 2016
Profitability ratios
Gross profit 68294 67149 71051 79985 88740
Net profits 33892 39870 39182 34854 32931
revenues 105524 106005
10743
7
11763
3
13456
4
Gross profit margin (Gross profit/sales)*100 64.72% 63.35%
66.13
%
68.00
%
65.95
%
Net profit margin (Net profit/sales)*100 32.12% 37.61%
36.47
%
29.63
%
24.47
%
Liquidity ratios
Current assets 191214 239882
13504
8
20237
5
19756
0
current liabilities 120318 128914
11482
4
14332
6
16336
8
Current ratio
(Current assets/current
liabilities) 1.59 1.86 1.18 1.41 1.21
Efficiency ratios
Creditors 120227 128772
11460
2
14306
7
16299
0
Cost of sales 37230 38856 36386 37648 45824
Inventory 61 63 56 34 31
Total assets 216033 264449
15679
1
22014
7
21952
6
Inventory turnover
ratio COGS/Inventory 610.33 616.76
649.7
5
1107.
29
1478.
19
Assets turnover
ratio (revenue/total assets) 0.49 0.40 0.69 0.53 0.61