Economic and Financial Management: Financial Ratios, Strategic Decisions, and Impact of Economy on Business

This report discusses the computation of financial ratios of Octopus Energy, including liquidity, solvency, assets turnover, interest coverage, and debt to asset ratios. It also identifies, explains, and justifies three strategic decisions helpful for financial analysis, including investment, dividend, and financing decisions. Lastly, it determines and measures the impact of the economy on businesses, including interest rates, changes in consumer income, tax rates, and unemployment.

Economic and
Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
1. Calculate and Analyse the Financial ratios........................................................................3
2. Identify, explain and justify three strategic decisions which would be helpful for financial
analysis of the company.........................................................................................................6
3. Determine and measure the impact of the economy on the business.................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Economic and financial management is the study in which managing the financial and
operational activities of the organisation are followed (Almeida-Filho, de Lima Silva & Ferreira,
(2021)). This report contains the computation of financial ratios of Octopus Energy, founded in
the year 2016. It is a British company that produces energy by considering sustainable goals. The
main aim of this company is to achieve net-zero carbon emission and operate the activities of the
organisation considering the environmental protocols. It also includes the analysis of ratios of the
last three preceding years which assist in knowing the deviations of the enterprise. Ratios help to
know the operational efficiency of the firm. By analysing ratios, it can predict the risk within and
outside the organisation. The ratios are divided into many categories such as liquidity ratios,
efficiency ratios and solvency ratios. Every organisation conducts its activities by focussing on
the key strategic decisions which are taken by the top-level managers. These decisions help to
forecast the future revenue and external factors which impact the working of the organisation
TASK
1. Calculate and Analyse the Financial ratios.
Liquidity Ratio: This ratio is used to assess the paying capacity of the firm with raising
furthermore capital to pay off its debts. This ratio involves the current assets and current
liabilities out of the balance sheet. This ratio includes the current ratio, Liquid Ratio and Acid
test ratio (Belhadi et.al., (2021)).
Current Ratio: In the following ratio, the company can determine that the assets are how
many times as of the current liabilities. That means the more the current assets, the more will be
ratio.
Current ratio = Current Assets / Current Liabilities
2019 = 124684 / 143229
= 0.87 times
2020 = 390308 / 364421
= 1.07 times
2021 = 369069 / 556276
= 0.66 times

Interpretation: It can be concluded from the above-calculated ratios that, in the year
2019 the company’s current ratio stood at 0.87 which means that the organisation does not have
sufficient funds to pay its current liabilities. During the year 2020, the company’s current assets
were more as compared to its current liabilities. The current assets fall short of its current
liabilities in the year 2021.
Solvency Ratio: It depicts the firm ability to pay off its long term liabilities of the
business concern (Cheng et.al., (2021)). It is the concern with the long term capability of the
firms to pay long term loans, debts, equity, etc. It is used to measure the financial position of the
business as the investors go through the financial records of the firm to decide whether to invest
in the firm or not. The solvency ratio includes debt to asset, interest coverage ratio, debt to equity
ratio.
Debt Equity Ratio: Debt / Equity
2019 = 58103 / 42976
= 1.35 times
2020 = 110656 / 89961
= 1.23 times
2021 = 0 / 64030
= 0 Times
Interpretation: From the above-calculated ratios it can be concluded that in the year
2019 the company’s liabilities stood at 58103 which has increased in the next year to 110656
which implies that the business concern is involved in the activities that have contributed to the
increase in the liabilities of the concern. From the year 2019 to 2020 the company’s debts have
decreased as their equities have increased. In 2021 the firm has paid all of its debt and become
debt-free.
Assets Turnover Ratio: This ratio shows how much sales the company is being able to
generate by the use of assets of the company. This ratio states the efficiency of management of
the company (Coulon, (2019)).
Assets Turnover Ratio: Total Sales / Average assets
*Total Sales = Revenue of the whole year
Average Assets = (Assets in the beginning + Assets at the end of the year) / 2

In 2019 = 459960 / 33672
= 13.66 Times
In 2020 = 1206115 / 83230
= 14.49 Times
In 2021 = 1897404 / 123177
= 15.40 Times
Interpretation: From the above-calculated ratio it can be interpreted that, sales of the
company is generated from the use of assets. In the year 2019 organisations assets turnover ratio
was 13.66 times which means that the company can generate 13.66 times sales by the use of
existing assets. In the year 2020, the business concern’s ratio has improved and also the sakes, as
well as the assets of the companies, have increased.
Interest Coverage Ratio = Earnings before interest and tax / Interest expenses
In year 2019 = (33953) / 3458
= -9.82.
In year 2020 = (47910) / 7679
= -6.24.
In year 2021 = (84686) / 10000
= -8.47.
Interpretation: This ratio interprets how much capable the company is of paying its
interest liabilities. In the following case, the company is not sound enough to pay its interest
liabilities. Over the period the company is not able to generate a positive cash flow. It can be
seen from the final accounts the companies that it has not been able to generate positive income
from last 3 years. Thus in the last 3 years, the interest coverage ratio is negative which means
that the organisation does not have sufficient funds to pay its liabilities. Firms need to grow their
earnings to pay off their interest payments. Any ratio below 1.5 is considered poor which means
that the firm is not able to generate enough earnings to pay its liabilities.
Debt to asset ratio: This ratio ascertains the relationship between the debts and assets. It
is a mixture of debt and equity which is used by the investors to know the current mix of the debt
used by the organisation. This shows how aggressively/defensively the business concern uses its
assets or liabilities (Coulon, (2020)).
Debt to asset ratio = Total Debt / Total Asset

In year 2019 = 58106 / 33672
= 1.73 Times.
In year 2020 = 110656 / 83230
= 1.33 Times.
In year 2021 = 0 / 123177
= 0 Times.
Interpretation: The above ratios, if the ratio is less than 1 means that the assets of the
business organisation are more than the debts. In the year 2019, the organisation’s ratio was 1.73
times which means that the firm’s debts are more than its assets. In 2020 the business concern
can reduce the ratio which is a good sign which means that the debts have increased but the
assets have increased more than the liabilities. In 2021 the firm has been able to eradicate the
long term debts of the business concern which means that the company does not have any long
term liability on their side.
2. Identify, explain and justify three strategic decisions which would be helpful for financial
analysis of the company.
Strategic Decision: It is a process that is taken by considering the mission, goals and
objectives of the company (Gabric & Bosnjak, (2018)). These decisions aid managers to forecast
further activities which result in the increased sales of the company. It helps to coordinate
between short term and long term objectives. These decisions work with a proactive approach
which identifies the opportunities and threats in advance.
Octopus Energy is British Sustainable energy-producing energy. It was started in 2016. The
mission of this company is to deliver cheap, faster and clean energy to millions of people's
homes. Besides, producing green fuel it also focuses on many new technologies such as Kraken,
which is an interacting application for customers (Gomoi, (2021)). There are numerous key
strategic decisions taken by octopus energy, which can be seen in the liabilities section of the
balance sheet as the company has worked upon its long term liabilities and have been able to
make it zero by the end of the year. Companies assets turnover ratio has also increased it shows
that the establishment is efficiently using its assets to increase its revenue. It includes Investment
decisions, Dividend decisions and financial decisions (Kaya, Çolak & Terzi, (2018)).

Investment decisions: Octopus energy has attracted customers from the market with
each passing day. It has been found in a survey that the company has reached an overall
performance level of 92% by providing qualitative goods and services which maximizes
customer satisfaction (Lessambo, (2020)). Octopus energy is considered a good investment
company to earn profit in the long run. It has also been assured by the annual reports and
statements that the company is safe and secure for investment purposes and can be considered a
good opportunity for investment decisions. It has also been observed that the company has
earned good revenue growth in the market. It has also proved its sustainability even in adverse
conditions such as a pandemic. Octopus has become one of the biggest suppliers after acquiring
many other companies. It is hence observed that it has also engaged many new potential
customers in the market. The company also has a good valuation in the market and a well-
developed brand image (Mahtani & Garg, (2018)).
There are many benefits associated with the company for employees working in it, such
as retirement plans, family planning, on the job training, support of professionals, proper
guidance. Investing in octopus is helpful as it focuses on tapping market areas that remain
untouched. It is one of those companies that puts its customer's at first preference this could be
the reason clients would find it more attractive to invest in such companies. It has not only
focused on increasing and earning profit but also on increasing the scale of working that is on
expansion and growth of the organization. It also focuses on covering the market globally which
will increase the reach of the company towards more customers and would allow customers to
improve their reach towards them as well.
Dividend Decision: It is one of the crucial parts of decision making in which the finance
manager takes decisions regarding the dividend income for the shareholders. It is companies
deciding whether they want to keep the profits with themselves or they want to distribute it with
the shareholders. If the dividend income is not paid to the shareholders is known as retained
earnings. A company is considered to be good by the stakeholders when the wealth of the
shareholders increases along with the increase in the value of the shares. The finance department
has to consider all the aspects while considering the following decision, Investment, financing
and dividend decisions. There needs to be proper planning whether the amount will be invested

because the shareholders need proper decision making and investment opportunities within the
organization for the investment. The management has to make sure with non-payment of
dividends its share price does not fluctuate much with such a decision. The main objective of the
administration is to maximize the wealth of the investor (Manganelli, Paola & Giudice, (2018)).
Dividend policy means the part of profit the company will keep aside for the investors.
This firm decides the amount of profit that will be paid to the shareholders. Some believe that if
the shareholders require money they will sell off their holdings in the market and convert these
holdings to cash. Some believe that it does affect the valuation of the share.
Financing Decision: These are the choice that is to be made by the firm for the long –
term purposes. It helps in gaining sustainability by obtaining the equity and capital structure of
the organisation. While taking these types of critical decisions the company should consider the
investment which the company has to be made for its expansion. The risk-free rate and the
market return that the company can get through the investment is considered in these choices. In
the Covid time, the energy industry has lessened and suffered a downfall in its fiscal condition.
The rate of loans, debt and borrowing affect the economic decisions of the company. For
example, the company has generated revenue by giving software licencing and hiking its revenue
with a margin of approximately 584 %. It will help the company in taking and increasing the
fiscal status of the company. This will assist the organisation in making investments for
expanding its operational activities by bringing new technology into the firm (Sidani and et.al.,
(2021)).
3. Determine and measure the impact of the economy on the business.
Economy comprises of various aspects which include manufacturing, use of goods and
services and distribution. The economic environment plays a big impact in the business. The
spending of the consumer affects the business organization and the economy as a whole.
Economic environment includes:
 interest rates
 Changes in the consumer income
 tax rate
 unemployment

In recent time inflation have increased which have reduced the net disposable income
with the customers. Thus it has also reduced the spending of the person. Thus the administration
has to increase the customer base to increase the revenue of the organization. The administration
needs to have to consider the Taxation policy implied by the government as it also dilutes the
profits of the business concern. Taxes reduce the overall profitability of the business concern, a
part of the profit is paid to the government for the welfare of the economy of the country.
CONCLUSION
From the above report, it can be concluded that inspecting the financial statements of
Octopus energy assist in analysing the financial performance of the enterprise. The organisation
adds value to society by fulfilling the environmental needs and improving the air quality index of
the particular area. By comparing financial ratios, it identifies the key strategic decisions
necessary to be taken by managers for achieving the organisational targets. It also helps in
knowing the trends of the financial statements. It compares the current performance with its
existing competitors to take financial decisions for achieving high profitability.

REFERENCES
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