Financial Analysis of Zurich Plc and Johnson Ltd

RUNNING HEAD: ACCOUNTING
financial analysis

Accounting 1
Contents
Introduction...........................................................................................................................................2
Part A - Zurich Plc.................................................................................................................................2
Requirement 1...................................................................................................................................2
Profitability ratios..........................................................................................................................2
Liquidity ratios..............................................................................................................................5
Gearing ratios................................................................................................................................6
Asset utilization ratios...................................................................................................................8
Investor potential ratios...............................................................................................................10
Requirement 2.................................................................................................................................11
Limitation of ratio analysis..........................................................................................................11
Part B - Johnson Ltd............................................................................................................................12
Requirement 1.................................................................................................................................12
Payback period............................................................................................................................13
Discounted payback period..........................................................................................................14
Accounting rate of return.............................................................................................................14
Net present value.........................................................................................................................16
Internal rate of return...................................................................................................................16
Requirement 2.................................................................................................................................18
Evaluation of capital budgeting techniques and their benefits and limitations.............................18
Possible sources of finance..........................................................................................................22
Conclusion...........................................................................................................................................23
References...........................................................................................................................................24

Accounting 2
Introduction
This report provides a detail financial analysis of Zurich Plc. Which is a public limited
company engaged in manufacturing and supplying office equipment. The board of directors
of the company has raised certain concerns after looking at the financial statements of the
company for the past two years. They found the results unsatisfactory and want a report on
the performance of Zurich in aspects of its profitability and liquidity. For this purpose, the
most effective tool of financial management that is ratio analysis is been used to measure
company’s financial performance and position over the past years. Apart from measuring the
financial components the ratio analysis also provides a deep and typical interpretation of the
results. In addition to this the report also states the limitations of the analysis to be carried
out.
The second part of the report deals with the calculation of capital budgeting techniques
required by Johnson Ltd who is a manufacturer of office equipment. The company is looking
forward to make an investment in purchasing a new machine. For this purpose various
investment appraisal techniques are been used like Net present value, payback period,
accounting rate of return and many more. The part also deals with the benefits and limitations
of each technique along with describing the possible and various sources for raising finance
for this investment purpose.
Part A - Zurich Plc.
Requirement 1
Profitability ratios
These are most important ratios used by an investor for evaluating the performance of a
company. They reflect the capability of a company in making sound and sufficient profits
from its operations. Profit is basically a surplus amount left after pay all the expense from the

Accounting 3
revenue generated by the business during a specific financial year. A company has a sound
profitability position only when it can earn high profits which contributes to its growth and
success. However, it is a fact that profits of a company have significant impact on the
financial health of the company (Bragg, 2012). Therefore, in order to evaluate the
profitability of Zurich three main ratios are been calculated as follows:
 Gross profit ratio
GPR of a company shows the amount of profit earned or made after paying all of its cost of
goods sold. It is expressed as a percentage of total revenue earned. The ratio is calculated by
dividing the amount of gross profit with the amount of total revenue earned.
Gross profit
margin 2015 2016
Gross profit (A) £ 7,382.00 £ 5,825.00
Total revenue (B) £ 18,920.00 £ 16,243.00
GPR (A/B) 39.02% 35.86%
Analysis
In case of Zurich Plc., the gross profit has reduced from 39.02% in 2015 to 35.86% in 2016.
This was due to the reduction of sales in 2016. However the direct expenses of the company
does not reduces in the same proportion as sales. Though the manufacturing cost of Zurich
has decreased in year 2016 but still the company needs to control it achieve the heights of
profit in near future. Decline in manufacturing costs may lead to higher profits for Zurich.
 Net profit ratio
It is also a profitability ratio which determines the quantum of net profit earned after paying
all its operating and non-operating expenses. The amount of net profit is also expressed in

Accounting 4
terms of percentage and is calculated by dividing the value of net profit with total sales for
the year.
Net profit
margin 2015 2016
Net profit (A) £ 972.84 £ 570.17
Total revenue (B) £ 18,920.00 £ 16,243.00
NPR (A/B) 5.14% 3.51%
Analysis
Just like the GPR, NPR of Zurich has also decline over the past two years. There has been a
decline in percentage of net profits in 2016 from that of 2015, which shows that the operating
expenses of the firm has increased and its sales has decreased. Also the reducing percentage
shows that the product produced by Zurich is not in demand which eventually raise the need
of improving its quality. Zurich must focus on increasing the quality of its product so to
attract more consumers and increase its demand. As a result, more revenue will be generated
which results in high profits.
 Return on equity
This ratio is mostly used by the investors to check that how well company has utilized their
investments. The ratio shows the amount of profits made by the company form its
shareholders’ funds.
Return on equity 2015 2016
Net income after preference dividends
(A)
£
972.84 £ 570.17
Average common stockholder's equity (B) £ £ 19,635.16

Accounting 5
20,108.00
ROE (A/B) 4.84% 2.90%
Analysis
Same trend has been followed in ROE of Zurich Plc. The ratio has been reduced from 4.84%
to 2.90% in 2016. Reason being the reduction in overall net income of the company and also
a significant decline in its shareholders’ equity. This means that company is inefficient in
producing high returns for its shareholders.
Liquidity ratios
These ratios basically reflect the company’s capability of meeting its short term financial
obligations by using its current and quick assets. The ratios measures the liquidity position of
the company and shows the position of its financial health. In case of Zurich Plc., the
liquidity is been analysed by calculating the following two fundamental ratios (Gibson,
2011).
 Current ratio
It is the most common liquidity ratio which check out the potentiality of the company to set
off its current liabilities with the help of its current assets. The ideal current ratio is 2:1 which
means every firm must have its current assets double of its current liabilities in order to avoid
the situation of insolvency and also to maintain a good financial health (Godwin and
Alderman, 2012).
Current ratio 2015 2016
Current assets (A) £ 6,503.00 £ 7,006.00