Financial Decision Making (PDF)

RUNNING HEAD: FINANCIAL DECISION MAKING
FINANCIAL ANALYSIS
Hi-Tech PLC

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Executive summary
This report contains a brief financial analysis of Hi-Tech PLC, a company that operates in United
Kingdom and deals with the manufacturing of computer hardware and accessories. It was
founded in 1980 and is now a multi-national company in UK. The first part of the report deals
with the analysis of company’s income statement and balance sheet with help of some specific
ratios. In addition to this, cash flow analysis and production analysis is also done which reflects
the financial position of Hi-Tech in the market.
The second part of the report contains investment appraisal techniques used for evaluating the
expansion project of Hi-Tech PLC. A management forecast is been done and various appraisal
methods are been used. The methods include payback, accounting rate of return and net present
value method. Along with this, various sources of finance and non financial factors are also
discussed in the later part of the report. Overall, the report presents the business analysis and
investment analysis of Hi-Tech PLC and its expansion strategy.

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Contents
Part 1 Business Performance Analysis...................................................................................4
Statement of profit and loss analysis..................................................................................... 4
Analysis of sales........................................................................................................... 4
Profitability ratios......................................................................................................... 4
Gross profit ratio....................................................................................................... 4
Net profit ratio.......................................................................................................... 5
Return on equity........................................................................................................ 6
Statement of financial position analysis.................................................................................7
Efficiency ratios........................................................................................................... 7
Inventory turnover ratio............................................................................................... 7
Inventory days.......................................................................................................... 7
Receivable turnover ratio............................................................................................. 8
Receivable days........................................................................................................ 8
Creditor turnover ratio................................................................................................ 9
Payables days......................................................................................................... 10
Asset turnover ratio.................................................................................................. 10
Liquidity ratios.......................................................................................................... 11
Current ratio........................................................................................................... 11
Quick ratio............................................................................................................. 12
Gearing ratios............................................................................................................ 12
Debt-to-equity ratio.................................................................................................. 12
Interest coverage ratio............................................................................................... 13
Statement of cash flow analysis...................................................................................... 14
Product Line Analysis.................................................................................................. 15
Part-2 Investment Appraisal.............................................................................................. 16
Management forecast................................................................................................... 16
Appraisal Techniques.................................................................................................. 17

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Payback period....................................................................................................... 17
Accounting rate of return........................................................................................... 17
Net Present Value.................................................................................................... 18
Sources of Finance...................................................................................................... 18
Non-Financial factors.................................................................................................. 19
References................................................................................................................... 20

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Part 1 Business Performance Analysis
Statement of profit and loss analysis
Analysis of sales
Looking at the revenue of Hi-Tech PLC, it is observed that total sales of the company increase
by 25.02% in 2017. Prior to this year, the amount was reported at £2022 million and it changed
to £2528 million in 2017. Reason behind such upsurge is the expansion plan of the company, in
which it has supplied new range of products in the market at the start of 2017. The core products
of the company are computers, laptop, tablet and other It devices. The sale of laptops makes the
highest contribution in the total revenue of Hi-Tech PLC. The sale of tablets has also increases
the company’s revenue as well as stimulates growth in business IT markets. It is expected that it
will become Hi-Tech’s main product by 2019.
From increased sales, it is reflected that company is performing better in its industry and is
focused on achieving its objectives as well as making profits.
Profitability ratios
Gross profit ratio
It is basically a financial metric used for assessing the financial health of a company. The amount
of gross profit is shown as a percentage of total sales, which is known as gross profit margin
(Vogel, 2014).
Gross Profit Margin 2017 2016
Gross Profit (A) 541 517
Sales (B) 2528 2022

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GPR (A/B) 21% 26%
In 2017, the ratio was 21% which was less than the GPR of 26%, reported in 2016. The reasons
behind the decline are:
 Change in sales is more than the change in gross profit amount due to the highest
contribution of laptop sales.
 Along with this, the ratio reduces due to increase in company’s cost of goods sold. It
rises by 32.03% in 2017 as compare to 2016.
 Gross profit increases only by 4.64% whereas 25.02% change is been noticed in total
revenue.
Net profit ratio
It is also one of the financial metric used for measuring the profitability of the company. It is
expressed in terms of percentage and indicates the amount which is earned as a part of total
revenue (Jenter and Lewellen, 2015).
Profit Margin 2017 2016
Net Profit (A) 130 82
Sales (B) 2528 2022
NPR (A/B) 5% 4%
Unlike Hi-tech’s GPR, its net profit margin has improved in year 2017 and shown an upsurge of
1% in the amount of net profit.
 The ratio rises due to the increase in the profits as well as in sales.