Financial Decision Making for Elton Plc: Business Performance Analysis and Investment Appraisal

FINANCIAL DECISION MAKING

TABLE OF CONTENTS
Executive summary..............................................................................................................................
Part 1: Business performance Analysis................................................................................................
Interpretation of statement of profit or loss.................................................................................1
Analysis of the Profit and Loss statement is as follows..............................................................2
Assessment of statement of financial position.............................................................................3
Analyzing the cash flow statement..............................................................................................5
Limitations of financial statements..............................................................................................6
Part 2: Investment Appraisal................................................................................................................
Critically evaluating investment appraisal techniques by taking into account the benefits and
limitations of each method...........................................................................................................7
Advising the Board of Directors about the non-financial factors which Elton Plc need to
consider while expanding business operations in international market.....................................10
Advising higher management in relation to the sources of finance which they need to
undertake for raising finance.....................................................................................................11
Conclusion..........................................................................................................................................
References..........................................................................................................................................

EXECUTIVE SUMMARY
Present report emphasis on assessing the financial performance of Elton plc. However,
with the help of ratio analysis, financial position of cited firm has been analysed and it resulted
that company is unable to maintain adequate amount of finance to carry out business operations.
But liquidity position of firm is suitable enough to overcome short term financial obligations.
Along with this researcher focuses on assessing the viability of available investment proposal for
Elton plc through tools like NPV, ARR and payback period and it has been suggested that firm
should reject the proposal. Lastly, two sources of funds has been suggested to top level
management of Elton plc i.e. bank loan and issue of shares.
PART 1: BUSINESS PERFORMANCE ANALYSIS
Interpretation of statement of profit or loss
In general, ratio analysis refers to the financial tool of assessing the performance of
business on the four components of business i.e. profitability, solvency, efficiency and liquidity
(Uechi and et.al, 2015). Through the means of this, managers can easily evaluate the financial
health and performance of business in comparison to previous year performance, competitors
and industry averages. According to the given case, ratio analysis is an effective tool for the
management of Elton plc in regards to make strategic framework for improving the overall
performance of the company (Hatzinger, Böhlke and Sturchio, 2013).
Ratio analysis of Elton Plc for the year of 2014 and 2015 are as follows:
Ratios Formula 2015 2014
Profitability ratios
Net sales 2630 2022
Gross profit 572 517
Net profit 160 82
Gross profit ratio GP/ net sales * 100 21.75% 25.57%
Net profit ratio Net profit / net sales * 100 6.08% 4.06%
Liquidity ratios
Current assets 758 507
1

Current liabilities 303 138
Inventory 290 120
Current ratio current assets / current liabilities 2.50 3.67
Quick ratio
Current assets – (stock + prepaid
expenses) / current liabilities 1.54 2.80
Solvency ratio
Debt 250 100
Shareholders’ equity 1099 939
Debt- equity ratio Debt / shareholders’ equity 0.22 0.10
Efficiency ratios
Net asset 1652 1177
Fixed assets 894 670
Inventory 290 120
Fixed asset turnover ratio Sales / fixed assets 2.94 3.01
Net assets turnover ratio Sales / total assets 1.59 1.71
Inventory turnover ratio Sales / inventory 9.06 16.85
Operating cash inflow -88
Cash flow from operating
activities Operating cash flow / net sales 0.04
Analysis of the Profit and Loss statement is as follows
Profitability ratios:
The main purpose of computing this ratio is to evaluate the profits generated by company
through its sales and other streams.
 Gross profit ratio: On the basis of above computation of GP margin of Elton plc clearly
indicates the declining trend in two years. It is because of the fact that, in 2014 GP ratio
2