Financial Analysis of Better Homes Ltd

This article provides a financial analysis of Better Homes Ltd including the usefulness of financial statements, areas of concern in financial performance, health and cash flow management, and steps to improve financial performance.

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Financial Analysis

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Contents
Solution 1:........................................................................................................................................3
Usefulness of General Purpose of Each of the Three Financial Statements for Better Holmes Ltd
.........................................................................................................................................................3
Solution 2:........................................................................................................................................3
Analysis of the financial statement of the Better Homes Limited...................................................3
Areas of concern in financial performance:.................................................................................4
Areas of concern in financial health:...........................................................................................4
Areas of concern in cash flow management:...............................................................................5
Solution 3:........................................................................................................................................6
Steps to be undertaken by Bill Rancini for improving the financial performance of the business. 6
References........................................................................................................................................7

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Solution 1:
Usefulness of General Purpose of Each of the Three Financial Statements for Better
Holmes Ltd
The general purpose of financials statements such as income statement, balance sheet,
cash flow and equity statement is to provide reliable and relevant information to the stakeholders
of a business entity so that they can gain an overview of its financial performance in an adequate
manner. As such, the usefulness of the general purpose financial statements for Better Holmes
Ltd can be described as follows:
 Income Statement: It is regarded to be a financial statement developed by a company for
stating the financial performance for a specific accounting period. Better Holmes Ltd can
gain an overview of the relevance and expense incurred by the company during a specific
accounting period by developing the income statement. Thus, the quantitative amount of
the revenue and expanses by the company during a particular period of time can be
assessed by the use of income statement by Better Holmes Ltd.
 Balance Sheet: It is a statement of financial position developed by a company that depicts
the summary of the assets, liabilities and equity possessed at a particular point of time.
The sheet presents the position of assets possessed by a company on one side and the
liabilities on the other side. Thus, Better Holmes Ltd can gain an overview of the
proportion of assets and liabilities maintained by it to sufficiently manage the liquidity
risk that can occur in the future.
 Cash Flow Statement: It is a financial statement for depicting the cash inflows and
outflows incurred by a company during a specific period of time. The cash flow
statement will help Better Homes Ltd to gain an analysis of the cash movement from
operations, investment and financing. Thus, it will help the company in better planning of
cash resources to meet the financial obligations as they become due (Lumby and Jones,
2007).

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Solution 2:
Analysis of the financial statement of the Better Homes Limited
There are many financial tools available that can be used to make the analysis of the
financial statements of the entity. Some of the important financial tools that are used to make
analyse of the financial statements are trend analysis, ratios analysis and variance analysis. In
this question, analysis of financial statements of Better Homes Limited has been done using the
ratio analysis.
Areas of concern in financial performance:
In this segment, ratios related to the income statement of the company will be calculated
in order to report the financial performance.
Net profit margin ratio: This ratio tells percentage of profit earned by the company in relation
to sales. It is calculated as net profit divided by the net sales. The net profit ratio has been
decreased in current year that shows that the technology implement in last year does not increase
the revenue (Davies and Crawford, 2011).
The formula to calculate the net profit ratio is: Net Profit/Net revenue
Financial Data 2017 2016
Net Profit £ 23,908.00 £ 24,002.00
Net sales £ 90,872.00 £ 88,476.00
Net Profit Ratio 26.31% 27.13%
Gross Profit Ratio: This ratio tells percentage of gross profit earned on the total sales. There
was not much change in gross profit as it was expected by the company after making the
significant changes in the company.
The formula to calculate the gross profit ratio is: Gross profit / Net Revenue
Financial Data 2017 2016
Gross Profit
£
50,162.00
£
47,928.00
Net sales £ £

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90,872.00 88,476.00
Gross Profit Ratio 55.20% 54.17%
Areas of concern in financial health:
Return on Assets: It shows profit earned using the assets of the entity. There has been
considerably decrease in return provided through use of the assets of the company.
Formula to calculate the return on assets is Net profit /Total assets
Financial Data 2017 2016
Net Profit
£
23,908.00
£
24,002.00
Total Assets
£
123,562.00
£
98,976.00
Return on Assets 19.35% 24.25%
Return on Equity: The percentage of return form equity has been decreased in the current year
as compared to previous year that indicated that company has failed to use the resources of
company properly.
Formula to calculate the return on equity is net profit/ shareholder’s equity
Financial Data 2017 2016
Net Profit
£
23,908.00
£
24,002.00
Shareholders Equity
£
105,812.00
£
81,904.00
Return on Equity 22.59% 29.31%
Debt Equity Ratio: There was decrease in this ratio that indicates change in capital structure as
company has issue shares in the last year but failed to utilize the funds effectively.
Formula to calculate the debt equity ratio is long term debt / Shareholder’s Equity
Financial Data 2017 2016

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Debt
£
300.00
£
400.00
Equity
£
105,812.00
£
81,904.00
Debt Equity Ratio 0.0028 0.0049
Current Ratio: Liquidity position of the company has been improved in the current year as
compared to previous year.
Formula to calculate the current ratio is: current assets / current liabilities
Financial Data 2017 2016
Current Assets
£
110,062.00
£
84,814.00
Current Liabilities
£
17,450.00
£
16,672.00
Current Ratio 6.31 5.09
Areas of concern in cash flow management:
Cash Flow to sales Ratio: There is increase in cash flow to sales in the current year that
indicates increase in efficiency of cash collection.
Formula to calculate the cash flow to sales ratio: Cash flow operating activity / net sales
Financial Data 2017 2016
Cash flow operation
activity
£
26,179.00
£
24,328.00
Net Sales
£
90,872.00
£
88,476.00
Cash Flow to sales Ratio 28.81% 27.50%
Cash Flow Ratio (Liquidity): There is not much change in this ratio (Brigham and Michael
2013).

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Formula to calculate the cash flow ratio (Liquidity) is: Cash flow from operating activity/
Current Liabilities
Financial Data 2017 2016
Cash flow operation
activity
£
26,179.00
£
24,328.00
Current Liabilities
£
17,450.00
£
16,672.00
Cash Flow Ratio
(Liquidity): 150.02% 145.92%
Solution 3:
Steps to be undertaken by Bill Rancini for improving the financial performance of the
business
It has been examined on the basis of analysis of case study that the performance of better
Holmes Ltd is declining in the past years The company in order to improve the financial health
ratios is investing in new staff and also adopted the use of technology measures for improving
the efficiency of its business systems. Also, it has increased its expense in the marketing and
advertising activities that has increased its operational costs to a high extent. As such, it is
recommended for improving the financial performance of the company that it should place
emphasis on reducing its extra expenditure. This has unnecessary resulted in reducing the
profitability position by increasing the cost of operations. As such, the company is recommended
to implement strategies for reducing its marketing and advertising expenses and also removing
the development of unprofitable product and services. It should also aim at review its current
pricing structure by identifying the methods and processes that can be eliminated from the
operational procedure of the company. This will help in improving the operational efficiency and
driving the cost savings to reduce the price of its products and services. This will help the
company to gain customer attraction and thus driving its profitability position (Brealey, Myers
and Marcus, 2007).

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References
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw
Hill, New York.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage
Learning.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Lumby,S and Jones,C. 2007. Corporate finance theory & practice. Thomson.