Financial Management

Running head: FINANCIAL MANAGEMENT
Accounting & Financial Management

FINANCE MANAGEMENT 2
Table of Contents
Ratio analysis................................................................................................................. 2
Analysis........................................................................................................................ 3
i) Profitability Ratio...................................................................................................... 4
ii) Liquidity Ratio......................................................................................................... 4
iii) Efficiency Ratio....................................................................................................... 5
iv) Investment Ratio...................................................................................................... 5
v) Gearing Ratio........................................................................................................... 6
Conclusion and Suggestion for improvement in ratio.................................................................6
i) Profitability Ratio...................................................................................................... 6
ii) Liquidity Ratio......................................................................................................... 6
iii) Efficiency Ratio....................................................................................................... 7
iv) Investment Ratio...................................................................................................... 7
v) Gearing Ratio........................................................................................................... 8
Three key capital project appraisal models/ techniques...............................................................8
Evaluate critically each of the three capital evaluation models....................................................11
NPV........................................................................................................................ 11
IRR (internal rate of return)........................................................................................... 12
Payback period.......................................................................................................... 12
Feasible decision........................................................................................................... 12
Reason for decision........................................................................................................ 13
Factors should be considered before an investment decision is made............................................13
Projects D and E are divisible............................................................................................ 14
i) The optimal investment policy..................................................................................... 14
ii) The resulting total NPV from your investment policy........................................................14
If projects D and E were indivisible projects.........................................................................15
Main difficulties encountered in appraising capital investment projects........................................15
Ways of overcoming the above difficulties........................................................................... 16
References................................................................................................................... 18
Appendix.................................................................................................................. 22
Ratio analysis............................................................................................................... 22
Ratio analysis

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Ratios of Artic Plc
Ratio/ years 2015 2016 2017 2018
Profitability Ratio
Gross Profit% 30% 29% 33% 35%
Net Profit % 2.0% 2.1% 1.62% 1.52%
Return on Equity (i.e. Shareholder’s
Funds) 3.10% 4.30% 4.50% 4.30%
Return on Capital Employed 3.3% 3.1% 2.3% 2.4%
% Overheads / Cost of Sales 45% 40% 45% 36%
%Materials/ Cost of Sales 40% 43% 33% 40%
% Wages/ Cost of Sales 15% 17% 22% 24%
Dividend Cover 2 2.9 3.7 3.1
Liquidity Ratio
Current Ratio 3.5 3.4 3.2 3.1
Quick Ratio 2.4 2.2 1.85 1.7
Efficiency Ratio
Stock Turnover in Days 65 67 69 67
Debtors Collection Period 76 88 93 111
Creditors Payment Period 45 47 52 50
Cash Operating Cycle 96
days
108
days
131
days
152
days
Dividend Yield 5.30% 3.20% 1.90% 2.10%
Fixed Asset Productivity 2.85 2.9 1.52 1.12
Working Capital Turnover 2.7 2.5 2.5 2.25
Investment Ratio
Average Share Price 12.7 13.9 13.54 14.12
Earnings Per Share ( €1) 0.8 0.94 0.98 0.81
P/E Ratio 15.88 14.78 11.02 10.77
Gearing Ratio
Gearing 35% 55% 64% 71%
Interest Cover 3 2.7 1.9 2.1
Comparative ratios for the period 2015
Ratio/ years Similar Sized
Competitor
Business Sector
Norm (industry
average)
Profitability Ratio
Gross Profit% 31% 32%
Net Profit % 5.30% 4.10%
Return on Equity (i.e. Shareholder’s
Funds) 7.80% 9%
Return on Capital Employed 6.70% 6.50%
Dividend Cover 2.8 Times 3.1 Times
Liquidity
Current Ratio 2.5 2.1
Quick Ratio 1.8 1.7
Efficiency
Stock Turnover in Days 52 52
Debtors Collection Period 51 68
Creditors Payment Period 45 52
Cash Operating Cycle 52 days 68 days
Dividend Yield 4.15% 2.60%
Fixed Asset Productivity 3 Times 2.1 Times
Working Capital Turnover 3.2 Times 3.6 Times
Investment Ratio
Average Share Price 7.25 32.5
Earnings Per Share ( €1) 1.75 1.2
P/E Ratio 7.25 32.5
Gearing Ratio
Gearing # 52% 49%
Interest Cover 4.2 Times 5.1 Times
Analysis

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i) Profitability Ratio
From the above calculation, it can be analyzed that there are different ratios that show the
profitability of Artic Plc. These ratios are Gross Profit%, Net Profit %, Return on Equity (i.e.
Shareholder’s Funds), Return on Capital Employed, % Overheads / Cost of Sales, %Materials/
Cost of Sales, % Wages/ Cost of Sales, and Dividend Cover. It is analyzed that Gross Profit% is
35% in the year of 2018 that was increased from last three years. From the comparative ratio, it
is also addressed that the gross profit of Artic Plc is higher than similar sized competitor i.e. 31%
and industry norms i.e. 32%. But, at the same time, net profit % is declining i.e. 1.52% as
compared to 2015, 2016 and 2017. It is also low as compared to similar sized competitor i.e.
5.30% and business sector norms i.e. 4.10%.
At the same time, it is identified that profit after tax and interest of Artic plc is € 307,000 i.e.
higher as compared to last years. Along with this, sales of the company is also higher i,e. €
20.2m as compared to last years. Both return on equity and return capital employed is also lower
i.e. 4.30% and 2.4% as compared to the previous three years, small sized competitor and,
business sector norms. It is evaluated that overhead expenses are also declining but material and
wages are increasing in the year of 2018 as compared to last years. The dividend coverage ratio
is also high i.e. 3.1 times as compared to small sized competitors and it is equal to business
norms. It shows that the profitability of the company is moderately good due to low net profit
and high material and wages expenses.
ii) Liquidity Ratio
From the above table, it can be stated that liquidity ratio assesses the competencies of the
company to meet its current liabilities as they can become a long-term liability. There are
different types of liquidity ratio such as the current ratio and quick ratio. It is addressed that the

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current ratio is lower i.e. 3.1 as compared to last year but high as compared to small sized
competitors and business norms. Along with this, quick ratio is 1.7 i.e. low as compared to the
previous year and small-sized competitors. But, it is almost equal to business norms. It indicates
that the liquidity position of Artic Plc is sound.
iii) Efficiency Ratio
Efficiency ratio measures how well the company utilizes their assets for generating income.
There are different kinds of efficiency ratios such as stock turnover in days, debtor collection
period, creditor collection period, cash operating cycle, dividend yield, fixed asset turnover, as
well as, working capital turnover. It is assessed that both stock turnover in days and the debtor
collection period is higher as compared to previous years, small sized competitors, and business
norms. But, the creditor payment period is declined in the year of 2018 as compared to the
previous year, small sized competitors and business norms. It is also identified that cash
operating cycle is also increased by 152 days as compared to previous years.
Along with this, the dividend yield is increased i.e. 2.10% in the year of 2018 as compared to the
last 3 years, small sized competitors and business norms. It is also addressed that fixed asset
productivity is declined i.e. 1.12 in the year of 2018 as compared to previous years, small sized
competitors and business norms. The analysis indicates that working capital turnover lower i.e.
2.25 as compared to last 3 years, small sized competitors and business norms. It means the
company is not performing better than the small-sized competitors as well as, it does not have
sound performance in the industry (Campbell, et. al., 2017).
iv) Investment Ratio
Investment ratio is used to contrast the stock prices of publicly traded companies with other
financial measures such as dividend rates and earnings. There are different types of ratios such as

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average share price, earning per share, and P/E ratio. The average share price is increased by
14.12 in the year of 2018 as compared to previous years. Along with this, it is higher than the
smaller competitor that means the company is not performing well as compared to its
competitors as well as, it has not sound share price within the industry (Herasymovych, 2017).
v) Gearing Ratio
Gearing ratio measures the ability of a company for sustaining the operation indefinitely by
contrasting the debt level with earnings, assets, and equality. There are types of gearing ratio of
Artic plc such as Gearing and interest coverage ratio. Along with this, the gearing ratio is
increased by 71% in the year of 2018. Moreover, the interest coverage ratio is also increased by
2.1times in the year of 2018 as compared to the previous year but low as compared to small sized
competitors and business norms. It means the company is performing well as compared to its
competitors and, within the industry (Rossi, et. al., 2016).
Conclusion and Suggestion for improvement in ratio
i) Profitability Ratio
From the above interpretation, it can be concluded that the company’s profitability position is
moderately good. It is also performing well as compared to a small sized competitor. The
position of company is sound in industry within the industry. But, little bit improvement is
required for the company to sustain the profitability and increases the net profit of the company
(Karadag, 2015). For this, it should remove unprofitable products as well as services. It should
also find new consumers as well as, increases the conversion rate. The company should review
the existing pricing structure as well as, reduces their overhead (Sari and Kahraman, 2015).
ii) Liquidity Ratio