Analysis of Financial Ratios and Performance Indicators

The provided assignment involves an analysis of different financial ratios and performance indicators commonly used in corporate finance. It includes a comprehensive survey of litigation in corporate finance, as well as empirical examinations of underpricing, board structure, and ownership in Indonesian IPO firms. The assignment also touches on mutual fund research, financial analysis of municipal sport, tourism, and cultural organizations, and risk-sharing finance governance. Various financial metrics such as current ratio, acid test ratio, gross profit margin, operating profit margin, net profit margin, gearing ratio, EPS, ROCE, stock turnover period, and dividend payout ratio are discussed in detail. This assignment is a valuable resource for students looking to deepen their understanding of corporate finance and financial analysis techniques.

Managerial Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Portfolio 1........................................................................................................................................1
Question 1...............................................................................................................................1
A) Computation of financial ratios of organisations..............................................................1
B) Analyse financial performance of companies...................................................................4
C) Suggestions to initiate improvement for poor performing company...............................14
D) Limitations of financial ratios.........................................................................................15
Portfolio 2......................................................................................................................................16
Question 2.............................................................................................................................16
A) Investment appraisal techniques and suggestions to management of entity...................16
B) Limitations of investment appraisal methods to aid in long-term decision-making.......20
CONCLUSION..............................................................................................................................21
REFERENCES..............................................................................................................................22

INTRODUCTION
Managerial finance plays crucial role in the company so that finance can be utilised in
proper way and meeting operational requirements. Present report deals with two companies such
as JD Sports Fashion Plc and Sports-Direct International Plc engaged in retail sector of sports
products. Financial ratios are being computed for company to assess performance of both rivals.
On the other hand, investment appraisal methods such as NPV, ARR and payback period are
calculated which clarifies whether investment should be made or not. Thus, overall financial
performance can be analysed with the help of such techniques in effective manner.
Portfolio 1
Question 1
A) Computation of financial ratios of organisations
2015 2016
Particulars Formula
Sports Direct
International Plc
JD Sports
Fashion Plc
Sports Direct
International
Plc
JD Sports
Fashion Plc
Current
assets 878297 400259 1311437 510695
Current
liabilities 382621 326748 540608 348154
Current
ratio
Current assets /
Current liabilities 2.3 1.22 2.43 1.47
Current
assets 878297 400259 1311437 510695
Current
liabilities 382621 326748 540608 348154
Inventories 517054 91024 702158 106336
1

Prepaid
expenses 0 0 0 0
Acid Test
ratio
Liquid assets /
Current liabilities 0.94 0.53 1.13 0.78
Gross profit
margin 1240812 739550 1284644 884221
Net sales 2832560 1522253 2904325 1821652
Gross
profit
margin
Gross profit / net
sales * 100 43.81% 48.58% 44.23% 48.54%
Operating
profit
margin 8345 92646 11137 133406
Net sales 2832560 1522253 2904325 1821652
Operating
profit
margin
Operating profit /
net sales * 100 0.29% 6.09% 0.38% 7.32%
Net profit
margin 241353 53971 278981 100630
Net sales 2832560 1522253 2904325 1821652
Net profit
margin
Net profit / net
sales * 100 8.52% 3.55% 9.61% 5.52%
2

Debt 136849 374 333063 247
Equity 1161551 309991 1384728 400825
Gearing
ratios Debt / Equity 11.78% 0.12% 24.05% 0.06%
Income
available
for equity
stakeholder
s 241353 53971 278981 100630
Outstandin
g equity
shares 9798931.8 2707185.36 13056310.8 3539157.1
Earnings
per share
(EPS)
Income available
for equity
stakeholders /
Outstanding equity
shares 2.46 1.99 2.14 2.84
Operating
profit 8345 92646 11137 133406
Capital
Employed
(Total
assets –
current
liabilities) 1391062 354922 1819248 443142
3

Return on
capital
employed
(ROCE)
Operating profit /
Capital Employed 0.60% 26.10% 0.61% 30.10%
Cost of
Sales 1591748 782703 1619681 937431
Average
stock 517054 91024 702158 106336
Stock
turnover
period
Cost of Sales /
Average stock 119 days 43 days 158 days 41 days
Dividend
paid 0 13260 0 13820
Net income
available to
equity
shareholder
s 241353 53971 278981 100630
Dividend
payout
ratios
Dividends / Net
income available to
equity shareholders 0.00% 24.57% 0.00% 13.73%
B) Analyse financial performance of companies
Financial ratios are quite helpful in determining performance of the company in that way
by which improvement if any required can be made by interpreting results in the best possible
manner (Arena and Ferris, 2017). It can be said that computation of ratios are beneficial for
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organisation so that necessary improvements may be easily done and as such, financial condition
can be enhanced with much ease. In relation to this, financial ratios for JD Sports Plc and Sports-
Direct International Plc have been calculated for the period of two years ie 2015 and 2016.
Current ratio
Current ratio of both companies have been computed for two periods. It shows how much
assets company has to effectively fulfil liabilities which becomes liquid within one year. Thus,
short-term liabilities are to be paid from the current assets. The ideal current ratio is 2 : 1 as
recommended by the market experts. It can be analysed that JD Sports Fashion Plc had 1.22 and
1.47 respectively in financial years 2015 and 2016. On the other hand, current ratio of Sports-
Direct International Plc had 2.3 and 2.43 in past two years. It clearly shows that Sports-Direct
International Plc has effective ratio which is more than ideal one as well. JD Sports Fashion Plc
has to improve upon its current ratio so that liabilities can be met within time frame.
Acid Test ratio
5
Sports Direct International Plc JD Sports Fashion Plc
0
0.5
1
1.5
2
2.5
3
2.3 2.43
1.22
1.47 2015
2016
Illustration 1: Current ratio

Acid Test ratio is further extension of above discussed ratio as it implies whether
liabilities can be paid within extreme liquid assets falling in one year. Here, extreme liquid assets
means that by subtracting prepaid expenses and inventories from current assets. Thus, residual
left after such subtraction is known as liquid assets. It can be interpreted that JD Sports Fashion
Plc has 0.53 and 0.78 ratio in both years. While, other organisation has 0.94 and 1.13 in 2015 and
2016. It shows that JD Sports Fashion Plc has to improve upon acid test ratio (Jackowicz,
Mielcarz and Wnuczak, 2017).
Gross Profit margin
6
Sports Direct International Plc JD Sports Fashion Plc
0
0.2
0.4
0.6
0.8
1
1.2
0.94
0.53
1.13
0.78
2015
2016
Illustration 2: Acid test ratio

This is a ratio that pertains to profitability aspect of the population in effective way.
Gross profit margin shows whether company has enough gross margin after reducing cost of
sales from revenue. If expenses are more than it is required to initiate control over the same so
that desired profit can be attained. It can be interpreted that Sports-Direct International Plc had
43.81 % in 2015 and 44.23 % in next year. On the other hand, JD Sports Fashion Plc had 48.58%
and 48.54 % in two years respectively (Diltz and Rakowski, 2018). This shows that latter
company has effective gross profit margin. While, former organisation has to reduce
expenditures for attaining more income.
Operating profit margin
7
Sports Direct International Plc JD Sports Fashion Plc
41
42
43
44
45
46
47
48
49
43.81
48.58
44.23
48.54
2015
2016
Illustration 3: Gross profit margin

This is another ratio which shows profit left after deducting operational expenses in the
best possible manner. More the amount, better for organisation. It can be interpreted that JD
Sports Fashion Plc had 6.09 % and 7.32 % in past couple of years while Sports-Direct
International Plc operating ratio is much lower as it was 0.29 % and 0.38 % in two periods.
However, ratio of both organisations are declined but JD Sports Fashion Plc has more ratio in
comparison to other firm (Chen, 2017).
Net profit margin
8
Sports Direct International Plc JD Sports Fashion Plc
0
1
2
3
4
5
6
7
8
0.29
6.09
0.38
7.32
2015
2016
Illustration 4: Operating profit margin

Net profit is attained after deduction of all expenditures of company. This ratio shows
that how company is garnering profit by incurring costs. It can be analysed from the computation
that JD Sports Fashion Plc had 3.55 % and 5.52 % in 2015 and 2016 respectively. On the other
hand, Sports-Direct International Plc had 8.52 % and 9.61 % in the same periods. This clearly
implies that net profit margin of JD Sports Fashion Plc is poor and needs to control upon
expenses for improving financial condition (Cox, 2017).
Gearing ratios
9
Sports Direct International Plc JD Sports Fashion Plc
0
2
4
6
8
10
12
8.52
3.55
9.61
5.52 2015
2016
Illustration 5: Net profit margin

The gearing ratio is another important for the company as solvency position is assessed in
effective manner. The ideal gearing ratio is below 50 % which means that company should have
balanced use of debt in comparison to equity (Hamdi and Majdoub, 2018). Thus, it can be
analysed from the computation that Sports-Direct International Plc had 11.78 % and 24.05 % in
two years. While, JD Sports Fashion Plc had 0.12 % and 0.06 % in past years. This shows that
company is required to increase use of debt as equity is financed up to a high extent.
Earnings per share
10
Sports Direct International Plc JD Sports Fashion Plc
0
5
10
15
20
25
30
11.78
0.12
24.05
0.06
2015
2016
Illustration 6: Gearing ratio

EPS is termed as earnings attained by company on per shares. This ratio is quite helpful
for organisation to analyse how much income is generated from the market which is again useful
for shareholders as dividends depend upon profits made by company. It can be interpreted that
JD Sports Fashion Plc had 1.99 % and 2.84 in 2015 and 2016. On the other hand, Sports-Direct
International Plc had 2.46 % and 2.14 % in same years. This shows that EPS of organisations are
low and as such, per share earnings has to be increased.
Return on capital employed (ROCE)
11
Sports Direct International Plc JD Sports Fashion Plc
0
0.5
1
1.5
2
2.5
3
2.46
1.99
2.14
2.84
2015
2016
Illustration 7: EPS

ROCE is quite effective financial ratio as it provides clarity whether company is
effectively utilising investment of shareholders for producing sales or not (Gill and Biger, 2013).
This is essential as shareholders invests with a view to get higher returns in the form of
dividends. It can be analysed that Sports-Direct International Plc had 0.60 % and 0.61 % in 2015
and 2016 respectively. On the other hand, JD Sports Fashion Plc's ROCE was 26.10 % and 30.10
% which shows that organisation is effectively using shareholders' investment to generate sales.
Stock Turnover period
12
Sports Direct International Plc JD Sports Fashion Plc
0
5
10
15
20
25
30
35
0.6
26.1
0.61
30.1
2015
2016
Illustration 8: ROCE

The stock turnover ratio is another effective ratio showing how quickly inventory is being
used and replenish in the best possible manner. This is useful ratio as it shows whether
production is quickly achieved by the company by utilising stock in effectual way. This ratio is
computed in days for both organisations. Lesser the days, more efficiency of firm can be
observed. It can be interpreted that Sports-Direct International Plc had 119 days in 2015 and 158
days in next year. While, JD Sports Fashion Plc had 43 days and 41 days in couple of years. This
shows that stock is replenished in effective manner by firm. Sports-Direct International Plc has
to improve upon ratio by utilising inventory at the earliest.
Dividend payout ratio
13
Sports Direct International Plc JD Sports Fashion Plc
0
20
40
60
80
100
120
140
160
180
119
43
158
41
2015
2016
Illustration 9: Stock turnover period

This ratio is useful for shareholders so that they may take decision whether to invest in
the company or not. This decision is made by assessing how many dividends are paid by the
firm. It can be seen from the dividend payout ratio JD Sports Fashion Plc had ratio of 24.57 %
and 13.73 % in 2015 and 2016 which means that ratio is decreased in 2016 year. On the other
hand, other organisation had paid no dividends and as such, ratio is zero as well. This is not good
for the company as shareholders' will no longer invest in the firm. Thus, dividends has to be paid
by Sports-Direct International Plc to shareholders by increasing its net profits (Dawar, 2014).
C) Suggestions to initiate improvement for poor performing company
The financial ratios are computed for both organisations in terms of profitability,
liquidity, solvency, efficiency and investment. It can be interpreted that Sports-Direct
International Plc has poor or low performance in comparison to JD Sports Fashion Plc.
Therefore, following suggestions can be given to firm so that financial condition may be
improved up to a high extent.
14
Sports Direct International Plc JD Sports Fashion Plc
0
5
10
15
20
25
30
0
24.57
0
13.73 2015
2016
Illustration 10: Dividend payout ratio

 Gross profit needs to be improved by reducing uncessary expenditures which provides
nothing in return but increases costs of company. Thus, eradicating unwanted expenses,
profitability position can be enhanced in a better way.
 Operating profit ratio is low in comparison to its rival and as such, it has to improve upon
the same for generating more operating income. It can be done by reducing operational
expenses and increasing performance in effective manner (Darmadi and Gunawan, 2013).
 On the other hand, ROCE is an important ratio from the point of view of customers. It is
suggested that ratio is around 0.60 % which is very poor as rival has more than 26 % in
2015 and 30.10 % in 2016. Thus, it is suggested to utilise investment made by
shareholders so that sales can be injected up too much extent.
 Stock turnover ratio in days is more which is not good for the company. Inventory is not
properly used by Sports-Direct International Plc and hence, it is required that
organisation should improve upon ratio by quickly replenishing stock and use the same
for meeting out production.
 Furthermore, dividend payout ratio is zero in both years which is not good for the
company as shareholders' will lose trust on organisation and investment will not be made
by them. Thus, it is required to increase earnings so that dividends may be paid to them in
the best possible manner.
D) Limitations of financial ratios
The limitation of ratios are listed below-
 Quantitative information is taken into account by the firm while computing ratios. Thus,
qualitative information should be considered which is ignored by ratios and as such,
financial performance cannot be evaluated by relying only on quantitative information.
 Ratios provide information regarding performance of company be it poor or not. It does
not impart reasons why performance is low which is the biggest limitation
(Dimitropoulos, Vrondou and Avgerinou, 2018).
 Historical data is considered by seeking financial statements. Thus, both companies
cannot make predictions and estimations for the future as ratios are computed on past
year data.
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 Another limitation of financial ratios is that when two companies follows different
accounting policies, and prepares financials, then comparison cannot be made of
organisations as ratios does not consider accounting policies while calculating the same.
Portfolio 2
Question 2
A) Investment appraisal techniques and suggestions to management of entity
Machinery 1
Year
Net profit
(Machinery
1) Depreciation
Net cash
flows
Present Value
factor @ 20%
Discounted
Cash Flow
(DCF)
2017 65000 25000 90000 0.833 74970
2018 65000 25000 90000 0.694 62460
2019 65000 25000 90000 0.579 52110
2020 55000 25000 80000 0.482 38560
2021 55000 25000 80000 0.402 32160
2022 45000 25000 70000 0.335 23450
Total DCF 283710
Initial
Investment 170000
NPV 113710
Calculation of Payback period
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Year Net cash flows DCF
2017 90000 90000
2018 90000 180000
2019 90000 270000
2020 80000 350000
2021 80000 430000
2022 70000 500000
Payback period 1.9 years
Calculation of ARR
Year Cash flows
2017 65000
2018 65000
2019 65000
2020 55000
2021 55000
2022 45000
350000
Average profit 58333.3333333333
17

Average investment (170000 +
20000 / 2) 95000
ARR 61.40%
Machinery 2
Calculation of NPV
Year
Net profit
(Machinery
2) Depreciation net cash flow
Present Value
factor @ 20%
Discounted
Cash Flow
(DCF)
2017 25000 28333 53333 0.833 44426.389
2018 35000 28333 63333 0.694 43953.102
2019 45000 28333 73333 0.579 42459.807
2020 75000 28333 103333 0.482 49806.506
2021 85000 28333 113333 0.402 45559.866
2022 65000 28333 93333 0.335 31266.555
Total
discounted
cash inflow 257472.225
II 170000
NPV 87472.225
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Calculation of Payback period
Year Net cash flows DCF
2017 53333 53333
2018 63333 116666
2019 73333 189999
2020 103333 293332
2021 113333 406665
2022 93333 499998
Payback period 2.6 years
Calculation of ARR
Year Cash flows
2017 25000
2018 35000
2019 45000
2020 75000
2021 85000
2022 65000
330000
19

Average profit 55000
Average investment (170000/2) 85000
ARR 64.71%
It can be interpreted from above calculation of investment appraisal techniques that
Machinery 1 should be implemented by the company as it is much fruitful for it. The appraisal
techniques such as NPV, payback period and ARR are being calculated for each of the
machineries. It can be analysed that Project A relates to Machinery 1 and Project B relates to
Machinery 2. NPV of Project A is 113710 and of other one is 874272 which clearly shows that
company should invest in former one as NPV is higher and it is recommended by market experts
that if a project has higher NPV, organisation should invest in it as favourable returns will be
achieved in near future. It is beneficial for company as higher profits would be attained in the
best possible manner (Buchman, Harris and Liu, 2016).
On the other hand, payback period is calculated as well which shows how much time will
be taken by the project to cover initial cost and generate returns. Shorter the payback period,
more beneficial for company as in less time frame, returns may be produced. It can be analysed
that Project A has 1.9 years of period while, Project B has 2.6 years. This clearly shows that
Project A should be taken by organisation as payback period is less. ARR is computed which
implies that how much return company will get on annual basis. It shows that ARR of Project B
is more in comparison to Project A. However, overall profitability of Project A is good and
investment should be made in the same.
B) Limitations of investment appraisal methods to aid in long-term decision-making
The limitation of investment appraisal methods are as follows-
1. NPV-
This method is useful for analysing profitability aspect of the project. However, when
two projects are of different size and time duration and as such, it is the biggest limitation of
NPV. Moreover, this method draws results on the basis of discounting rate which is difficult to
calculate in real life. Another demerit of NPV is that when there are two projects and have
20

unequal size, comparison becomes difficult. Thus, this method have drawbacks and not useful
for company to rely upon (Delen, Kuzey and Uyar, 2013).
2. ARR-
It is calculated to assess average return that will be generated by company in the future.
However, it has certain limitations as well. One of the main limitation of this that it does not take
into account time value of money which is an important concept ignored by ARR. Another
disadvantage of this method is that information is used from income statement and cash flows
are ignored which means that inaccurate results are drawn. Moreover, it is useful only when
investment is fully made in particular project. In simple words, when amount of investment is
made in instalments, ARR is not suitable.
3. Payback Period-
It shows how much time project will take to provide desired results. One of the major
limitation of this method is that profitability aspect of the project is not taken into account and
only focus is made on time factor only (Limitations of financial ratios, 2017). This leads to
inaccurate results and better decision cannot be made. Liquidity factor of new project is only
taken into account and how many returns will be generated by project is ignored which is a
crucial aspect. On the other hand, another demerit is that all the cash flows are not considered. In
simple words, cash flows before computation of payback period is considered but after
calculation, cash flows occurred are not taken into account which leads to improper conclusions.
CONCLUSION
Hereby it can be concluded that organisation is benefited by using financial ratios. This is
evident from the fact that firm assess what more improvements need to be done so that financial
health may be enhanced in a better way. It can be analysed that performance of Sports-Direct
International Plc is poor in comparison to JD Sports Fashion Plc. Thus, suggestions have been
provided to improve upon the same. On the other hand, investment appraisal techniques are quite
useful in determining whether investment should be made in particular project or not.
21

REFERENCES
Books and Journals
Arena, M. and Ferris, S., 2017. A survey of litigation in corporate finance. Managerial
Finance. 43(1). pp.4-18.
Buchman, T. A., Harris, P. and Liu, M., 2016. GAAP vs. IFRS Treatment of Leases and the
Impact on Financial Ratios.
Chen, L., 2017. Managerial incentives, R&D investments and cash flows. Managerial
Finance. 43(8). pp.898-913.
Cox, J. S., 2017. Managerial ability, growth opportunities, and IPO performance. Managerial
Finance. 43(4). pp.488-507.
22

Darmadi, S. and Gunawan, R., 2013. Underpricing, board structure, and ownership: An
empirical examination of Indonesian IPO firms. Managerial Finance. 39(2). pp.181-200.
Dawar, V., 2014. Agency theory, capital structure and firm performance: some Indian
evidence. Managerial Finance. 40(12). pp.1190-1206.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A
decision tree approach.Expert Systems with Applications. 40(10). pp .3970-3983.
Diltz, J. D. and Rakowski, D., 2018. Mutual fund research: a perspective on how we have
arrived at the current state of academic research on mutual funds. Managerial Finance.
44(3). pp.294-302.
Dimitropoulos, P. E., Vrondou, O. and Avgerinou, V., 2018. Financial Analysis of Municipal
Sport, Tourism and Cultural Organizations. In Innovative Approaches to Tourism and
Leisure (pp. 363-376). Springer, Cham.
Gill, A. S. and Biger, N., 2013. The impact of corporate governance on working capital
management efficiency of American manufacturing firms. Managerial Finance. 39(2).
pp.116-132.
Hamdi, H. and Majdoub, J., 2018. Risk-sharing finance governance: Islamic vs conventional
indexes option pricing.Managerial Finance.
Jackowicz, K., Mielcarz, P. and Wnuczak, P., 2017. Fair value, equity cash flow and project
finance valuation: ambiguities and a solution. Managerial Finance. 43(8). pp.914-927.
Online
Limitations of financial ratios, 2017 [Online] Available Through:
<http://www.yourarticlelibrary.com/accounting/financial-statements/5-limitations-of-financial-
ratios/53045>
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