Financial Statement Analysis and Modelling

This document provides a financial statement analysis and modelling for Milton Ltd. It includes a report on the company's financial performance, ratio analysis, and recommendations for improvement. The analysis covers liquidity, operational efficiency, profitability, and long-term solvency. The report compares Milton Ltd's performance with industry benchmarks.

Running head: FINANCIAL STATEMENT ANALYSIS AND MODELLING
Financial statement analysis and modelling
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1FINANCIAL STATEMENT ANALYSIS AND MODELLING
Table of Contents
Question 1..................................................................................................................................2
Question 2 – Report...................................................................................................................2
Introduction............................................................................................................................2
Comment on the financial performance.................................................................................2
Conclusion and recommendation...........................................................................................5
Reference....................................................................................................................................6

2FINANCIAL STATEMENT ANALYSIS AND MODELLING
Question 1
Refer to excel sheet
Question 2 – Report
Introduction
Main objective of the report is to build the financial model for Milton Ltd for the year
ended 2019 to 2023 based on the assumption and data provided for the year 2018. The
financial model will contain an excel sheet including input sheet, model sheet, error sheet,
income statement, balance sheet, cash flow statement and ratio computation for the company
for year ended 2023 and will be compared with the industry benchmark (Brigham et al.,
2016).
Comment on the financial performance
Ratio analysis for the year 2023
Ratio Milton Ltd Industry
Liquidity ratios
Current ratio
Current assets 222439 563497.25
Current liabilities 128828 324742.95
Current assets/current liabilities 1.73 1.74
Quick ratio
Current assets 222439 563497.25
Inventory + prepaid expenses 156073 453232.89
Current liabilities 128828 324742.95
(Current assets-inventory-prepaid exp)/current liabilities 0.52 0.34
Operational Efficiency ratio
Accounts receivable ratio
Sales 1021025
2144153.0
3
Accounts receivable 66367 146006.61
Sales/accounts receivable 15.38 14.69

3FINANCIAL STATEMENT ANALYSIS AND MODELLING
Account receivable days
365/Accounts receivable 23.73 24.85
Long term solvency
Debt equity Ratio
Long term debt 40000 140000
Total equity 660528
1428493.3
4
Total debt/total equity 0.06 0.10
Net profit margin
Net income 79340 254990.48
Sales 1021025
2144153.0
3
Net income/sales 7.77% 11.89%
Gross profit margin
Gross profit 502513
1142179.0
4
Sales 1021025
2144153.0
3
Gross profit/sales 49.22% 53.27%
Liquidity –
The term liquidity represents the company’s ability to meet the short term obligation
on becoming due. It is basically the comparison of current assets with the current liabilities.
Liquidity ratio more than1 signifies that the liquidity position of the company is strong
enough to pay off the obligation. Current ratio and quick ratio are 2 liquid ratios those are
most widely used for measuring the liquidity position (Vogel, 2014). Looking into the current
ratio of Milton Ltd and comparing it with the industry benchmark it can be identified that the
current ratio of Milton Ltd is slightly below than the industry benchmark, where the industry
benchmark is 1.74 and Milton’s current ratio is 1.73. On the other hand, if the quick ratio is
compared it can be identified that the quick ratio that considers only the current assets those
are most liquid are significantly better than the industry benchmark, where the industry
benchmark is 0.34 and Milton’s quick ratio is 0.52 (Robinson, et al., 2015).

4FINANCIAL STATEMENT ANALYSIS AND MODELLING
Operational efficiency ratio –
It represents the efficiency of the entity or time taken by the entity to convert its
balance sheet items into profit and loss items. Accounts receivable ratio represents the times
the company collects its receivable during the year whereas the account receivable days taken
by the company for converting its receivables into cash. It can be identified that the company
is more efficient as compared to industry benchmark as the company takes 23.73 days to
collect the receivables whereas the industry benchmark is 24.85 days (Prentice, 2016).
Profitability ratios –
It represents the ability of the company to create return for the shareholders from the
revenue earned by it. Gross profit margin compares the amount left after paying for cost of
sales with the revenues whereas net profit margin compares the amount left with the company
after paying all the expenses including finance expenses and tax expenses with the revenues.
It can be identified that as Milton Ltd has more than 50% of cost of sales on total sales its
gross margin is less as compared to the industry benchmark (Ehiedu, 2014). The industry
benchmark for gross profit is 53.27% whereas the gross profit margin of Milton Ltd is
49.22%. On the other hand, after meeting the cost of sales the company will have sufficient
amount meeting the other expenses like operational expenses, interest expenses and tax
expenses. However, its net profit margin is significantly low as compared to the industry
benchmark. The industry benchmark for net profit is 11.89% whereas the net profit margin of
Milton Ltd is 7.77% (Zainudin & Hashim, 2016).
Long term solvency –

5FINANCIAL STATEMENT ANALYSIS AND MODELLING
Ability of the company to meet its short term obligation is measured through long
term solvency ratio. It further signifies the company’s leverage position. Debt equity ratio
establishes the relationship among the shareholder’s funds that is equity and long term debts.
To be more specific, it compares the long term borrowings raised by the entity as compared
to the shareholder’s funds. Very high debt to equity ratio signifies that the entity is highly
leveraged and is overburdened with the interest risk. Looking into the debt equity ratio of the
company it can be identified that the long term debt of the company is very low as compared
to the shareholders fund. Debt to total equity of Milton Ltd is 0.06 whereas the industry
benchmark is 0.10 (Faello, 2015). It is signifying that the company is lower leveraged and
sustainable for long term.
Conclusion and recommendation
From the above analysis it can be concluded that Milton Ltd is outperforming the
industry benchmark some of the financial aspects that is in liquidity, solvency and efficiency
context. However, the profitability position is quite low as compared to the industry
benchmark. Hence, it can be stated that the expected performance of the company for the
year 2023 will be better as compared to the expected industry benchmark. However, it is just
an estimate and can be changed with the change in economy and market demand. Hence, to
achieve the projected performance and outperform the industry benchmark, Milton Ltd shall
reduce its credit period to the debtors for converting the receivables into cash quickly that
will improve the efficiency and liquidity. Further, to balance the debt and equity further find,
if required shall be raised through debt instead of equity. To improve the profitability position
it shall try to minimise the wastages and the expenses wherever possible. Further, to reduce
the cost of sales it may search for the suppliers with lower quoted price.

6FINANCIAL STATEMENT ANALYSIS AND MODELLING
Reference
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Ehiedu, V. C. (2014). The impact of liquidity on profitability of some selected companies: the
financial statement analysis (FSA) approach. Research Journal of Finance and
Accounting, 5(5), 81-90.
Faello, J. (2015). Understanding the limitations of financial ratios. Academy of Accounting
and Financial Studies Journal, 19(3), 75.
Prentice, C. R. (2016). Why so many measures of nonprofit financial performance?
Analyzing and improving the use of financial measures in nonprofit
research. Nonprofit and Voluntary Sector Quarterly, 45(4), 715-740.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Zainudin, E. F., & Hashim, H. A. (2016). Detecting fraudulent financial reporting using
financial ratio. Journal of Financial Reporting and Accounting, 14(2), 266-278.