Financial Analysis Management & Enterprise: Importance and Techniques

This document provides an overview of financial analysis and its importance in evaluating the performance and position of businesses. It discusses the techniques used for detailed analysis, such as ratio analysis, horizontal and vertical analysis. The document also includes a comparative analysis of Farsons and Heiniken, highlighting their profitability, liquidity, leverage, turnover, and shareholders ratios.

Financial Analysis Management
& Enterprise

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Explaining detailed analysis of the final reports by employing different techniques.............1
2. Outlining an importance of assessing working capital prior in making the decision...........19
3. Critically analysing cash flow statement of the companies in past two years .....................20
CONCLUSION..............................................................................................................................21
REFERENCES..............................................................................................................................22

INTRODUCTION
Financial analysis refers to the practice of evaluating the businesses, budgets, projects
and the other business transactions regarding finance for the purpose of determining the
suitability and the performance. Financial analysis is been used for assessing that an enterprise is
liquid, solvent, profitable, efficient and stable enough in warranting the monetary investment.
The present report focuses on Farsons that his engaged in production, brewing, distribution and
the sale of the branded beverages and the beers. Heiniken is seen as the number one as the
brewer in the Europe and stands as number two across the world. Furthermore, the report
includes ratio analysis, horizontal and vertical analysis of the both the companies financial
statements in order to facilitate comparison of the performance and position of the firms.
Moreover, the study highlights significance of the working capital and the cash flow analysis of
Farsons and Heiniken.
1. Explaining detailed analysis of the final reports by employing different techniques
Heiniken
Farsons
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Farsons
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Profitability ratios
Operating profit ratio- It means the profitability ratio which is computed by dividing the
operating profit with that of the revenue of the company. It reflects the amount of the profits that
is been generated by an entity after paying off its operating expenses and cost of sales (Bastos
and Schoffelen, 2016). It is the ratio that depicts an efficiency of an organization in controlling
the expenses and the cost that are been attached with running an operational activities of the
business.
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Interpretation- From the above evaluation it has been interpreted that the ratio of Farsons
is showing a better results as compared to Heiniken. A higher ratio of the operating margin tends
to be favourable than the lower ratio as it clearly shows that an enterprise is been making
sufficient amount of the money from their ongoing operations for fixed and the variable cost. As
operating margin of Farsons over the years is indicating a rising trend because its profits and
revenue is increasing so this shows that firm is performing better from one accounting period to
another but the percentage ratio of Heiniken is declining which shows its poor performance from
the previous years.
Net profit ratio- This ratio indicates the amount of the profits gained as the percentage of
the revenue. It is calculated by dividing the net profit by revenue which depicts the profit earned
by the company after making payment of tax obligation, costs and expenses (Aktas, Croci and
Petmezas, 2015). It means the percentage value of the sales that is been left after paying off all
the expenses that are deducted from sales. It is counted as an indicator of an entity's profitability
and depicts the proportion of the revenue which is translated into the net profit.
Interpretation- The results generated shows that the profit margin ratio of Heiniken is
reflecting a decreasing trend over the years which clearly depicts bad performance of the
company. On the other hand, the NP ratio of Farosns is seen as better than Heiniken as it
increasing with passage of one financial year to another (Ramiah and et.al., 2016). This shows
that Heiniken needs to take corrective measure in order to improve its NP margin as it should
reduce utilities, insurance premium, labour cost, operation cost and must focus on increasing the
sales revenue.
ROA- It is the ratio that tells about profits that is been earned by the company in relation
to its total assets. It gives an idea to the analyst, manager and an investor is efficiently managing
an enterprise by making the use of tits assets for the purpose of generating more and more
returns. It is computed by dividing the profits with total assets of the firm (Baker and et.al.,
2017). This ratio is used for comparing the similar companies with that of their previous
performance. It takes into account the debt of the company and the other related metrics like
ROE.
Interpretation- Positive value of the ROA indicates upwards trend of the profits,
however, negative or low ratio reflects ineffective use of the company's assets with respect to
generating larger returns. The ROA of Heiniken is seen as stable in the past 4 years which clearly
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depicts that it is not making an efficient use of its assets for the purpose of generating profits.
However, ROA of Farsons is increasing during the past four years and resulting higher ratio than
its competitors Heiniken that in turn means that it is making an effective use of the assets so that
he higher profitability could be attained.
ROE- It is also one of the major profitability measure of the business relating to an equity
and is accounted by dividing the net income to that of the shareholders funds (Afrifa and
Tingbani, 2018). It is counted as the measure that reflects the way in which company makes use
of an investment for generating growth in its earnings.
Interpretation- Higher ROE considered to be better than the lower ratios so as seen in the
results generated return on equity of Farsons within the 4 years has been increased which means
that the company is generating increased profits by using the money received from its
shareholders in order to achieve growing success in the long run. However, the ROE of Heiniken
is declining as the year passes which incubates that company does not performs well in gaining
returns from the investment made by their shareholders.
Liquidity ratios
Current ratio- It is the financial ratio which shows proportion of an enterprise current
assets over its current obligations. It is the ratio that is classified in terms of the liquidity ratio
and larger value of the current ratio is seen as better than lower value (Biswas and et.al., 2015).
The liquidity of an entity highly depends on converting the assets into the cash with an objective
of making payment for fulfilling an obligation.
Interpretation-An ideal current ratio is said to be 2:1 and higher the ratio seems to show a
better liquidity position of the company. The current ratio of Heiniken and Farsons is increasing
which means that both the firms are capable of the meeting their short term obligations
effectively and efficiently. Moreover, it has been reflected that liquidity position of Farsons is
better than Heiniken because it had attained an ideal ratio and the higher results in comparison to
its rivalry which in turn depicts an ideal liquidity position of the firm as compared to its
competitors.
Quick ratio- It is been defined as the acid-test ratio which reveals an ability of the
company in meeting its current obligation by making use of the immediate assets or the most
liquid assets (Farrés and et.al., 2015). It is been computed by dividing the quick assets with the
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current liabilities where the quick assets are been attained as deducting an inventory from the
current assets.
Interpretation- From the analysis, it has been highlighted that the quick ratio of Farsons
is increasing over the years and equates to 1 which means that company is having sufficient cash
for paying its current obligations. However, the QR of Heiniken is also incraesing but is lower
than Farsons which states that it is also having adequate cash but resulted a poor liquid position
in comparison to its rivalry.
Leverage ratios
D/E ratio- It shows the percentage of financing made by an entity from an investors and
the creditors. It is been computed by dividing the total liabilities with that of the shareholders
funds.
Interpretation- This ratio is been utilized for evaluating the leverage position of the
company and is counted as an essential metric that is used in the corporate finance. High value of
the ratio indicates the firm or the stock with higher risk towards the shareholders. The analysis
shows that the ratio of the two companies is showing an increasing trend and the ratio of
Heiniken is greater than Farson which means that leverage position of Farson is better than its
competitor as lower ratio is better.
Debt- to- asset ratio- It is the leverage ratio which measures an amount of the total assets
that is been financed by creditors rather than investors (Filbeck, Zhao and Knoll, 2017). It
shows the percentage of the assets that are been financed by the borrowing in comparison with
percentage of the resources funded by an investors.
Interpretation- Ratio that is equated to 1 states that a company is owing the same amount
of the liabilities as their assets and is seen as highly leveraged. Both the firms are resulting a ratio
that is lower than one which means that both are conducting its business with better leverage
position as it depicts the liabilities are lower than its assets.
Turnover ratios
Accounts receivable days- It is considered as an efficiency or activity ratio which
measures for the number of the times a business could turn their accounts receivables into the
cash during a particular period.
Interpretation- High ratio of receivable turnover indicates that the collection process of
the company in terms of the accounts receivable is seen as efficient and it has high proportion of
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the quality customers who pays their dent obligation on quick basis. As the ratio of Farsons is
higher than Heiniken which means that former company is more efficient than Heiniken and its
collection process is much better than its rivalry.
Accounts payable days- It means an efficiency ratio which measures an average number
of the days that the company takes in paying off to its suppliers.
Interpretation- In case the number of the days gets increases from one accounting period
to the another period which indicates that company is making the payment to its suppliers on
slow basis and might be an indicator of worsening the financial condition. As the ratio of Farsons
is increasing which means it is paying to its suppliers on slower basis while the ratio of Heiniken
is decreasing which depicts that it is making timely payment to the suppliers.
Asset turnover- It tells about an entity's ability in generating higher revenues by making
use of the company's assets (Mathuva, 2015). It is an efficiency ratio that indicates the use of
assets made by the firm for the producing sales.
Interpretation- The high ratio seems to be favourable and reflects an efficient use of the
assets. Lower value of the ratio indicates that the assets are not been used effectively. As per the
results ascertained, it is observed that Heiniken is making an efficient and optimum use of its
assets as its ratio resulted as greater than Farsons over the 4 years of analysis made.
Inventory turnover ratio- It acts as the crucial efficiency ratio that measures the way in
which an inventory of the company is effectively been managed by making comparison of the
COGS with respect to its average inventory for the particular period.
Interpretation- High ratio states that an inventory is getting converted into cash quickly
whereas low ratio results in maintaining the excessive level of an inventory. ITR of Farsons is
seen as higher and rising over the years as compared to Heiniken which in turn highlights that
former company is efficient comparing to latter.
Shareholders ratios
Shareholders funds ratio- It means the the amount to which the assets are been funded
by the shareholders fund of an organization.
Interpretation- Lower ratio indicated more and more debt that the company has used for
funding its assets. It shows the ratio that the shareholders would be receiving at the time winding
up of the company. The ratio of Farsons and Heiniken is declining during the last 4 years and the
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Former enterprise is having lower ratio than the latter company which directly indicates better
ratio of Heiniken.
Vertical analysis & Horizontal of Farsons
Interpretation-The vertical analysis of P&L account of the Farsons indicates that over the year
he the change in percentage of profitability of the company with respect to hits revenue is
increasing which depicts that the firm is performing better.
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Interpretation- In accordance to the horizontal analysis of income statement, it has been seen
that the profits and revenue of the company is decreasing which means that as compared to past
year, in the current year the performance of the company is seen as poor.
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10

11

12

Interpretation- As per the horizontal assessment of the balance sheet of Farsons the total assets
of an enterprise is resulting as negative than its total liability which reflects a negative sign in
context of the financial state of the an entity and a poor financial position.
13

Interpretation- Referring to the vertical analysis of the Farson's balance sheet, it has been
analysed that over the 4 years as the liabilities of the company are increasing against the total
assets that clearly states poor or unsound position of an enterprise.
Vertical analysis & Horizontal of Heiniken
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Interpretation- The analysis showed that profit percentage has been seen as declining from one
accounting period to another along with the decrease in revenue and the other income. This
indicates that the profitability performance of the firm towards its sales is not seen as good.
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Interpretation-The horizontal statement of Profit and loss account of the company also reflected
that sales over the accounting years is increasing but the profit is declining and leads to negative
results. This shows that an entity must have to take appropriate measures in order to improve its
financial performance.
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Interpretation- As per the vertical analysis it has been assessed that assets of the company is
increasing with increase in its liabilities and equities as when total assets are been kept as base.
17

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Interpretation- According to horizontal analysis, In comparison to base year or previous
year total assets of the company is showing a rising trend but the liabilities and equities are
falling which indicates a better position of the firm over the year and its financial health has been
improved from one period to another.
2. Outlining an importance of assessing working capital prior in making the decision
Working capital is seen as an important metric for both the companies irrespective of its
size. It is the signal of an entity's operational liquidity and helps in conducting smooth
functioning of the business operations (Talonpoika and et.al, 2016). Having an adequate amount
of the working capital indicates that an entity must be able in paying all its short run expenses
and the liabilities.
In order to achieve in efficiency and effectiveness in the routing activities of the business,
maintaining and assessing working capital is an essential part for Farsons as well as Heiniken. It
is counted as the liquidity measure and a measures of the credit-worthiness in the future periods.
Efficient management of the working capital enable the companies in maintaining and
improving the profitability and earnings of the company.
It is the prevalent metric in respect of maintaining an efficiency, liquidity and the overall
health of an enterprise (Wasiuzzaman, 2015). It is the reflection of the results in relation to the
activities of both the companies that includes debt management, collection of the revenue,
inventory management, making payments to the suppliers.
In case the company is not having sufficient working capital for covering their short term
liabilities, financial insolvency could be resulted and leads to the legal troubles like liquidation of
the assets. Thus, it is very important for both the companies in managing an adequate amount of
the working capital that in turn crucial for ensuring optimum use of the resources and meeting
the requirement of the funds in case of any uncertainty in the future.
3. Critically analysing cash flow statement of the companies in past two years
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Cash flow margin ratio- It refers to the cash flow ratio that measures the cash generated
from the operating activities as the percentage of the sales revenue for a specific period (Ramiah
and et.al., 2016). It is the ratio that is considered as the crucial metric of an entity's efficiency and
the profitability with maintaining the earning quality.
Interpretation- Higher percentage means more amount of the cash is been received from
the sales. This ratio indicates an extent to which the improvement is resulted in free cash flow of
the companies and its ability in expanding their asset base and in creating the long term value for
the shareholders. From the above assessment, it has been analysed that the ratio of Heiniken is
greater than Farson in the year 2017 but at present the ratio of Farsons has resulted a high value
than Heiniken because its net sales and the cash flow from the operational activities has been
increased with a high value as compared to its competitor. This means that company has made
enough cash with reference to its sales or revenue.
Cash flow coverage ratio- It is considered as an indicator of companies ability in paying
the interest and the principal amount when it gets due. It is the ratio that tells about the number of
the items which the financial obligation of an enterprise has covered or paid with its earnings.
This ratio is stated as an important measure of the liquidity position of an entity.
Interpretation- The analysis shows that in the year 2017, the ratio of Farsons is lower than
Heiniken which depicts poor liquidity position of the firm. On the other hand, During the year
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2018, Farsons had taken appropriate measures for improving its liquidity position so resulted a
high ratio than Heiniken.
Current liabilities coverage ratio- It referred as the ratio that gives a better regarding the
debt management practices of an organization (Bastos and Schoffelen, 2016). This ratio is been
used for analysing current stability of an entity. It is the ratio that involves current maturing
proportion of the long run debt.
Interpretation- As from the analysis it is been stated that the ratio of the both the
companies that is Farsons and Heiniken are resulting the ratio below 1, which clearly reflects that
company is unable to pay its current liabilities. However, Farsons has taken corrective action and
attained a ratio close to 1 in the year 2018 that is 0.70.
CONCLUSION
By summing up the above report it has been measured that overall as per the ratio
analysis liquidity, efficiency, profitability and leverage position of Farsons is better than
Heiniken. However, in case of vertical and horizontal analysis it is been reflected that position of
Heiniken is sound in comparison to Farsons. Cash flow assessment also shows that cash position
of Farsons is good than its competitor Heiniken.
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REFERENCES
Books and Journals
Afrifa, G. and Tingbani, I., 2018. Working capital management, cash flow and SMEs’
performance. Int. J. Banking, Accounting and Finance. 9(1).
Aktas, N., Croci, E. and Petmezas, D., 2015. Is working capital management value-enhancing?
Evidence from firm performance and investments. Journal of Corporate Finance. 30.
pp.98-113.
Baker, H. K. and et.al., 2017. Working capital management practices in India: survey
evidence. Managerial Finance. 43(3). pp.331-353.
Bastos, A. M. and Schoffelen, J. M., 2016. A tutorial review of functional connectivity analysis
methods and their interpretational pitfalls. Frontiers in systems neuroscience. 9. p.175.
Biswas, A. and et.al., 2015. Sedentary time and its association with risk for disease incidence,
mortality, and hospitalization in adults: a systematic review and meta-analysis. Annals of
internal medicine. 162(2). pp.123-132.
Farrés, M. and et.al., 2015. Comparison of the variable importance in projection (VIP) and of the
selectivity ratio (SR) methods for variable selection and interpretation. Journal of
Chemometrics. 29(10). pp.528-536.
Filbeck, G., Zhao, X. and Knoll, R., 2017. An analysis of working capital efficiency and
shareholder return. Review of Quantitative Finance and Accounting. 48(1). pp.265-288.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Ramiah, V. and et.al., 2016. A behavioural finance approach to working capital
management. The European Journal of Finance. 22(8-9). pp.662-687.
Talonpoika, A.M., and et.al, 2016. Defined strategies for financial working capital management.
International Journal of Managerial Finance. 12(3). pp.277-294.
Wasiuzzaman, S., 2015. Working capital and firm value in an emerging market. International
Journal of Managerial Finance. 11(1). pp.60-79.
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