Managerial Finance Assignment - Madhouse Retail Ltd
Added on 2020-06-06
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MANAGERIAL FINANCE
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3PORTFOLIO 1.................................................................................................................................3b) Analysis of the performance and economic financial position of the two companies for2015 and 2016.............................................................................................................................4c) Recommendations to improve financial performance ...........................................................9d) Limitations of financial ratios and interpretation.................................................................10PORTFOLIO 2...............................................................................................................................11b) Limitations of using investment appraisal techniques for long time decision making.........15CONCLUSION..............................................................................................................................17REFERENCES..............................................................................................................................18Appendix......................................................................................................21
INTRODUCTIONManagerial finance is an approach of analysing economic position of any company onwhich appropriate decisions are made regarding further implementations. However, variety ofideas are generated for increasing monetary position and managing fund efficiently. Presentreport is based on understanding decision making tools for Madhouse Retail Ltd interested inpurchasing shares of one of two entities as Sport Direct international plc and JD sports Fashionplc. In this regard, financial position of the two companies is to be discussed in terms of ratioanalysis for decision making regarding buying shares. In addition to this, investment appraisaltechniques and appropriate selection of the project for manufacturing company is to be identifiedin this assignment. However, appropriate decision in relation to economic position of entity andits growth is to be understood in this report.PORTFOLIO 1a) 10 financial ratios results of JD and SD for 2015 and 2016RATIOSJD2015201620152016CURRENT RATIOS1.221.472.302.43QUICK RATIOS0.540.780.941.13GROSS PROFIT MARGIN48.58%48.54%43.81%44.23%OPERATING PROFIT MARGIN6.09%7.32%10.44%7.68%NET PROFIT MARGIN3.55%5.52%8.52%9.61%GEARING RATIOS12.66%9.55%16.50%23.88%EARNINGS PER SHARE27.06pence50.16pence40.6pence46.8penceRETURN ON CAPITAL
EMPLOYED26.10%30.10%21.25%12.27%AVERAGE INVENTORIESTURNOVER PERIOD105 days93 days119 days158 daysDIVIDENT PAYOUT RATIO25.17%14.15%00See formulas and calculations in Appendix.b) Analysis of the performance and economic financial position of the two companies for 2015and 2016.Financial ratios are key components to analyse economic position of any entity. Different ratiosare evaluated to identify business performance of any firms such as; profitability, liquidity,efficiency, financial gearing, investment and so on (Babalola and Abiola, 2013). However,variety of ideas generated to create balance and improving business performance in context todecision making process. Ratio analysis of the companies is evaluated as follows:Current ratio:This ratio is useful to identify liquidity position of the entity which is evaluated as division ofcurrent assets to current liabilities (Sohn and Kim, 2013). As an ideal current ratio of any entityis considered as 1 which demonstrates its effectiveness. YearJD SportsFashion PLCSports DirectInternational PLC20151.222.3020161.472.43
Illustration 1: Current ratioInterpretation: It can be observed that both companies increased the current ratio. In the accounting year 2016, cash and its equivalents of JD sports increased from 121 to 216 GBP million. Along with this, level of inventories also inclined from 225 to 238 GBP million respectively. Further, other current assets also inclined from 16 to 26 GBP million which in turn resulted are higher current ratio in 2016 over 2015. On the other side, balance sheet of Sports Direct presents that total current assets are significantly inclined from 878 to 1311 GBP million at the end of 2016, especially trade receivables and cash had major impact in this increase. This is one of the main reasons due to which liquidity of Sports Direct is good.Quick ratios: It is considered as liquidity ratio which demonstrates business performance and inventory management of the company (Vogel, 2014).YearJD SportsFashion PLCSports DirectInternational PLC20150.540.9420160.781.13
Illustration 2: Quick ratioInterpretation:Analysing quick ratio it can be concluded that JD with weak 0.78 ratio in 2016indicate poor liquidity position. That would indicate that they will not be able to pay all of their currentdebt liabilities using only quick assets. On the other side SD 1.13 ratio in 2016 puts them in a betterposition than the competing firm as with this figures it can be stated that after paying off all of theircurrent liabilities with quick assets they will still have assets left over.Gross profit margin:It is profitability ratio to identify financial position and profit level of the company(Cheng, Ioannou and Serafeim, 2014). YearJD SportsFashion PLCSports DirectInternational PLC201548.58%43.85%201648.54%44.23%
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