Financial Analysis and Report

This report provides a detailed analysis of the financial performance of Alam Plc. using ratio analysis. It covers profitability, efficiency, liquidity, solvency, and investing ratios. It also includes a break-even analysis of Chiller Limited.

Running Head: FINANCIAL ANALYSIS 1
FINANCIAL ANALYSIS AND REPORT

FINANCIAL ANALYSIS 2
Table of Contents
PART A......................................................................................................................................3
Answer 2: Ratio analysis............................................................................................................3
Profitability.............................................................................................................................3
Efficiency...............................................................................................................................4
Liquidity.................................................................................................................................5
Solvency.................................................................................................................................6
Investing Ratios......................................................................................................................7
PART B......................................................................................................................................8
Answer 2: Break even Analysis.................................................................................................8
PART C......................................................................................................................................8
Answer 1....................................................................................................................................8
Answer 2: Critical Evaluation of the sources of the funds.......................................................12
Ownership Sources...................................................................................................................12
References................................................................................................................................14

FINANCIAL ANALYSIS 3
PART A
Answer 2: Ratio analysis
It is the technique which is used by the company to evaluate the financial performance of the
business. It is necessary to evaluate the financial performance of the company so that if there
are any variances the company can take the necessary and the relevant steps to improve the
performance of the business. The different parameters that can be used are the categories like
profitability, the efficiency, the liquidity, the solvency and the overall investment
opportunities the investor is having with regards to the company.
Profitability
The profitability of the company is the most crucial and the sustainable measurement to judge
the performance of the company. The profitability of the company is mostly used by each of
the users of the financial statements such as suppliers, investors, customers, as well as the
management.
Profitability 2017 2018 2017 2018
Operating margin
Operating
income 8150 8375 54.3% 51.7%
total revenue 15000 16200
Total margin Net income 1210 440 8.07% 2.72%
total revenue 15000 16200
Return on Equity Net income 1210 440 24.1% 6.1%
Shareholder's
equity 5030 7215
Return on Capital Operating profit 2865 1510 31.5% 12.8%
Total assets -
current liabilities 9105 11840
The operating margin is the ratio which is used to identify the raw profits of the company.
The operating margin is dividing the operating income by the total revenue. The operating
margin of the company is 51.7% in the year 2018 whereas the same was 54.3%. This is a

FINANCIAL ANALYSIS 4
negative indication and the company must improve immediately by cutting the costs such as
the cost of the sales and the raw materials (Robinson, Henry Pirie and Broihahn, 2015).
The total margin also known as the net profit is the ratio which is calculated by dividing the
net income by the total revenue. The net income in the previous year was $1040 whereas the
same declined to $250. This implies that the net income has been declined to a non-
acceptable level and the percentage of the net profit decreased from 14.7% to 2.7%. The net
income determines the ultimate results of the company and to improve the net profit margin
the company must reduce the labour charges and must keep the extra costs out (Zietlow,
Hankin, Seidner and O'Brien, 2018).
The return on equity of the Alam Plc. was 24.1% in the eyar 2017 and the same reduced to
6.1% in the year 2018. This indicates the investors are not getting enough returns against the
funds invested by them in the business. In order to improve the ratio the company must
distribute the idle cash if any left and shall focus on funding through debt (Ahmad, 2016).
Hence, the overall profitability of the company is not smooth and sound and the company
needs immediate actions by the company to improve and the profitability. Hence, the
profitability areas are not in the favour of the investors and the immediate corrective actions
are required (Williams and Dobelman, 2017). The overall profitability of the company needs
to be revised to grab the greater market share.
Efficiency
The efficiency of the company can be measured with the help of the turnover ratios. Basically
the efficiency determines how well, the company is able to realize the cash from the current
assets and how well they are able to pay back the current liabilities. In this case the
parameters used to calculate the efficiency of the company are the fixed asset turnover ratio,
the accounts receivable turnover ratio, the inventory turnover and the accounts payable
turnover ratio.
Activity Ratios 2017 2018 2017 2018
Fixed Asset Turnover Net sales 15000 16200 2.69 2.35
times Fixed Assets 5570 6890
Accounts payable
turnover
Accounts payable * 365 75555
0 784750
110.3
0
100.2
9

FINANCIAL ANALYSIS 5
days Cost of goods sold 6850 7825
Inventory Turnover Inventory * 365
29200
0 337625 42.63 43.15
days Cost of goods sold 6850 7825
Accounts Receivable
Accounts Receivable *
365
91067
5
136875
0 60.71 84.49
days Net Sales 15000 16200
The fixed asset turnover ratio is the ratio which measures the ability of the company to value
the generation of the sales with respect to the fixed assets. The net sales might have increased
but the overall fixed assets have also increased thereby leading to the low ratio of the
company. In the financial year, the fixed assets of the company reached from 2.69 to 2.35
times. This indicates the performance of the company is not sound in this area (Grant, 2016).
The overall capacity of the company to realize the cash is 42.63 days in the year 2017 and the
same increased to 43.15 in the year 2018. This implies that the cash conversion cycle will be
affected due to the increase in the number of days as the company will be able to realize the
cash late. The just in time concept of the inventory shall be applied in order to maintain the
balance of the demand and supply of the inventory.
The accounts receivable ratio of the company is the ratio which indicates the ability of the
company to realize the cash from the customers. The customers took only 60 days back them
but now they are taking almost 84.49 days to pay back the money. This means the cash
conversion cycle of the company is poor and the company needs to get rid of the long term
credit facilities provided to the customers (Ahmad, 2016).
The accounts payable turnover ratio is the ratio which defines the ability of the company to
pay back the accounts payable. The accounts payable ratio of the company is 110.30 days and
this changed to 100.29 days. The decrease in the change of the figures results in the positive
performance, however, the overall position is not smooth (Simeon and John, 2018).
The overall efficiency of the company in comparison to the previous year is not satisfactory
and the actions must be taken from now onwards to deliver the progressive results.

FINANCIAL ANALYSIS 6
Liquidity
The liquidity scenario means the measurement of the position of the company with respect to
the current ratio as well as the quick ratio. The current ratio of the company is the ratio that
observes the capacity of the company to use the current assets to pay back the contractual
obligations of the company.
2018
0.00
0.50
1.00
1.50
2.00
2.50
Liquidity
Current Ratio
Quick Ratio
Axis Title
The current ratio of the company is 1.67 and the same approved from the year 2017 to 1.93
(Plenborg and Pimentel, 2016). The quick ratio on the other hand of the company is reduced
from 0.56 to 0.52. The company improved on one perspective whereas the company felt the
loss on the other hand. The benchmarks have still not touched. The overall liquidity of the
company is not fruitful and hence the company should focus on how the cash can be
generated in the fastest possible manner (Kajananthan and Velnampy, 2018). Some of the
ways is to get rid of the obsolete assets and to focus on the long term liabilities.
Gearing Ratios
The solvency ratios are the ratios which determine the ability of the company to finance the
assets through the various sources of the funds. The solvency ratios of the company is
measured on the various parameters such as debt to Equity ratio, long term debt to capital
ratio and times interest coverage ratio (Wafi, Hassan and Mabrouk, 2015).
The debt to the equity ratio is the ratio that determines the financing of the assets via debt and
equity. The debt to equity component was 96.34% in the year 2017 and the same has been
decreased to 72.18% in the year 2018. Earlier the debt component of the company was higher
and now the same has been stabilised to keep a check on the balance of the debt and the
equity (Altman, Iwanicz‐Drozdowska, Laitinen and Suvas, 2017).

FINANCIAL ANALYSIS 7
2018
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
Capital Structure
Long tern debt to capotal Ratio
Times interest coverage ratio
Axis Title
The second and the most important parameter of the company are to value the ability of the
company to pay the finance costs so that the leverage of the company remains constant. The
times interest coverage ratio of the company was 5.31 times whereas it reduced to the 1.78.
This is the terrible situation for the company as the company is not able to pay the financial
costs despite paying back the other creditors and borrowings.
From the overall analysis it can be stated that the efficiency position of the company was not
at all sound and the readily changes are required to be made.
Investing Ratios
Investing ratios requires cautious examination of monetary information to evalaute the firm’s
actual worth. This is regualrly done by analysing the firms’ benefit and loss account, asset
report and income articulation. This can be tedious and lumbering. A simpler method to get
some answers is the investing ratios that required to be taken to grab the activities of the
company (Ishibashi, Iwasaki Otomasa and Yada, 2016).
In the category of the investing ratio the Earning per share has been included to analyse how
much share the shareholders are going to receive. The EPS is one of the true reflectors one
can use to choose the stock (DeFusco, et al 2015). The EPS of the company is 0.04 and the
same has been reduced drastically to 0.25. The EPS therefore is the ultimate source of the
company to determine the real value of the shareholders of the company (Williams and
Dobelman, 2017).

FINANCIAL ANALYSIS 8
PART B
Answer 2: Break even Analysis
Break-even analysis is a technique which is utilised for the implementation of the cost
functions. The three major factors that are used by the concept of the breakeven are the sales,
profit and the cost. The major gaols of the methodology are to classify the relationship
between through various parameters (Tanco, Cat and Garat, 2019).
The key assumptions of the break even model, within the light of the reality of the today’s
business model are determined below.
 The total costs are classified into the fixed and variable expenses. It ignores the semi
variable cost.
 The functioning of the cost and the revenue remains linear.
 The cost of the product will remain constant is also one of the most important feature
and the assumption.
 The volume of the sales and the volume of the production are equivalent to each other
(Kabanov, 2019).
 The zero improvement in the technology is also one of the most important factors.
 The changes in the input prices are set off.
 Where the firm deals with the multiple products the product mix is constant.
Part B
CHILLER LIMITED Units 2018 2019
300000 300000
Sales 350 420
10500000
0
12600000
0
less: Costs
Direct Materials 200 240 60000000 72000000
Direct Labor 30 36 9000000 10800000
Variable overhead 30 36 9000000 10800000
Variable Selling 30 36 9000000 10800000
Variable administration 25 30 7500000 9000000
Total variable costs 315 378 94500000
11340000
0
Fixed manufacturing 1750000 1750000 2508333
Fixed selling and distribution 1900000 1900000 2723333
Fixed administrative 850000 850000 1218333
Total fixed cost 4500000 6450000
Net Profit 90000000
10695000
0
Break-even point 4500000 6450000

FINANCIAL ANALYSIS 9
Contribution margin per unit 35 42
Breakeven point (in units) 128571 153571
Breakeven point (in dollars)
Fixed costs/ contribution margin ratio 45000000 64500000
Margin of Safety (in units)
Actual units - Breakeven units 171429 146429
Margin of safety (in dollars)
Actual sales - Breakeven sales 60000000 61500000
The breakeven units are 128571 for the financial year 2018 and the same has been increased
in over the year 2019 to 153571. Overall the company needs to maintain the number of units
to be in a situation of no profit and no loss. Beyond that if the company keeps a record of low
units the losses will be incurred. The margin of safety on the other hand is 171429 and the
same has been reduced to 146429.
PART C
Answer 1
Basis Advantages Disadvantages Criteria to meet
Net Present Value The basic advantage of
the NPV is that it gives
the importance to the
time value of the
money.
The good part of the
NPV is that it considers
the cash flow before
and after the tax cash
flow to judge the
overall potential of the
project.
The profitability and the
The major
disadvantages of
the net present
value of the firm
are at times it
becomes difficult to
use and the
implement its
results while
deciding project
shall be accepted or
declined.
Sometimes the
A positive NPV
shows a positive
aspect whereas the
negative NPV
shows the project
shall be deducted.

FINANCIAL ANALYSIS 10
risk of the projects are
given the highest
priority.
The net present value
helps in maximising the
overall value of the firm
(Hopkinson, 2017).
discounting rate is
difficult to calculate
and it involves the
long procedures
which makes it not
only time
consuming but also
irrelevant.
Internal Rate of
Return
The major advantage of
the internal rate of
return it is simple to use
and understand. The
IRR furnishes any
entrepreneur with a
brisk depiction of what
capital ventures would
give the best potential
income. It can likewise
be utilized for planning
purposes, for example,
to give a fast preview of
the potential worth or
reserve funds of buying
new hardware instead of
fixing old gear.
The hurdle rate is not
required and this
completely eliminates
the determination of the
risk of the wrong
application of the rate.
The disadvantages
of the Internal rate
of return. The
disadvantage of
using the IRR, does
not account for the
project size. The
cash flows simply
compared to the
amount of the
capital outlay while
generating the cash
flows.
The IRR, method is
majorly connected
with the future
costs. The internal
rate of return will
help the company
in getting the set
rate that could be
used as the rate of
return to deal with
the cash flows of
the business.
If the internal rate
of return is more
than the cost of
capital than the
project shall be
accepted.
Otherwise the
project shall be
rejected (Rivers,
2015).

FINANCIAL ANALYSIS 11
Accounting rate of
return
Accounting rate of
return is one of the
simplest formats to
determine whether the
project shall be
accepted or rejected.
The accounting rate of
return keeps its
attention majorly on the
net operating income.
The overall
performance of the
management can be
evaluated using the
accounting rate of
return.
The major
disadvantages of
the ARR method is
that it does not take
into account the
concept of the time
value of money.
Also, Under this
method a dollar in
hand and a dollar to
be received in
future are
considered to be of
the equal value
(Bora, 2015).
The ARR is
accepted is it’s
higher than in
comparison to the
other proposals.
Payback period The payback period of
the company reveals the
recovery of the payback
of the investment. The
main advantage of the
method is that it is easy
to use and implement.
The best thing about
this method is the
preference to liquidity.
It is also useful in case
of the uncertainty
(Gorshkov, Vatin,
Rymkevich and
Kydrevich, 2018).
With the pros, there
are certain cons
attached to it. The
cons are it ignores
the concept of the
time value of the
money. The entire
cash flows are not
covered. This
method ignores the
profitability and
certainly neglects
the return of the
projects investment.
If the payback
period of the
company is less
than the life of the
project, the project
shall be accepted
whereas in the
reverse situation the
project shall be
rejected.
Basis Project A Project B Accept or Reject the

FINANCIAL ANALYSIS 12
proposal
Net Present value 140 175 Accept project B
Internal Rate of
return
20 17 Accept project B
Accounting rate of
return
16 22 Accept project B
Payback period 6 7 Accept project B
From the overall analysis it can be said that if the payback period of the project B can be
improved a bit and the Project B is the ideal project for the Croswell Limited. The net present
value the accounting rate of return and the payback period are better than that of the project A
on the overall basis (Penman and Yehuda, 2019). The projects B shall be accepted as the net
present value is higher than the project A as well as the returns are also adaptable at 17%
hence the proposal B is the right choice for the company.
Answer 2: Critical Evaluation of the sources of the funds
The critical evaluation of the funds can be done on the basis, of analysing the different
aspects of the market. There are different sources of the funds and based on the needs and the
capacity of the company these sources of funds can be utilised.
Generally there are three major sources of funds namely, cash, debt and equity. Thereafter the
category can be bifurcated on different other parameters. The other examples of the sources
of the funds that are used but not on the regular basis are letter of credit, venture funding,
euro issue, working capital loans. The sources of the funds are generally classified on the
basis of the period, ownership, source of generation and control (Miyaki and Okajima, 2018).
On the basis of the period the various sources again can be classified into the three major
categories namely long term sources, medium term sources and the short term sources.
Long term Sources: Long term borrowings are those borrowing which are folded for the
period of more than 5 years. It determines variety of the sources such as debt and equity,
common loans from the banks. Such financing is generally required for the acquisition of
fixed assets such as vehicle, machinery to run the business (Cuervo-Cazurra, Nieto and
Rodríguez, 2018).

FINANCIAL ANALYSIS 13
Ownership Sources
On the basis of the ownership the funds can be bifurcated into the owner’s funds or the
borrowed funds. The term owner’s funds are funds that are contributed by the sole proprietor,
partnership as well as the shareholders or the investors of the business. The main feature of
the owner’s capital is that it is reinvested for the longer duration and the same is not required
to be refunded over the life period of the business (Agarwal and Jayasuriya, 2018).
Borrowed Funds
The borrowed finds are those funds which are accumulated with the help of the loan as well
as the borrowing. The certain examples are the commercial bank loans, the loans from the
financial institutions, the debentures as well the trade credits. This helps the company having
the tax advantage as the interest expenses will have the benefit of the deduction of the tax.
The leverage of the company shall not be too much but the overall position shall be stable
enough (Arkan, 2016).
Hence, the main sources of the finance that could be used is the combination of the debt and
the equity.

FINANCIAL ANALYSIS 14
References
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Concentrated Ownership.
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FINANCIAL ANALYSIS 15
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