Evaluation of Clustering Algorithms for Financial Risk Analysis

This assignment involves evaluating the suitability of various clustering algorithms for financial risk analysis. It focuses on applying Multiple Criteria Decision Making (MCDM) methods to assess and compare different clustering techniques, aiming to identify the most effective approach for identifying high-risk financial datasets.

FINANCIAL DECISION
MAKING
1

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................3
PART 1............................................................................................................................................1
BUSINESS PERFORMANCE ANALYSIS...............................................................................1
PART 2..........................................................................................................................................12
INVESTMENT APPRAISAL..................................................................................................12
CONCLUSION..............................................................................................................................15
APPENDICES ..............................................................................................................................17
REFERENCES..............................................................................................................................18
2

1

EXECUTIVE SUMMARY
In order to have desirable profits and to attain organisational goals and objectives,
management of an organisation has to take various financial decisions during a financial year.
The report provides information regarding financial decision making of Dining group plc that is
based in UK. Its overall business performance has been analysed by its financial statements
using ratio analysis techniques that shows following results. Liquid position of the cited firm is
not good and has increased more of its finance through bank loan and other creditors. It has also
been determined that profit earning capacity of the company has been declined in 2016 than
2015. Operating cycle of the business is 16 days. Further, for making more investments, directors
have provided investment appraisal information that has been critically evaluated. Dining group
plc initial investment is 120000 million pound. During first year it will receive 20800 million
pound, same as last year it will receive 43200 million pound. Company's average rate of return is
11.2% and average annual profit was 6694 million pound. It was found that company's net
present value is 16% and total cost of capital is 3% and cited firm has an investment target
criterion of 12%. At last, sources of funds that can be used by Dining Group plc for raising funds
of 100 m has been recommended along with other non-financial factors that its board of directors
must consider.
PART 1
BUSINESS PERFORMANCE ANALYSIS
In order to measure and manage quantifiable achievements of an organisation, various
methodologies, processes, measurements and techniques are used by the management is
considered as a business performance analysis (Allan and et.al., 2015). Here, the performance of
Dining Group plc is undertaken by analysing and interpreting its financial statements using ratio
analysis technique.
Statement of Profit and Loss
As per the profit and loss statement of Dining Group plc, it has been analysed that, in
2016, profit earned by firm is 29099, while in 2015, firm earned profit of 68875. This shows that,
the earning capacity of the company has reduced. However, revenues has been increased by
2

approximately 3.70% along with the increase in cost of sales by approximate 14%. In year 2016,
firm has also generated income from sale of plant property and equipment. Furthermore, finance
cost and taxation expenses in 2016 is also less than that of 2015. Thus, the only reason due to
which profit of Dining Group plc has been declined in 2016 is increase in proportion of revenue
to cost of sales. Factors that facilitated increment in revenue of the company may be increase in
the percentage of tourists in UK in 2016, or decline in competitors. While, factors that have
caused increase in cost of sales could be increase in staff and their salaries, increase in the cost of
accommodation facilities or high food material cost.
Moreover, for further analysis of company's profitability, profitable ratios such gross
profit ratio, operating profit ratio and net profit ratio has been calculated below. (APPENDIX 1)
Gross Profit ratio:
Gross profit ratio of Dining Group plc in 2015 is 18.51%, while in 2016 is 9.98%. This
means that the firm's efficiency to earn profit has been declined in 2016. This is due to the
increased cost of sales. In order to increase revenue, did not effectively maintained its cost of
providing services which lead to decline in profit percentage (Bas, 2013). (APPENDIX 1)
Revenue and sales: Dining Group Plc belongs from a hospitality, service providing industry.
Primary services that are provided by the organisation are accommodation service and dining
service. In 2016, revenues are increased due to increase in its dining services, which also lead to
increase in the cost of material used.
Cost of sales: Due to weather changes, prices of food material gone up in UK. Therefore,
external factor i.e. change in weather negatively affected business and caused decline in gross
profit. However, there may be some other factors causing increase in cost of sales that includes
increase in staff payment, increase in the proportion of electricity bill that is associated with the
use of hotel rooms, etc.
3

2015 2016
0
100000
200000
300000
400000
500000
600000
700000
800000
2015 2016
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00 18.51
9.98
From the above graph it can be seen that, revenues has been increased from the past year
but profit has been declined. Decline in gross profit indicates that the organisation is not
performing well in the hospitality sector.
Operating Profit Ratio
4
Gross income
Net sales
G ros s profit ratio

Operating ratio for Dining Group plc has been calculated that shows 4.47% in 2016 and
12.97% in 2015. This shows a huge decline in operating profit margin of the company. From the
profit and loss statement it is also visible that organisation has generated operating income from
sale of plant, property and equipment amounted to 1150, which was not generated in 2015. This
means that, firm has generated an extra revenue this year. However, operating cost of business in
2015 shows 38010 and in 2016 shows 40364, from this analysis it can be said that, business has
also incurred extra operating cost in 2016 which caused decline in operating margin of the
company (Bogdan, 2015). Reason behind decrease in operating income is increase in operating
cost of the company i.e. may be the company has charged more depreciation or have incurred
more operating expenses such as selling, general and administrative expenses, etc. Appendix 1
clearly presents that operating cost significantly inclined in 2016 from £38010 to £40364
respectively. Hence, such increasing cost pattern is one of the main causes due to which relative
margin is decreased. Thus, firm needs to do continuous monitoring of expenses and take
corrective measure for improvements. (APPENDIX 1)
2015 2016
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00 12.97
4.49
Above graphical representation shows the difference between operating profit margin of
Dining group plc in year 2015 and 2016.
Net profit Ratio
5
O perating profit ratio

Net profit ratio determines actual profit earning capacity of the business. This is the main
third component of income statement. Net profit is the final profit of company which is
distributed among owners and shareholders of company (Hair, 2015). Owners of the company
are keen to know whether their business is profitable and can provide them good amount of
profit share or not. From the calculation of net margin ratio of Dining Group Plcit has been
analysed that like gross profit ratio and operating ratio, business has also shown a significant
decline in net margin ratio. Net earning capacity of the company in 2016 has decreased to more
than half from 2015. Referring appendix 1 and profitability statement it can be stated that, in
2016, operating cost increased by 6.19% respectively. On the \other side, sales revenue of
Dinning Group Plc also inclined by 3.70% in 2016 which was lower as compared to 2015.
Hence, in comparison to the level of sales revenue, expenses incurred by the firm were higher
which in turn places direct impact on profit margin. In the year of 2016, due to having high direct
and indirect expenses Dinning Group Plc failed to generate high margin irrespective of
generating more sales. Thus, for making improvement in performance business unit is required
to undertake budgetary control and thereby exert control on expenses and attain high margin.
From the overall analysis of statement of profit and loss, it has been identified that Dining Group
plc was able to manage and lower its finance cost and tax charges, however, even then the profit
earning capacity of the company has been declined in 2016 than 2015. (APPENDIX 1)
2015 2016
0.00
2.00
4.00
6.00
8.00
10.00
12.00 10.05
4.09
6
Net m argin

Statement of Financial Position
Current Ratio
Current ratio is one of the main ratio under liquidity ratio. It is calculated to determine the
liquidity position of an organisation (Hottenrott and Lopes‐Bento, 2016). It helps external users
of financial statement of the company, information regarding, whether the company have enough
liquid resources i.e. cash resources that will enable business in paying off its short term
obligation. Short-term obligations refers to the payments that firm had to pay within a period of 1
year or less. Ideal current ratio that a company supposed to have is 2:1. Main components of
current ratio includes current assets and current liabilities of the entity.
From the calculation of current ratio for Dining Group Plc it has been analysed that,
current ratio for the year 2015 of the company is 0.28 and for the year 2016 is 0.36 respectively.
After analysis, it can be said that liquidity position of the company is not well in both the years.
And hence, dining group requires to either lower its current liabilities or to increase it current
assets such as cash and cash equivalents. Present position of the company will reflect a negative
image in front of shareholders. However, Dining Group plc has managed to improve its liquidity
position to a little level, But management needs to make more strategies regarding the same.
Furthermore, it can be also seen from the statement of financial position that inventories of the
company has reduced but trade payables and cash amount has been increased that has lead to
increase in total current assets in comparison to the last year. However, when talking about
current liabilities, amount of bank overdraft and trade payables have been increased from last
year. Increase in current liabilities set off the benefit of increase in trade payables and cash
amount (Li, Mullan and Helgeson, 2014). Hence, it can be stated that Dinning group Plc is
required to undertake significant action or measure for making improvement in current assets
and relative ratio. Hence, by controlling expenses and undertaking strategic action firm can
maintain enough liquidity and would become able to meet obligation such as payables, overdraft
etc on time.
7

2015 2016
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.28
0.36
Quick Ratio
It is also known as acid test ratio. It is the another ratio under liquidity ratio that is used to
determine the ability of a business to pay-off its short term debt (Magni, 2015). Unlike current
assets which consists of all the current assets, it considers liquid assets which consists of all the
current assets excluding inventories and prepaid expenses. Ideal quick ratio that a company
supposed to have is 1.2:1.
From the calculation of quick ratio of Dining Group plc it has been analysed that quick
ratio for the year 2015 and 2016 are 0.23 and 0.32 respectively. This means that like current
ratio, quick ratio also does not fulfil the requirement of ideal ratio. This ratio measures the ability
of company to pay off its short-term debt through cash and cash equivalent reserves. Therefore,
Dining Group plc need to increase its cash and cash equivalent resources either by restricting the
policy of accounts receivable or by generating for cash by making operations more efficient.
8
Current Ratio (CR)

2015 2016
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.23
0.32
Debt to Equity ratio
Debt-equity ratio is calculated to determine the financial performance of the firm and is
one of the main ratio under efficiency ratio. It mainly measures efficiency of company to pay off
its long term debts (Marks and et.al., 2015). It compares total debt of a business to its total
equity. The main purpose of calculation of this ratio is that it provides percentage of company
financing that comes from investors and creditors. If debt-equity ratio of the company is high,
this means that more creditor financing or bank loan are used than investor financing.
The debt-equity ratio of Dining Group plc shows 0.17 in year 2015 and 0.24 in year
2016. This means as comparison to 2015, company has increased more of its finance through
bank loan and other creditors.
9
Q uic k ratio

2015 2016
0
0.05
0.1
0.15
0.2
0.25
Statement of Cash Flow
It is one of the main financial statement prepared by an entity. It shows the overall flow
of cash in a specific period of time from all the activities i.e. operating, financing and investment
activities (Noyes and et.al., 2014). This report helps external users in knowing the amount of
cash generated from all the activities and amount of cash spent in all the activities. It is generally
made for a period of financial year. In short it is the summary of cash inflows and cash outflows
of the company that also tells cash at the beginning and at the end held by company.
Cash flow form Operating activities
It determines the amount of cash generated by a company from regular and ongoing
business activities such as selling goods and service providing activities. It does not consider
investment costs or long-term capital (Oladotun and Edosa, 2017). However, it does consists
earnings before interest. From the statement of cash flow from Dining Group plc it has been
analysed that, the company has generated 32401 from operating activities in year 2016. it is also
visible that inventories has been decreased from 757 and trade receivables and trade payables has
been increased from 5973 and 117361 respectively. Increase in trade receivables is considered
negative under operating activities because, services has been provided but cash has not yet
received.
10
Debt to equity ratio

Cash Flow from Investment activities
It determines the amount of cash generated by the company from investing activities.
Activities that are considered under this are purchase and sale of any investment, land, building
or plant (Paradkar, Knight and Hansen, 2015). The cash flow statement of Dining Group plc
shows that the company has purchased a plant costing to 60000 and has also sold a pant
amounted to 10192. Both the transactions have caused a negative cash flow from investing
activities that is of 49808.
Cash Flow from Financing activities
It determines the amount of cash generated from financing activities by an organisation.
It includes activities like proceeds from further issue of share capital, increase in term loan
amount, etc. (Sivathaasan and et.al., 2013) From the cash flow statement of Dining Group plc it
has been determined that there is an increase in long term loan and company has also received
proceeds from issue of share capital. Hence, it shows a positive cash flow of amount 25049.
from the overall analysis of inflows and outflows of cash from all the three activities it
can be said that due to the following reasons, company has experienced increase in cash during
2016:
 Increase in trade payables
 Decrease in inventories
 Proceeds from sale of plant amounted to 10192
 Proceeds from issue of shares
 Increase in long term loan
Operating cash cycle for Dining Group plc has been calculated below:
Operating Cash Cycle = Inventory period + Accounts receivable period
= 0.6 days + 16.24 days
= 16.30 or 16 days
11

Inventory period = 365 / Inventory turnover
= 365 / 6092.76 days
= 0.06
Inventory turnover = COGS / Average inventory
= 639754 / 6010.5
= 6092.76 days
Accounts receivable period = 365 / receivables turnover
= 365 / 22.48
= 16.24 days
Receivables turnover = credit sales / average accounts receivable
= 710,712 / 31619.5
= 22.48
This shows that, Dining Group plc is able to convert its current assets like inventories and
accounts receivable into cash within 16 days. This means that company has an efficient operating
cycle. Further, statement of cash flows present that dividend paid by the company in the year of
2016 accounts for £10000 respectively.
Market Segment Analysis
Dining Group plc is divided under three small segments that are Premium, Value and
Classic. From the segmental analysis of all segments and organisation as a whole it has been
analysed that value segment of the firm generates the lowest amount of revenue then other two
segments. However, operating cost incurred by value segment is more than the premium segment
but less than classic segment in both years. In year 2016, company has suffered gross loss of
amount 1656, which is the worst performance among all three segments in 2015 and 2016. The
gross margin of value segment accounted for 9.2% respectively in the year of 2015. On the other
side, at the end of FY 2016, GP margin of the fir, reached on -3.1% significantly. Considering
12

such declining trend it can be presented that business unit failed to exert effective control on
direct expenses such as material and labour which in turn resulted into decreasing gross
profitability aspect. It can be said that the value segment of Dining Group plc is the least
performing segment among all, and company is highly required to make more fruitful strategies
and need to take corrective actions for the same. It is in the hand of organisation to even shut
down its value segment as it is suffering of net loss in both the years. However, due to following
reasons performance of value performance might be inferior to other segments:
 Company might have incurred higher than normal maintenance cost.
 Company might be unable to attract more customers.
PART 2
INVESTMENT APPRAISAL
Management Forecast
Forecasting is a management tool that is required to be undertaken by managers of
Dining Group plc, in order to determine the future events that can significantly affect the
revenues and expenses of firm (Suwelack and Wüst, 2015). By using forecasting technique,
management of cited firm can help in reducing cost of capital and can also help in improving its
efficiency by optimum allocation of resources effectively. Further, forecasting technique also
provides information regarding, where company can expand its business in the future.
Management makes forecast on the basis of demand, availability of competition and inflationary
aspects. At the time of forecasting, pertaining to more than one or 2 years, manager makes some
additions in the previous framework. On the basis of such aspect, it can be stated that
management forecast is not highly wide and appropriate in comparison to investment appraisal
techniques. Moreover, investment appraisal tools present solution or viability of the proposal by
taking into account time value of money concept, income and expenditures associated with the
same.
Investment Appraisal Techniques
Payback Period
13

It refers to the time in which project need to recover its money which are invested in it.
As per the below table, company's initial investment is 120000 million pound. During first year it
will receive 20800 million pound, same as last year it will receive 43200 million pound.
Advantage
 By using this method, ranking of project cab be done easily.v
 It provides more liquidity while making decision.
 It provides clear details about cash flows of the project in a company.
 It helps the business to deal with risk (Watkiss and et.al., 2015).
 It is simple process which are computed easily.
Disadvantage
 It reduces an effective decision of investment.
 It makes the highest focus on liquidity so that it avoid profitability of cited firm.
 When initial amount is recover in a particular period than amount is not consider in a
cash flow. In this method, time value of money is not taken or recognized.
Accounting Rate of Return
It calculates the return which are arrived from net income of determined capital
investment (Winch, 2014). As per the below calculation, average rate of return is calculated by
dividing average annual profit from investment by average investment. In this, company's
average rate of return is 11.2% and average annual profit was 6694 million pound.
Advantage
 It is based on profit so that it only measures the profitability of investment.
 It is useful to present the clear scenario and picture of level of profit and return in a
project.
 While calculating accounting rate of return, employee need to have basic knowledge of
finance in computation.
 This method is easy to calculate and simple to understand.
Disadvantage
14

 It ignores the cash flow from investment.
 It does not consider the terminal value of project.
 ARR does not consider the last value in a project. This methods ignores time value of money.
Net Present Value
It is the difference between the present value of cash inflows and present value of cash
outflows. NPV is used in capital budgeting to analyse profitability of a projected investment or
project (Young and McPherson, 2013). As per the below table, it was found that company's net
present value is 16% and total cost of capital is 3% and cited firm has an investment target
criterion of 12%.
Advantage
 In NPV, both after cash flow and before cash flow over the life span of the project are
considered.
 Profitability and risk of the projects are given high priority.
 NPV gives important to the time value of money.
 NPV helps in maximizing the firm's value.
Disadvantage
 It is difficult process to use and thus requires high professionals and understanding.
 Company will give more efforts by using this method. This method does not provide accurate result, hence, it is not reliable.
Sources of Finance
Dining Group plc is considering a further investment of £100 m for which it would be
requiring more funds (Post and Byron, 2015). There are various options from where the company
can raise more funds for the investment purpose. However, below are two of the best and most
suitable fund raising sources that can be used by dining Group plc along with their advantages
and disadvantages:
Equity Financing: For public companies it is highly used source of fund. Under this method,
funds are raised by issuing equity shares of company to public (Kou, Peng and Wang, 2014.).
15

This method is generally used by the companies for enhancing capital for the purpose of business
expansion. Public that buy's equity share of a company then become its stakeholders. However, it
does have following advantages and disadvantages.
Advantages:
 Main advantage of equity financing is that it provides funds on continuous basis and is a
permanent source of finance. It is not necessary to pay dividends or cost of finance to shareholders by the company.
Drawbacks:
 Profit is to be shared among shareholders.
 Conflicts can arise among stakeholders and company.
Bank loan: It is the type of external source of fund. For the companies that are earning a good
amount of profit every year and those who have a good amount of assets, raising finance through
bank loan is easy (Lee, Sameen and Cowling, 2015). This method is also suitable for Dining
group plc to raise funds for further investments of £100 m.
Advantages:`
 Interest amount is the only cost considered under bank loan. Simple, short and easy process of raising funds.
Drawbacks:
 Economic issues like change in interest rate, inflation etc., can cause increase in cost of
finance. It negatively impacts on the cash position of the company at end of the financial year.
Non-Financial Factors
Other than financial factors, board of directors of dining Group plc must also consider
some other non-financial factors such as:
 Customer satisfaction and comfort.
16

 Hygienic environment of hotels and restaurants.
 Climate and environmental issues.
 Inspiration and motivation to staff and other employees.
 Competitors in the market.
17

APPENDICES
APPENDIX 1
ratios Formula 2015 2016
Gross income 126890 70958
Operating income 88880 31744
Net profit 68875 29099
Net sales 685381 710712
Gross profit ratio Gross income / net sales * 100 18.51 9.98
Operating profit ratio Operating income / net sales * 100 12.97 4.47
Net Margin Net income after tax / net sales * 100 10.05 4.09
APPENDIX 2
Ratios Formulas 2015 2016
Current assets (CA) 38005 50956
Current liabilities (CL) 136403 140840
Inventory 6389 5632
Prepaid expenses 0 0
Debt 48115 72845
Equity 283560 302978
Current Ratio (CR) Current assets / current liabilities 0.28 0.36
Quick ratio
Current assets – (inventory + prepaid
expenses) / current liabilities 0.23 0.32
Debt to equity ratio Debt / equity 0.17 0.24
18

REFERENCES
Journals and Books
Allan, G. and et.al., 2015. The economics of distributed energy generation: A literature
review.Renewable and Sustainable Energy Reviews. 42. pp.543-556.
Authority, F. C., 2014. The FCA’s regulatory approach to crowdfunding over the internet, and
the promotion of non-readily realisable securities by other media. Policy
Statement. 14(4).
Bas, E., 2013. A robust approach to the decision rules of NPV and IRR for simple
projects. Applied Mathematics and Computation. 219(11). pp.5901-5908.
Bogdan, T., 2015. Risks Anticipation In Public-Private Partnership Projects. .Annals-Economy
Series. 4. pp.198-201.
Francis, B. and et.al., 2015. Gender differences in financial reporting decision making: Evidence
from accounting conservatism. Contemporary Accounting Research. 32(3). pp.1285-
1318.
Hair, J. F., 2015. Essentials of business research methods. ME Sharpe.
Hottenrott, H. and Lopes‐Bento, C., 2016. R&D partnerships and innovation performance: Can
there be too much of a good thing?. Journal of Product Innovation Management. 33(6).
pp.773-794.
Kou, G., Peng, Y. and Wang, G., 2014. Evaluation of clustering algorithms for financial risk
analysis using MCDM methods. Information Sciences. 275. pp. 1-12.
Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the
financial crisis. Research policy. 44(2). pp. 370-380.
Li, J., Mullan, M. and Helgeson, J., 2014. Improving the practice of economic analysis of
climate change adaptation. Journal of Benefit-Cost Analysis. 5(3). pp.445-467.
Magni, C. A., 2015. Aggregate Return On Investment for investments under
uncertainty. International Journal of Production Economics. 165. pp.29-37.
19

Marks, L. and et.al., 2015. The return of public health to local government in England: changing
the parameters of the public health prioritization debate?. Public health. 129(9). pp.1194-
1203.
Noyes, E. and et.al., 2014. Firm network position and corporate venture capital
investment. Journal of small business management. 52(4). pp.713-731.
Oladotun, A. J. and Edosa, O. M., 2017. The Need for Professionalism and Competencies in the
Construction Industry. International Journal of Built Environment and
Sustainability. 4(1).
Paradkar, A., Knight, J. and Hansen, P., 2015. Innovation in start-ups: Ideas filling the void or
ideas devoid of resources and capabilities?. Technovation. 41. pp.1-10.
Post, C. and Byron, K., 2015. Women on boards and firm financial performance: A meta-
analysis. Academy of Management Journal. 58(5). pp. 1546-1571.
Sivathaasan, N. and et.al., 2013. Factors determining profitability: A study of selected
manufacturing companies listed on Colombo Stock Exchange in Sri Lanka. European
Journal of Business and management. 5(27). pp.99-107.
Suwelack, K. and Wüst, D., 2015. An approach to unify the appraisal framework for biomass
conversion systems. Biomass and Bioenergy. 83. pp.354-365.
Watkiss, P. and et.al., 2015. The use of new economic decision support tools for adaptation
assessment: A review of methods and applications, towards guidance on
applicability. Climatic Change. 132(3). pp.401-416.
Winch, G. M., 2014. Three domains of project organising. International Journal of Project
Management. 32(5). pp.721-731.
Young, R. F. and McPherson, E. G., 2013. Governing metropolitan green infrastructure in the
United States. Landscape and Urban Planning. 109(1). pp.67-75.
20