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Financial decision-making in Elton Plc : Project
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Added on 2020-01-15
Financial decision-making in Elton Plc : Project
Added on 2020-01-15
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Financial decision-making
Executive summaryEvery organisation need to have some finanacial information about it which would aidin taking long term decisions. These decisions being irreversible have to be made after dueanalysis of its financial statements. The analysis part involves a deep study of theorganisation's balance sheet, income statements and cash flow statement to evaluate itscurrent position. In this project Elton Plc has planned an expansion strategy in which it willbe setting up its market in Africa, Asia, Middle East and South America. For this reason, itwill be needing funds but prior to that it wants to assess the current financial position i.e. of2015 and compare it with the previous year as in how much increase in sales has beenrecorded. The results show that the year 2015 has been a profitable year for the company.Also, various ratios have been calculated to know about its liquidity and solvency positions.The company's overall financial performance has improved in about all the aspects. Apartfrom all this, the new project in which the company wants to invest has been appraised usingtechniques like: Payback Period, Accounting Rate of Return and Net Present Value and thevalues show that the company should undertake the project as it is a profitable venture.
Table of ContentsPART 1 BUSINESS PERORMANCE ANALYSIS..................................................................4Interpretation of Profit and Loss.......................................................................................4Statement of Financial Position .......................................................................................5Statement of Cash Flows..................................................................................................6Limitations of Financial Statements ................................................................................9Part 2 .........................................................................................................................................9Investment Appraisal........................................................................................................9Non-Financial Factors.....................................................................................................12Sources of Internal Finance............................................................................................13REFERENCES.........................................................................................................................15APPENDIX..............................................................................................................................17
PART 1 BUSINESS PERORMANCE ANALYSISInterpretation of Profit and LossThe Profit and Loss Statement which is also known as Income Statement shows profit figureswhen the income earned is in excess of the expenses incurred. The profit amount is used incalculating various Profitability Ratios which help in comparing current year's performancewith that of previous year (Zimmermann, 2012). from year 2014 to 2015It is evident from the income statement of Elton Plc that it has successfully met the phase oneexpansion strategy earning revenue of £2630m in 2015 thereby showing an increase inamount which is approximately twice the profit earned in previous year i.e. 2014. The sale ofnewly introduced products laptop and wearable technology alone has been able to generaterevenue of £419m for the year 2015 contributing to around 15.9% of the entire revenue.The Gross Profit Ratio provides information regarding the profit earned from sales ofcompany's products. The said ratio of Elton has fallen down from 25.57 to 21.75 inthe year 2015. Although the profit has increased over a period of one year but theproportionate increase in sales is 30.06% which is less than the increment in cost ofsales i.e. 36.74%. So in order to increase the ratio the cost of sales associated with thesale of laptop and wearable technology need to be reduced which are newly broughtto the market.The Operating Profit Ratio refers to that percentage of revenues which are made up ofoperating income. The ratio of Elton for the year 2015 has come out to be 9.70 whichis higher than previous year i.e. 7.40. An increase in ratio is due to two reasons : theextra gross profit of £55m earned in 2015 due to sale of newly introduced products inAfrican, Asian, Middle Eastern and South American markets plus an operatingincome of £80 which is negligible for the year 2014. So, the increase in operatingincome from 0 to £80m has been a huge factor in increasing the ratio.The Net Profit Ratio is of utmost importance to the company. It measures the overallprofitability. A higher ratio indicates that the affairs of business are very wellmanaged. The ratio of Elton for the year 2015 is 6.08 which is more than 4.06pertaining to year 2014. Higher ratio indicates that more profits have been earned bythe company i.e. £162m for the year 2015 and £82m for 2014 which is clearly onaccount of increased sales. Expanding the business to new markets have contributedto increase in revenues which is around 15.9% of the total revenues earned.
The Times Interest Ratio defines the firm's ability to meet the interest expenses withits income or profits. The said ratio of Elton for the year 2015 is 6.04 which is lessthan 13.67, the ratio pertaining to year 2014. The reason behind fall in ratio is due tohigh interest expenses in year 2015 amounting to £25 which is more than that of 2014i.e. £6m. An increase in interest expenses may be due to additional borrowings orhigher interest rate. From the figures shown in financial statements, the borrowingshave increased from £100m to £150m.So as per the phase one expansion strategy of Elton it has been able to market its newproducts very well. The sale of hybrid product and wearable technology has been able tocontribute to a sales of around £419 which has eventually helped it improve its market shareand its financial position by earning more profits.Statement of Financial Position For understanding the financial position of any organisation, various ratios need to becalculated. Actual ratio calculations are then compared with the ideal ratios which helps inevaluating the organisation's ability to meet its financial requirements (Aspara, Chakravartiand Hoffmann, 2015).To understand the financial position of Elton Plc some ratios have been calculated. Liquidity Ratios are calculated for getting the estimate figures regarding its ability to meetshort term financial obligations. It is mostly used to compare the liquidity position of presentyear with that of previous year (Doumpos, Zopounidis and Pardalos, 2010).Current Ratio gives us an idea about firm's ability to pay back all its liabilities with its assets.The ideal current ratio is considered to be 2:1. For the year 2015, current ratio of Elton Plc iscalculated to be 2.50 which is a good ratio figure as compared to previous year i.e. 3.67. Theratio has moved closer to the ideal state than before and this improvement indicates increasein assets value from £507m to £758m which shows an increase of about 49.50% from year2014 to 2015. The increased figure is on account of inventory, trade and other recievableswhich have also increased by 141.67% and 84.98% respectively. But the cash position hasfallen down from £134m in 2014 to 0 in 2015 which may pose a threat to company inmeeting its daily costs.Quick Ratio which is also known as liquidity ratio or acid test ratio. How easily assetscan be converted into cash defines its liquidity. So, Elton's liquidity ratio would helpin knowing about its ability to meet short term financial requirements as and whenthe need arises. The ideal quick ratio is considered to be 1:1. For the year 2015, the
quick ratio has come out to be 1.54 which is a good indicator of Elton's liquidityposition as compared to previous year when it was 2.80. The impact of change inassets is evident but with that there is a rise in the stock value from £120m to £290mwhich is approximately 141.67% more now. Total Assets Turnover Ratio is a kind of efficiency ratio which measures how well afirm can generate sales with all of its assets. Higher the ratio more good it is. For the year2015, Elton's total assets turnover ratio has come out to be 1.59 which is less than the ratio ofprevious year i.e. 1.72. The fall in ratio is evident from the figures which shows that thecomapany is not using its assets in an efficient manner.Inventory Turnover Ratio is another kind of efficiency ratio which defines howfrequently a firm's inventory is being sold which is compared against average inventory. Ahigher ratio indicates that the firm is good at sales(both cash and credit) and a lower ratioindicates less sales(cash and credit) and hence accumulation of excess inventory. For the year2015, Elton's ratio has fallen down from 12.54 to 7.10 which clearly indicates that itsinventory has not been able to generate optimum sales.Solvency Ratio defines the company's ability to meet its long term debts. The ratioexhibits company's ability to meet short term as well as long term obligations (FinancialRatio Analysis,2015).Debt Equity Ratio represents how much debt a firm is using to finance its assets with Equityshare capital. A higher ratio indicates risk as the firm's growth depends on debt. On thecontrary, a lower ratio in dicates less risk . Elton's debt equity ratio has increased from 0.11 to0.23 in 2015 which represents that the borrowings have increased resulting into more debt.The financial statements show that the company has taken more loans in the form ofborrowings. The borrowings have increased by 150% from year 2014 to 2015 i.e.£100m to£250m but the increase in equity is 17% only i.e. £939m in 2014 to £1099m in 2015 whichhas resulted into higher debt and hence increase in the ratio.Statement of Cash FlowsFigures of Balance Sheet as well as Cash Flow Statement represent that Elton maintainedgood cash position till the start of year 2015 of about £134. By the year end, the cash positioncertainly fell down to zero as per the financial statements. The shortage of cash posed a great
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