Financial Analysis of Zurich Plc and Johnson Ltd

Verified

Added on  2023/06/10

|27
|5445
|80
AI Summary
This report provides a detail financial analysis of Zurich Plc and Johnson Ltd. The report uses ratio analysis to measure company’s financial performance and position over the past years. It also deals with the calculation of capital budgeting techniques required by Johnson Ltd.

Contribute Materials

Your contribution can guide someone’s learning journey. Share your documents today.
Document Page
RUNNING HEAD: ACCOUNTING
financial analysis

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
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
Document Page
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
Document Page
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

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
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
Document Page
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
Document Page
Accounting 6
Current liabilities
(B) £ 4,701.00 £ 2,410.00
CR (A/B) 1.38 2.91
Analysis
Unlike all the profitability ratios, the current ratio of Zurich has shown an increase in year
2016. The ratio was 1.38 times in 2015 which increased to 2.91 times in 2016. It was more
than the ideal ratio of 2:1 and it indicates that the firm has enough current assets to meet its
short term liabilities.
Quick ratio
It is another ratio which measures the liquidity of a firm by evaluating its potentiality of
paying off its short term obligations with its most liquid assets. The quick assets include all
the current assets except inventories and prepaid expenses. The ideal ratio is considered to be
1:1 (Higgins, 2012).
Quick ratio 2015 2016
Quick Assets (A)
£
4,960.00 £ 5,686.00
Current Liabilities (B)
£
4,701.00 £ 2,410.00
QR (A/B) 1.06 2.36
Analysis
It is been analysed that the quick ratio of Zurich has also rise in 2016 as compare to 2015.
Earlier the ratio was reported at 1.06 times which increased to 2.36 times. This is due to the
reduction in amount of company’s trade debtors over the years. Overall, increase in both

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
Accounting 7
current and quick ratio shows that there is no need for the company to dispose its fixed assets
to meet its liabilities. Also Zurich has a sound liquidity position.
Gearing ratios
These ratios basically deals with the analysis of company’s capital structure. They shows the
amount of financial leverage taken by the firm and the risk involved in it. The ratios basically
shows the amount of borrowed funds in comparison with the equity of the company (Jenter
and Lewellen, 2015). To analyse the capital structure of Zurich, certain gearing ratios are
been calculated which are as follows:
Debt equity ratio
It shows the proportion of debt taken by the company against its equity. The ratio helps in
knowing the portion of company’s assets that are financed through debt and the assets which
are funded by equity. A high ratio is unfavourable as it reflects high financial risk (Kimmel,
Weygandt and Kieso, 2010).
Debt equity ratio 2015 2016
Debt (A) £ 11,821.00 £ 7,702.00
Equity (B) £ 20,108.00 £ 19,635.16
D/E ratio (A/B) 58.8% 39.2%
Analysis
From the above table, it can be interpreted that D/E ratio of Zurich has declined to a great
extent in year 2016. This is due to the huge reduction in the total debt component of the
company which reflected that the capital structure of Zurich is been properly maintained.
Debt ratio
Document Page
Accounting 8
It is a financial ratio which measures the extent of company’s leverage. It shows the
percentage of the firm’s assets that are financed through debt. A high ratio is risky for the
companies.
Debt ratio 2015 2016
Total Debt (A) £ 11,821.00 £ 7,702.00
Total Assets (B) £ 32,229.00 £ 27,337.50
Debt ratio (A/B) 37% 28%
Analysis
It can be seen that Zurich’s debt ratio has also reduced from 37% to 28% in 2016 due to a
huge fall in its total amount of debt. This indicates that only less portion of assets are funded
through debt and company has sound financial position. Also it has low financial risk.
Equity ratio
It is also a type of gearing ratio which shows the portion of company’s shareholders’ equity
against its total assets. It is calculated by dividing the total equity of the firm with its total
assets.
Equity ratio 2015 2016
Total equity (A) £ 20,108.00 £ 19,635.16
Total Assets (B) £ 32,229.00 £ 27,337.50
Equity ratio (A/B) 62% 72%
Analysis
The ratio has increased in case of Zurich Plc., from 62% to 72%. This means company’s has
financed its assets more from the equity financing and less from the external debt financing.
Hence, it proves that company is not facing any type of financial risk because of its low
leverage market. Also it has great solvency position due to more of its internal financing.
Document Page
Accounting 9
Asset utilization ratios
They are also known as efficiency ratio which measures the competence of a company in
utilizing its available resources and assets to generate sales and increase its turnover. Zurich’s
efficiency is been measured by calculating the following asset utilization ratios which
indicates how efficient the company is in term so generating revenue from its assets (Krantz
and Johnson, 2014).
Inventory turnover ratio
ITR shows how effectively a company manages its inventory and how many times it is
converted into sales. A high ITR is favourable for the companies as it reflects the quick
conversion of stock into cash (Lee, Lee and Lee, 2009).
Inventory turnover ratio 2015 2016
COGS (A) £ 11,538.00 £ 10,418.00
Average Inventory (B) £ 1,543.00 £ 1,320.00
ITR (A/B) 7.48 7.89
Analysis
The ITR of Zurich has improved which shows that company has improved its efficiency in
managing its inventory. Though, the ratio is quite similar in figures but it is showing an
upward trend which reflected that company has converted more of its inventories into cash in
2016.
Fixed asset turnover
This ratio indicates how well a company uses its fixed assets to generate revenue or sales
for the year.
Fixed Asset turnover 2015 2016

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
Accounting 10
ratio
Net revenue (A) £ 18,920.00 £ 16,243.00
Average Fixed Assets (B) £ 25,726.00 £ 20,331.00
ATR (A/B) 0.74 0.80
Analysis
The FATR of Zurich also shows the same trend as its ITR. This has also increased in year
2016 from 0.74 to 0.80. This represented that company is very much efficient in maintaining
both its current as well as fixed assets. It has the capability to generate sales by using its
assets efficiently.
Receivable turnover ratio
This ratio determines how quickly a company collects its receivables and converts them into
cash. A high DTR is favourable for the company as it reflects its efficiency in timely
collecting its debtors (Saleem and Rehman, 2011).
Debtor turnover
ratio 2015 2016
Net revenue (A) £ 18,920.00 £ 16,243.00
Average debtors (B) £ 4,960.00 £ 4,230.00
DTR (A/B) 3.81 3.84
Analysis
In Zurich Plc., case this ratio has also increased in year 2016. Although the change is not so
significant but it shows that the company is looking forward to maintain its assets effectively
and efficiently. The ratio increases due to the reduction in amount of average debtors. Overall
it can be said that Zurich Plc., is efficient enough to manage its assets.
Document Page
Accounting 11
Investor potential ratios
These ratios are been used by the investors to measure the performance of the firm’s stock
within the market it operates. They are used for the purpose of evaluating the investments
Earnings per share 2015 2016
Net income (A)
£
972.84 £ 570.17
Outstanding shares (B)
£
12,410.00 £ 12,410.00
EPS (A/B) 7.84% 4.59%
Book Value per share 2015 2016
Shareholders' equity
(A) £ 20,108.00 £ 19,635.16
Outstanding shares (B) £ 12,410.00 £ 12,410.00
BPS (A/B) 162% 158%
Analysis
The earnings per share and book value per share of the Zurich has reduced respectively in
year 2016 which represented that company is not earning enough profits for its shareholders.
Also it reflected underperformance of its stock in the market.
Requirement 2
Limitation of ratio analysis
The analysis done with the help of various ratios is considered to be an analytical tool of
financial management which provides a summary of company’s position and performance.
The techniques is widely used by many investors and other users of financial statements to
Document Page
Accounting 12
analyse the annual and financial reports of the companies. However, despite of several
benefits ratio analysis has its own limitations which are as follows:
Based on historical data
The data used in ratio analysis is derived from the past events and transaction of the business.
However, it is not always true that past trends of the business will continue in its future also.
Apart from financial there are various factors which has a significant impact on company’s
performance such as environmental, social and many more. Ratio analysis does not consider
such impacts and changes on the business (Tracy, 2012).
Inflation
It is one of the factor which has a high impact on the components of financial statements. If
inflation has impacted one financial year, then it became difficult to compare the information
of other period. In that case, the technique of ratio analysis fails (Vogel, 2014).
Different strategies
It is not always possible that the companies follow the same strategies and policies o that
their financial data can be comparable. Sometimes, firms change their strategies as per their
requirement and modify their policy which makes it difficult to compare their data and
performance. In such case ratio analysis cannot compare the firms having different strategies.
Quantitative and not qualitative
Ratio analysis only take into account the quantitative analysis and ignores the qualitative
factors which also impact the financial health of the organization. It focuses only on the
financial results of the company and ignore the data related to sustainability, corporate social
responsibility and many more (Warren and Jones, 2018).

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
Accounting 13
Part B - Johnson Ltd
Requirement 1
Calculation of cash flows
Years 0 1 2 3 4 5 6
Initial
investment

2,000,0
00.00
Annual cash
inflow
£
1,220,00
0.00
£
1,220,00
0.00
£
1,220,00
0.00
£
1,220,00
0.00
£
1,220,00
0.00
£
1,220,00
0.00
(-) Annual
cash outflow
£
350,000.
00
£
350,000.
00
£
350,000.
00
£
350,000.
00
£
350,000.
00
£
350,000.
00
Net cash
flow

2,000,0
00.00
£
870,000.
00
£
870,000.
00
£
870,000.
00
£
870,000.
00
£
870,000.
00
£
870,000.
00
Residual
value
£
500,000.
00
Total Cash
flows

2,000,0
00.00
£
870,000.
00
£
870,000.
00
£
870,000.
00
£
870,000.
00
£
870,000.
00
£
1,370,00
0.00
Payback period
years Cash flows Cumulative cash flows
Document Page
Accounting 14
0 2,000,000.00
1 £ 870,000.00 1,130,000.00
2 £ 870,000.00 260,000.00
3 £ 870,000.00 £ 610,000.00
4 £ 870,000.00 £ 1,480,000.00
5 £ 870,000.00 £ 2,350,000.00
6 £ 1,370,000.00 £ 3,720,000.00
PBP 2.30
Discounted payback period
years Cash flows pvf@10% PV of cash flows Cumulative cash flows
0 2,000,000.00 1

2,000,000.00
1
£
870,000.00 0.909090909
£
790,909.09

1,209,090.91
2
£
870,000.00 0.826446281
£
719,008.26

490,082.64
3
£
870,000.00 0.751314801
£
653,643.88
£
163,561.23
4
£
870,000.00 0.683013455
£
594,221.71
£
757,782.94
5
£
870,000.00 0.620921323
£
540,201.55
£
1,297,984.49
Document Page
Accounting 15
6 £ 1,370,000.00 0.56447393
£
773,329.28
£
2,071,313.77
PBP 2.75
Accounting rate of return
Calculation of net income
Years 0 1 2 3 4 5 6
Initial
outlay

2,000,0
00.00
Cash
Inflow
s
£
1,220,000.0
0
£
1,220,000.00
£
1,220,000.0
0
£
1,220,0
00.00
£
1,220,0
00.00
£
1,220,0
00.00
Cash
Outflo
ws
£
350,000.00
£
350,000.00
£
350,000.00
£
350,00
0.00
£
350,00
0.00
£
350,00
0.00
Depre
ciation
£
250,000.00
£
250,000.00
£
250,000.00
£
250,00
0.00
£
250,00
0.00
£
250,00
0.00
Net
Incom
£
620,000.00
£
620,000.00
£
620,000.00
£
620,00
£
620,00
£
620,00

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
Accounting 16
e 0.00 0.00 0.00
Average income £ 620,000.00
Average investment £ 1,250,000.00
Average income (A) £ 620,000.00
Average investment (B) £ 1,250,000.00
ARR (A/B) 50%
Net present value
years PV of cash flows
0 2,000,000.00
1 £ 790,909.09
2 £ 719,008.26
3 £ 653,643.88
4 £ 594,221.71
5 £ 540,201.55
6 £ 773,329.28
NPV £ 2,071,313.77
Internal rate of return
At 39%
year Cash flows pvf@39% Present values
Document Page
Accounting 17
s
0 2,000,000.00 1 2,000,000.00
1 £ 870,000.00 0.71942446 £ 625,899.28
2 £ 870,000.00 0.517571554 £ 450,287.25
3 £ 870,000.00 0.372353636 £ 323,947.66
4 £ 870,000.00 0.267880314 £ 233,055.87
5 £ 870,000.00 0.19271965 £ 167,666.10
6 £ 1,370,000.00 0.13864723 £ 189,946.71
9,197.13
At 38%
years Cash flows pvf@38% Present values
0 2,000,000.00 1 2,000,000.00
1 £ 870,000.00
0.72463768
1 £ 630,434.78
2 £ 870,000.00
0.52509976
9 £ 456,836.80
3 £ 870,000.00
0.38050707
9 £ 331,041.16
4 £ 870,000.00
0.27572976
7 £ 239,884.90
5 £ 870,000.00
0.19980417
9 £ 173,829.64
6 £ 1,370,000.00 0.14478563 £ 198,356.32
Document Page
Accounting 18
7
£ 30,383.60
At 40%
year
s Cash flows pvf@40% Present values
0 2,000,000.00 1 2,000,000.00
1 £ 870,000.00 0.714285714 £ 621,428.57
2 £ 870,000.00 0.510204082 £ 443,877.55
3 £ 870,000.00 0.364431487 £ 317,055.39
4 £ 870,000.00 0.260308205 £ 226,468.14
5 £ 870,000.00 0.185934432 £ 161,762.96
6 £ 1,370,000.00 0.132810309 £ 181,950.12
47,457.27
IRR is calculated by using following formula
Lower Rate
+ NPV at lower rate * (Higher Rate - Lower Rate)
PV at lower rate- PV at upper rate
IRR 38.78%

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
Accounting 19
Requirement 2
Evaluation of capital budgeting techniques and their benefits and limitations
Generally when a person thinks of investing in a project, he or she requires to take a major
decisions as making an investment is considered to be a capital expenditure. Usually,
decisions related to such expenditures are irreversible and are very crucial by nature.
Therefore it is very important for the investor to critically evaluate the project before making
any sort of investment. For that purpose various capital budgeting techniques are been used
that analyse the project from all the aspects and checks its feasibility and viability.
Payback period
It is the simplest investment appraisal technique which is always used by the investor to
check the attractiveness of the project. The method basically measures the amount of time
taken by a project to recover its initial investment. Generally, projects having shorter payback
period are more desirable as compare to the one which takes longer time to recoup its initial
outlay (Baker, Jabbouri and Dyaz, 2017). In case of Johnson Ltd., the payback period of
project is 2.30 year which is significantly less than its estimated life. Hence the project is
acceptable. However, many companies compare the calculated payback period with their
expected ones. If the calculated period is less than the expected one, then the project is
accepted. There are certain benefits and limitations of PBP method which are as follows:
Benefits
Easy to calculate and apply.
More beneficial for the companies having shortage of funds as it will help them in
selecting the projects which take less time to recover the investment.
It helps in determining the time required by the project to start generating required
returns. Hence, helps in identifying the risk involved.
Document Page
Accounting 20
Limitations
The method ignores the time value of money.
It does not consider the net income to identify the risk rather than cash flows are been
used for making decisions. Cash flows often avoid the non-cash expenses like
depreciation.
Salvage value is ignored.
Discounted payback period
This method is the extension to PBP method as it takes into account the present values of
cash flows. In other words, discounted cash flows considers the time value of money and give
more realistic results. For Johnson, the DPBP of the project is 2.75 years which is also less
than the estimated life of the proposal, hence acceptable (Bierman and Smidt, 2014).
Benefits
It identifies actual risk associated with the investment
It considers time value of money.
Limitations
Implementation of this method is quite complex and is a time consuming process.
It does not reflect the fact that whether the project will improve or enhance the value
of firm.
Net present value
This technique basically measures the profitability of the project and is being widely used by
many financial analysts and investors. NPV is a simple accounting difference between the
present values of cash inflow and present values of cash outflow. The fundamental rule of
Document Page
Accounting 21
NPV says that if the figure is greater than zero, accept the project and if it is less than zero or
negative, then reject the project (Borgonovo, 2017).
NPV of Johnson’s project is positive and therefore company can make investment in the new
machinery. However, following are the benefits and limitations of using this method.
Benefits
It considers the cash flows over the full life of the project.
It respects and takes into account time value of money.
Gives accurate and clear results.
Interpretation of results is quite easy.
Limitations
Difficult to apply as it includes the calculation of company’s cost of capital which is
required to determine the present values.
Not suitable for the projects having different life scales.
Accounting rate of return
This methods involves the two main components of financial statements that are net income
and capital investment. The average of both the elements is taken to calculate the ARR of the
project. In order to measure the proposal on ARR basis, firms are required to set a minimum
rate of return. If ARR is higher than the cut off, the project must be accepted and if it is lower
than the project should be rejected (Daunfeldt and Hartwig, 2014). The ARR of Johnson’s
project is 50% which way higher than the required rate of 10%.
Benefits
It involves the calculation of investment income rather than cash flows. The net
income shows the true profitability of the project.

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
Accounting 22
Easy and simple to apply as well as to understand.
Limitations
Money’s time value is not considered in this method.
The method cannot be applied in cases where capital investment is not made at initial
stage.
Internal rate of return
It is basically the rate where the NPV is equal to zero or in other words the PV of cash
outflow is equal to PV of cash inflow. In Johnson’s Ltd. case, the IRR of the project is
38.78%, higher than the company’s cost of capital. Hence the project must be accepted
(Gotze, Northcott and Schuster, 2016).
Benefits
Cash flows are considered for the total life of the project.
It meets the owner’s purpose of maximizing the wealth.
It is the most reliable and sophisticated method.
Limitations
Difficult to implement as it involves complex calculations.
Interpreting the results is difficult.
In practical context, only few capital budgeting techniques are applied. Generally net present
cash method is mostly used in real life by the investors and financial analyst. In addition to
that, in some examples payback period method is also used as it is very simple and easy to
use. Rest techniques are not found in the real life instances of capital budgeting decision
making (Shapiro, 2008).
Requirement 3
Document Page
Accounting 23
Possible sources of finance
Johnson Ltd. is looking for making an investment in purchasing a machinery worth
£200,000. It seems to be a capital expenditure and hence it require raising funds from
different and appropriate sources. Generally there are external and internal sources of finance,
from where the company raises funds for its future and current projects. Some of the sources
are as follows:
Loan from banks
Johnson can borrow the money by taking loan from bank, if the company has a sound
financial position. Before granting the loan the bank will check the creditworthiness of the
company and its liquidity position in the market. A sound financial position can help Johnson
to easily take a loan from the bank.
Generating funds from internal sources
Another source to raise money is to use the retained earnings. Such source is generally used
for the purpose of expanding the business. Johnson’s Ltd can finance its requirements of
investment in new asset by using the earnings generated from its regular operations. Such
funds are ploughed back in the company for the purpose of business expansion (Jenter and
Lewellen, 2015).
Angel investors
They are those people who invest their own funds in the business rather than using the money
of other people to meet the financing requirements of the companies.
Conclusion
From the above report is concluded that it is very necessary to conduct a financial analysis to
know about the actual performance and position of the company. Ratio analysis provides a
brief scenario of the company’s financial performance as well as its position. Similarly, it is
Document Page
Accounting 24
very important for the investors to apply proper techniques before making an investment in a
project. The investor should check the feasibility and viability of the project.
References
Baker, H.K., Jabbouri, I. and Dyaz, C. (2017). Corporate finance practices in
Morocco. Managerial Finance, 43(8), 865-880.
Bierman Jr, H. and Smidt, S. (2014). Advanced capital budgeting: Refinements in the
economic analysis of investment projects. Oxon: Routledge.
Borgonovo, E. (2017). Sensitivity Analysis: An Introduction for the Management
Scientist (Vol. 251). Switzerland: Springer.

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
Accounting 25
Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New
Jersy: John Wiley and Sons.
Daunfeldt, S.O. and Hartwig, F. (2014). What determines the use of capital budgeting
methods?: Evidence from Swedish listed companies. Journal of Finance and
Economics, 2(4),101-112.
Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage
Learning.
Godwin, N. and Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.
Gotze, U., Northcott, D. and Schuster, P. (2016). INVESTMENT APPRAISAL. (2nd ed.). New
York: Springer.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Jenter, D. and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of
Finance, 70(6), pp.2813-2852.
Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for
business decision making. New Jersy: John Wiley and Sons.
Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John
Wiley and Sons.
Lee, A. C., Lee, J. C., and Lee, C. F. (2009). Financial analysis, planning and forecasting:
Theory and application. Singapore: World Scientific Publishing Co Inc.
Saleem, Q. and Rehman, R.U. (2011). Impacts of liquidity ratios on
profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
Shapiro, A. C. (2008). Capital budgeting and investment analysis. India: Pearson Education.
Document Page
Accounting 26
Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to
analyse any business on the planet. RatioAnalysis. Net.
Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New
York: Cambridge University Press.
Warren, C. S., and Jones, J. (2018). Corporate financial accounting. USA: Cengage Learning.
1 out of 27
circle_padding
hide_on_mobile
zoom_out_icon
[object Object]

Your All-in-One AI-Powered Toolkit for Academic Success.

Available 24*7 on WhatsApp / Email

[object Object]