Managerial Finance - Understanding Financial Statements and Cash Flow Statement

This article discusses the analysis of financial statements and cash flow statements of Conrad and Company Limited and Pindara Ltd. It also highlights the major activities of the management team of Google Limited. The article provides insights into profitability, liquidity, efficiency, and solvency analysis of the companies. It also discusses the limitations of ratio analysis and the importance of cash flow statements.

Running head: MANAGERIAL FINANCE
Managerial Finance
Name of the Student:
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Table of Contents
Question 1: Understanding financial statements..........................................................2
Requirement 1:..........................................................................................................2
Requirement 2:..........................................................................................................4
Question 2: Understanding financial statements..........................................................5
Requirement 1:..........................................................................................................5
Requirement 2:..........................................................................................................6
Requirement 3:..........................................................................................................6
Question 3: Understanding cash flow statement:.........................................................6
Requirement 1:..........................................................................................................6
Requirement 2:..........................................................................................................7
References:..................................................................................................................8

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Question 1: Understanding financial statements
Requirement 1:
Profitability analysis:
For analysing the profitability position of Conrad and Company Limited, the
two profitability ratios considered include net margin and return on capital employed.
In case of net margin, the ratio is found to be 8.65% of the total revenue.
However, the average net margin of the companies operating in this industry is
obtained as 6.71% (Csimarket.com, 2018). This implies that the organisation has
been performing better than its other competitors in the industry. On the other hand,
ROCE is calculated as 25.30%, which implies that the organisation has managed to
earn sufficient returns from the amounts invested in the business.
Liquidity analysis:
In order to assess the liquidity position of the concerned organisation, the
ratios considered include current ratio and quick ratio.

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Current ratio and quick ratio are considered to be measures of liquidity;
however, in case of quick ratio, inventory is not taken into consideration (Asongu,
2015). An ideal current ratio is considered as 2 and in this case, it is computed as
1.24. On the other hand, quick ratio is obtained as 0.72, which is below the ideal
standard of 1. This implies that the organisation does not have adequate cash to
settle its short-term dues and obligations.
Efficiency analysis:
The efficiency analysis of Conrad and Company Limited has been performed
by considering inventory turnover period, receivables turnover period and payables
turnover period.
According to the above table, it is inherent that the organisation is taking 135
days or 4.5 months to clear its outstanding stocks, as indicated by inventory turnover
period. However, it is collected the amounts from the customers with respect to
credit sales made within 115 days. On the other hand, it is settling its owed amounts

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to the suppliers and creditors in 150 days or 5 months. The strategy is used in order
to retain more cash in hand for dealing with the liquidity issues (Eiteman, Stonehill &
Moffett, 2016).
Solvency analysis:
The ratios considered for analysing the solvency position of the organisation
constitute of debt-to-equity ratio and debt-to-assets ratio.
The above table clearly indicates that majority of company assets are funded
by debt, since debt-to-equity ratio is above 1 and debt-to-assets ratio is above 0.50
(Gottardo & Maria Moisello, 2014). Therefore, it could be said that the organisation
has high leverage, as it might have to incur additional finance cost for repaying its
loan amounts.
After considering all the above aspects, the financial condition of Conrad and
Company Limited could be considered as stable; however, it needs to undertake
corrective measures for addressing its liquidity problems.
Requirement 2:
For investment decision, two further ratios are considered, which are
discussed as follows:

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From the above table, it could be evaluated that the organisation has
distributed maximum portion of its earnings as dividends to the shareholders. In
addition, the return on equity is found to be considerably high for the organisation,
which implies that the objective of the firm is to maximise the wealth of its
shareholders (Baker & Weigand, 2015). Therefore, purchasing the shares of the
organisation at $4 each would help in increasing the return on investment for the
shareholders and the organisation could utilise the amount of $200,000 for funding
its expansion.
Question 2: Understanding financial statements
Requirement 1:
The gross profit margin of Pindara Ltd is observed to decrease in the year
2015 than the year 2014 that is from 40% to 33%. This signifies that the company is
getting inefficient in making adequate profits after paying off its cost of goods sold.
The net profit margin of the company is observed to decrease from 25% in 2014 to
15.5% in the year 2015. This indicates that the company is turning out to be
inefficient in converting its sales to profit (Guo et al., 2016). The current and quick
ratio of the company is also observed to decrease in the year 2015 in comparison to
2015 that indicates weakening liquidity position of the company. A decline in these
ratios to place as the company is falling short to pay all its short-term debts or
financial obligations. Additionally, the accounts receivable and payable days are
observed to increase in the year 2015 than 2014.
Moreover, inventory turnover days and gearing ratios are observed to attain
an increasing trend in the year 2015 in comparison to year 2014. Increasing trend in

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gearing ratio is observed as the company has been involved in debt investments for
its business expansion process resulting in financial risk. Increasing inventory
turnover days signifies that Pindara Ltd is being incapable of selling its inventory
over a given period in attaining sales growth.
Requirement 2:
For investing successfully in a business expansion project, Pindara Ltd needs
to consider certain important financial matters. The company must check they have
sufficient cash reserves. The debt-to-capital ratio is important in analysing the
amount of total capital for the company that is provided by debt. This can facilitate in
analysing increased financial risks of high leverage that might support the company
in maintaining strict debt covenants. Such financial situation can hinder the
organisation’s business expansion opportunities along with capability to pay or raise
dividends (Gottardo & Maria Moisello, 2014).
Requirement 3:
There are certain limitations in use of ratio analysis in the organizations for
analysing organisational performance. For instance, the companies can make
changes in their financial statements annually in order to improve their ratios.
Moreover, as the ratios are calculated through employing historical costs they are
also observed to overlook the changes in price level between periods (Titman &
Martin, 2014). For this reason, this does not reflect the original financial situation.
Question 3: Understanding cash flow statement:
Requirement 1:
After evaluation of the cash flow statements of Goggle Limited, the major
activities of the management team of the organisation include the following:
 The management team has made heavy investment in working capital, which
is funded by issuance of stocks as well as internally generated funds.
 Capital expenditure is another item where investment is made, which is
financed by internally generated funds and stock issuance.
 Huge cash dividends are incurred and for funding them, issuance of stocks
and internally generated funds are used.

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 Funds are arranged for capital expenditure from issuance of debt as well.
Requirement 2:
With the help of cash flow statement, it becomes possible to identify the
amount of money that an organisation has obtained and the amount of money it has
incurred over a particular accounting year. On the other hand, income statement
denotes the revenue made and expenses incurred by an organisation constituting of
non-cash accounting like depreciation, conventionally for any accounting period
(Gitman, Juchau & Flanagan, 2015).
The users need both reports, as there is linkage between income statement
and cash flow statement by net income. This is because the profit on the income
statement is utilised for computing operating cash flows.

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References:
Asongu, S. A. (2015). Finance and growth: new evidence from meta-
analysis. Managerial Finance, 41(6), 615-639.
Baker, H. K., & Weigand, R. (2015). Corporate dividend policy revisited. Managerial
Finance, 41(2), 126-144.
Csimarket.com. (2018). Furniture & Fixtures Industry Profitability by quarter, Gross,
Operating and Net Margin from 3 Q 2018. Retrieved 7 December 2018, from
https://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=407
Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2016). Multinational business
finance. Pearson Higher Ed.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance.
Pearson Higher Education AU.
Gottardo, P., & Maria Moisello, A. (2014). The capital structure choices of family
firms: evidence from Italian medium-large unlisted firms. Managerial
Finance, 40(3), 254-275.
Guo, H., Wang, B., Qiao, X., & Liu, R. (2016). A review of studies on citations and
journal ranking in finance. Managerial Finance, 42(4), 303-311.
Titman, S., & Martin, J. D. (2014). Valuation. Pearson Higher Ed.