Financial Decision Making Doc
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Added on 2020-01-07
Financial Decision Making Doc
Added on 2020-01-07
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FINANCIAL DECISION MAKING
TABLE OF CONTENTSExecutive summary..........................................................................................................................3Part 1: Business performance Analysis............................................................................................3Interpretation of statement of profit or loss.................................................................................3Assessment of statement of financial position.............................................................................5Analyzing the cash flow statement..............................................................................................7Limitations of financial statements..............................................................................................7Part 2: Investment Appraisal............................................................................................................8Critically evaluating investment appraisal techniques by taking into account the benefits andlimitations of each method...........................................................................................................8Advising the Board of Directors about the non-financial factors which Elton Plc need toconsider while expanding business operations in international market.....................................11Advising higher management in relation to the sources of finance which they need toundertake for raising finance.....................................................................................................12Conclusion.....................................................................................................................................13References......................................................................................................................................14
EXECUTIVE SUMMARYPresent 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 resultedthat 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 forElton plc through tools like NPV, ARR and payback period and it has been suggested that firmshould reject the proposal. Lastly, two sources of funds has been suggested to top levelmanagement of Elton plc i.e. bank loan and issue of shares. PART 1: BUSINESS PERFORMANCE ANALYSISBusiness performance analysis means analyzing business performance on the basis of itsfinancial figures and strategic position that it have in the industry. In order to understand businessperformance various models like SWOT and PESTEL are used along with ratio analysis. Hence,it can be said that business performance analysis helps in reviewing firm internal and externalconditions.1.2 Interpretation of statement of profit or lossIn general, ratio analysis refers to the financial tool of assessing the performance ofbusiness 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 financialhealth and performance of business in comparison to previous year performance, competitorsand industry averages. According to the given case, ratio analysis is an effective tool for themanagement of Elton plc in regards to make strategic framework for improving the overallperformance of the company (Hatzinger, Böhlke and Sturchio, 2013). 1.3 RATIO ANALYSIS OF ELTON PLC FOR THE YEAR OF 2014 AND 2015 RatiosFormula 20152014Profitability ratiosNet sales26302022Gross profit572517Net profit 16082Gross profit ratio GP/ net sales * 10021.75%25.57%Net profit ratio Net profit / net sales * 1006.08%4.06%Liquidity ratios3
Current assets 758507Current liabilities 303138Inventory 290120Current ratio current assets / current liabilities 2.503.67Quick ratioCurrent assets – (stock + prepaidexpenses) / current liabilities1.542.80Solvency ratioDebt250100Shareholders’ equity 1099939Debt- equity ratio Debt / shareholders’ equity 0.220.10Efficiency ratiosNet asset 16521177Fixed assets 894670Inventory 290120Fixed asset turnover ratioSales / fixed assets 2.943.01Net assets turnover ratio Sales / total assets1.591.71Inventory turnover ratioSales / inventory 9.0616.85Operating cash inflow -88Cash flow from operatingactivities Operating cash flow / net sales 0.041.4 ANALYSIS OF THE PROFIT AND LOSS STATEMENT Profitability ratios:The main purpose of computing this ratio is to evaluate the profits generated by companythrough its sales and other streams. Gross profit ratio: GP ratio of cited firm was 25.57% which has been declined to 21.75%in 2015. This means that GP margin of Elton plc declining trend in two years. There isone single issue responsible for such kind of variance which is elevation in cost of goodssold to the customers (Edmister, 1972). COGS However, despite of increasing revenue,company has generate lower GP margin which shows that COGS has also increasedparallel to the revenue. . Firm by controlling expenses will earn good profit in itsbusiness.4
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