Financial Analysis of MagicWorks Ltd

This assignment requires a financial analysis of MagicWorks Ltd, focusing on its solvency, liquidity, and profitability using various ratio analysis techniques. The analysis utilizes financial data from the company to assess its current financial health. The report includes recommendations for MagicWorks Ltd to enhance its financial performance by focusing on equity sources and trade receivables.

Managing Financial performance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1..................................................................................................................................3
Preparing a business report for the Board of directors of ARM holdings Ltd by making
analysis of key ratios...................................................................................................................3
QUESTION 2................................................................................................................................17
QUESTION 3................................................................................................................................19
a. Issue more debentures............................................................................................................19
b. Sell their investment..............................................................................................................20
c. Company is allowed to make all sales on credit or not..........................................................20
d. Issue more ordinary shares....................................................................................................20
CONCLUSION..............................................................................................................................21
REFERENCES..............................................................................................................................22

INTRODUCTION
Financial performance management is the process which is highly concerned with taking
strategic actions or decisions which directly help in growth as well as enhancing performance of
the firm. In this regard, ratio analysis technique is significant which in turn aids in evaluating the
financial performance and thereby assists in assessing causes of deviations (Ratio analysis,
2017). In this, measure of financial analysis helps in framing highly competent strategic and
policy framework for the near future. The present report is based on different case situations
which in turn develops understanding about several financial tools and techniques that help in
managing the monetary aspects.
QUESTION 1
Preparing a business report for the Board of directors of ARM holdings Ltd by analyzing the
key ratios
To,
Board of Directors,
ARM Holdings Plc
Date: 22nd February, 2017
Subject: Financial performance analysis
It has been reported to the higher management team that ratio analysis has been conducted with
the aim to extract appropriate information from the financial statements of Arms Holding Plc.
Such financial tool is effectual which in turn provides deeper insight about financial health,
position and performance of the concerned business unit.
Profitability ratios
Particulars 2015 2014 2013
Sales revenue 968.3 795.2 714.6
Gross profit 929 757 675

Net profit 339.7 255.4 104.8
operating profit 406.1 309 153.5
GP ratio
Gross
profit /
net sales
* 100 96% 95% 94%
Operating profit ratio
Operatin
g profit /
net sales
* 100 42% 39% 21%
NP ratio
Net
profit /
net sales
* 100 35% 32% 15%
2015 2014 2013
0%
20%
40%
60%
80%
100%
120%
GP ratio
Operating profit ratio
NP ratio
From profitability ratio analysis, it has been assessed that GP ratio of ARM Holdings Plc
increased from 94% to 96% at the end of 2016. It shows that business unit has made proper
control on the direct expenses. Besides this, in 2015 operating profit ratio also increased from

21% to 42%. Hence, operating profit margin of the firm inclined in 2015 with higher rate as
compared to previous years. Along with this, NP margin of the company was 15% in 2013
whereas it accounted for 35% at the end of 2015. By considering such aspect, it can be stated that
firm had generated enough profit over indirect expenses. Thus, from overall evaluation, it is
reported to the team of higher management that profitability aspect and performance of business unit was
sound during such period (Chwieroth, 2015).
Liquidity ratios
Particulars 2015 2014 2013
Current assets 948.3 870.9 780.1
Inventory 1.8 2.7 3
prepaid expenses 28.7 23.9 21.7
Current liabilities 262.5 260.3 280.3
Quick assets 917.8 844.3 755.4
Current ratio
Current
assets/
current
liabilitie
s 3.61 3.35 2.78
Quick ratio
Quick
assets /
current
liabilitie
s 3.50 3.24 2.69

2015 2014 2013
0
0.5
1
1.5
2
2.5
3
3.5
4
Current ratio
Quick ratio
Tabular presentation clearly entails that the output of both current and quick ratio exceeded ideal
measure. Moreover, according to ideal ratio current and quick ratio must be 2:1and .5:1 (Mateen
and More, 2013). From financial statement analysis, it has been found that company‘s asset level
increased significantly and thereby capability in relation to making payment of financial obligations
from 2.78 to 3.61. On the other side, quick ratio of the firm also increased from 2.69 to 3.50 which
mean that business unit had more current assets which can easily be convertible into cash for
fulfilling the monetary obligations. Hence, liquidity aspect of the concerned business
organization was sound from the year 2013 to 2015. However, for enhancing the return and
thereby financial performance, company is required to invest money in other profitable
investment opportunities rather than keeping with itself.
Efficiency ratios
Particulars 2015 2014 2013
Inventory 1.8 2.7 3
Cost of goods sold 39.3 37.8 39.3
Net sales 968.3 795.2 714.6
Total assets 2120.2 1837.2 1638.4
Inventory turnover
ratio
COGS /
inventor
21.83 14.00 13.10

y
Total assets turnover
ratio
Net sales
/ total
assets 0.46 0.43 0.44
2015 2014 2013
0
5
10
15
20
25
Inventory turnover ratio
Total assets turnover ratio
By conducting ratio analysis, it has been identified that total asset turnover ratio was 0.44, 0.43
& 0.46 respectively from 2013-2015. Such increasing trend or pattern shows that Arms Holding
Plc made optimum use of assets while carry out business activities. However, management team is
required to conduct training and programs for employee motivation. This in turn helps the
business unit in enhancing efficiency and thereby profitability aspect of personnel (Lam, 2010).
Further, movement of inventory turnover ratio from 13.10 to 21.83 shows that stock was sold and
replaced by Arms Holding Plc in 2015 more quickly. In this, by employing inventory control and
management techniques, company can enhance its efficiency level or performance.
Solvency ratios
Particulars 2015 2014 2013
Long term debt 11.3 6.5 4.2
Shareholders’ equity 27.9 25.6 18.8
Debt-equity ratio Long term 0.41 0.25 0.22

debt /
shareholde
rs equity
2015 2014 2013
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
Debt-equity ratio
Debt-equity ratio
Graphical presentation clearly states that in the period of 2015, solvency position of Arms
Holdings Plc was sound as compared to previous years. In the accounting year 2015, debt-equity
ratio of business unit was 0 .41 which was highly near to the ideal measure such as .5:1 (Landi
and et.al., 2013). In contrast to this, in 2013 and 2014 such measure was 0.22 & 0.25. It presents
that during such period; most of the funds were raised by the organization through equity rather
than debt instruments. Thus, solvency position of organization was sound in the year 2015 and
indicates that highly balanced or optimal capital structure had been maintained by Arms
Holdings Plc.

Horizontal analysis of P&L
Particulars
Change
s 2015 Changes 2014
Change
s 2013
Sales revenue 22% 968.3 11% 795.2 100% 714.6
Cost of sales 4% 39.3 -4% 37.8 100% 39.3
Gross profit 23% 929 12% 757 100% 675
General Administrative 14% 146.9 5% 129.3 100% 123
Sales and marketing 14% 98 5% 86.2 100% 82
Research &
development 19% 278 -26% 232.9 100% 316.8
Operating income 31% 406.1 50% 309 100% 153.5
Finance expenses 0% 0.3 50% 0.3 100% 0.2
Finance income 15% 9 -16% 7.8 100% 9.3
Net income before tax 31% 414.8 49% 316.5 100% 162.6
taxation 23% 75.1 6% 61.1 100% 57.8
Net profit 33% 339.7 59% 255.4 100% 104.8
Horizontal balance sheet analysis
Particulars
Change
s 2015
Change
s 2014
Change
s 2013

Sales revenue 100% 968.3 100% 795.2 100% 714.6
Cost of sales 4% 39.3 5% 37.8 5% 39.3
Gross profit 96% 929 95% 757 94% 675
General Administrative 15% 146.9 16% 129.3 17% 123
Sales and marketing 10% 98 11% 86.2 11% 82
Research &
development 29% 278 29% 232.9 44% 316.8
Operating income 42% 406.1 39% 309 21% 153.5
Finance expenses 0% 0.3 0% 0.3 0% 0.2
Finance income 1% 9 1% 7.8 1% 9.3
Net income before tax 43% 414.8 40% 316.5 23% 162.6
taxation 8% 75.1 8% 61.1 8% 57.8
Net profit 35% 339.7 32% 255.4 15% 104.8
Horizontal analysis of balance sheet
Current Assets
In %
2015
In %
2014
In %
2013
Cash and Short Term
Investments
1% 681.4 13% 674.9
100%
589.1
Trade Receivables 38% 229.5 3% 166.8
100%
161.2
Inventory -33% 1.8 -10% 2.7
100%
3
Prepaid Expenses
20%
28.7 10% 23.9
100%
21.7

Other Current Assets 165% 6.9 -49% 2.6
100%
5.1
Total Current Assets Non-
Current Assets
948.3 870.9
100%
780.1
100%
Property/Plant/
Equipment
42% 61.6 29% 43.4
100%
33.6
Goodwill
15%
650.7 8% 567
100%
525.9
Intangibles
19%
92 -7% 77.2
100%
82.9
Long Term
Investments
-47%
14.2 31% 26.7
100%
20.4
Other Long Term
Assets
40% 353.4 29% 252
100%
195.5
Total Non-Current Assets 21% 1,171.90 13% 966.3
100%
858.3
Total Assets 15% 2,120.20 12% 1,837.20
100%
1,638.40

Current Liabilities
Trade Payable 9% 12.7 67% 11.7 100% 7
Accrued Expenses 45% 100.7 -21% 69.4 100% 88.1
Notes Payable/Short
Term Debt
0 0 100% 0
Current Port. of LT
Debt/Capital Leases
33% 5.2 44% 3.9 100% 2.7
Other Current
liabilities
-18%
143.9 -4% 175.3 100% 182.5
Total Current Liabilities
Non-Current Liabilities
1% 262.5 -7% 260.3
100%
280.3
Provisions
135%
6.1 73% 2.6
100%
1.5

Long Term Debt 74% 11.3 55% 6.5
100%
4.2
Other Liabilities 8% 42.7 -4% 39.5
100%
41
Total Non-Current
Liabilities
24% 60.1 4% 48.6
100%
46.7
Total Liabilities 4% 322.6 -6% 308.9
100%
327
Shareholders’ Equity
Common Stock
0
0.7 0 0.7
100%
0.7
Additional Paid-In
Capital
9% 27.2 38% 24.9
100%
18.1
Retained Earnings 18% 1,769.70 16% 1,502.70
100%
1,292.60
Total Equity 18% 1,797.60 17% 1,528.30
100%
1,311.40
Total Liabilities &
Shareholders' Equity
15% 2,120.20 12% 1,837.20
100%
1,638.40

Vertical analysis of balance sheet
Current Assets
In %
2015
In %
2014
In %
2013
Cash and Short Term
Investments
32% 681.4 37% 674.9
36%
589.1
Trade Receivables 11% 229.5 9% 166.8
10%
161.2
Inventory 0% 1.8 0% 2.7 0% 3
Prepaid Expenses
1%
28.7 1% 23.9
1%
21.7
Other Current Assets 0% 6.9 0% 2.6
0%
5.1
Total Current Assets
Non-Current Assets
45% 948.3 47% 870.9
48%
780.1
0% 0% 0%
Property/Plant/
Equipment
3% 61.6 2% 43.4
2%
33.6
Goodwill 31% 650.7 31% 567 32% 525.9
Intangibles 4% 92 4% 77.2
5%
82.9
Long Term
Investments
1% 14.2 1% 26.7
1%
20.4
Other Long Term
Assets
17% 353.4 14% 252
12%
195.5

Total Non-Current
Assets
55% 1,171.9
0
53% 966.3
52%
858.3
Total Assets 100% 2,120.2
0
100% 1,837.2
0 100%
1,638.4
0
Current Liabilities
Trade Payable 4% 12.7 4% 11.7 2% 7
Accrued Expenses 31% 100.7 22% 69.4 27% 88.1
Notes Payable/Short
Term Debt
0% 0 0% 0 0% 0
Current Port. of LT
Debt/Capital Leases
2% 5.2 1% 3.9 1% 2.7
Other Current
liabilities
45% 143.9 57% 175.3 56% 182.5
Total Current
Liabilities Non-
Current Liabilities
81% 262.5 84% 260.3 86% 280.3
0% 0% 0%
Provisions 2% 6.1 1% 2.6 0% 1.5
Long Term Debt 4% 11.3 2% 6.5 1% 4.2
Other Liabilities 13% 42.7 13% 39.5 13% 41

Total Non-Current
Liabilities
19% 60.1 16% 48.6 14% 46.7
Total Liabilities 100% 322.6 100% 308.9 100% 327
Shareholders’ Equity
Common Stock
0%
0.7 0% 0.7
0%
0.7
Additional Paid-In
Capital
2%
27.2 2% 24.9
1%
18.1
Retained Earnings
98%
1,769.7
0
98% 1,502.7
0 99%
1,292.6
0
Total Equity
100%
1,797.6
0
100% 1,528.3
0 100%
1,311.4
0
Total Liabilities &
Shareholders' Equity
100%
2,120.2
0
100% 1,837.2
0
100%
1,638.4
0
Interpretation: From horizontal analysis, it has been assessed that high growth has been
witnessed in the sales revenue, gross and net profit margin. Sales revenue of the firm reached at
22% at the end of 2015. Besides this, percentage change of GP and NP was 23% & 33%
respectively. Thus, by considering this it can be stated that ARM Holding Plc has performed its
business activities and functions more effectually. Along with this, analysis also shows that
ARM Holdings Plc had enough assets for fulfilling the obligations.

QUESTION 2
On the basis of cited case situation, Tuesday is a small restaurant chain which is planning
to expand its business operations and functions.
Option 1
If business unit does not take premises on lease then profit will be:
Birmingham (£) Tyseley (£) Solihull (£) Stirchley (£)
Food
revenue
160,000 60,000 55,000 78,000
Drinks
revenue
270,000 128,000 164,000 145,000
total 430,000 188,000 219,000 223,000
Food costs 110,000 45,000 50,000 60,500
Drink costs -72,000 -25,000 -30,000 -25,000
Staff costs 137,500 77,000 84,750 85,750
Overhead
costs
36,000 23,500 22,000 18,000
211,500 120,500 126,750 139,250
Profit/
(loss)
218,500 67,500 92,250 83,750
Option for Soilhull restaurant
Particulars /
year 1 2 3 4 5
Food Revenue 56100 57222
58366.4
4 59533.77 60724.44
Drink revenue 167280 170625.6
174038.
1 177518.9 181069.3
Food cost 52000 54080 56243.2 58492.93 60832.65

Drink cost 31200 32448
33745.9
2 35095.76 36499.59
Staff cost 22000 22660 23339.8 24039.99 24761.19
Overhead cost 61800 63654
65563.6
2 67530.53 69556.44
Depreciation 73750 73750 73750 73750 73750
Total sales
revenue (food +
drink revenue) 223380 227847.6
232404.
6 237052.6 241793.7
Total expenses
(all expenditure
+ depreciation) 240750 246592
252642.
5 258909.2 265399.9
Profit (Revenue
– expenses) -17370 -18744.4 -20238 -21856.6 -23606.2
Add:
Depreciation 73750 73750 73750 73750 73750
Cash inflow 56380 55005.6
53512.0
1 51893.44 50143.83
Computation of cash inflow for Soilhull restaurant
Years Cash
inflow
PV
factor
@
Discounte
d cash
inflow

10%
1 56380 0.909 51249.42
2 55005.6 0.826 45434.63
3 53512.012 0.751 40187.52
4
51893.4356
4 0.683 35443.22
5
50143.8254
3 0.621 31139.32
Total
discounted cash
inflow 203454.1
Initial
investment 295000
NPV -91545.9
Interpretation or recommendation: From the above evaluation, it has been assessed that
Tuesday’s restaurant chain which is established in Brimingham and Soilhull is enjoying huge
profit margin as compared to other locations. Further, from the overall evaluation, it has also
been assessed that owner of restaurant will attain negative NPV such as £91545.9 respectively.
Hence, it can be stated that Tuesday’s restaurant chain should avoid opening another unit in
Soilhull.

QUESTION 3
a. Issue more debentures
Computation from debt-equity ratio
Particulars Amount (in £)
Debentures 50000
Shareholders’
equity 48000
Debt-equity ratio 1.04
By considering the present solvency position, it is recommended to Magic Works do not
issue of shares. Moreover, debt-equity position of the business unit is higher than the ideal ratio
such as .5:1. It reflects that business unit has generated most of the funds from debt instruments
rather than the equity. Hence, interest burden of the firm will increase if it issues more debt. This
in turn closely influences the working capital and thereby overall financial position of the
organization (Weber and Fried, 2011). Hence, company avoids issuing debt instruments because
this in turn will impose burden in front of it.
b. Sell their investment
Given financial statement presents that book value of investment is £45000. On the other
side, market value of investment is £30000 which shows that if business unit sells their
investment then it will suffer loss of £15000. This aspect clearly shows that by selling
investment, Magic Works would not be able to generate fund for the expansion purpose. Thus,
Magic Works should avoid such source while taking decision in relation to enhancing fund.
c. Company is allowed to make all sales on credit or not
By dividing net sales from trade receivables, it has been assessed that Magic Works will
receive money from debtors within the period of 24 days. Hence, by collecting money from
debtors within the less time frame company can meet its financial requirement to the significant
level (Koller, Goedhart and Wessels, 2010).
d. Issue more ordinary shares
From financial statement analysis, it has been assessed that MagicWorks need to place
emphasis on issuing more shares. On the basis of the cited case situation, business unit requires
£50m for the expansion purpose. In this, by issuing shares to the general public at large, the

company can generate enough amount of finance. Moreover, investors are always ready to invest
money in the venture or firm which is continuously growing and offers high return. It is the most
effectual sources of finance in which the company offers dividend to the shareholders when it
generates enough profit. Thus, by raising fund from shares MagicWorks can enhance share
capital as well as premium. Further, by generating finance through equity shares, the
organization can build suitable capital structure in line with the ideal ratio.
If Magic Works raise £50 million through the means of equity shares then ideal ratio
would be:
Calculation of debt-equity ratio
Particulars
Amoun
t (in £)
Debentures 50000
Shareholders’
equity 98000
Debt-equity
ratio .51
Hence, the above table shows that if business unit raises fund such as £50 million by
issuing ordinary shares, then it would be able to attain ideal ratio such as .5:1 (Barlow, Roehrich
and Wright, 2013).This in turn helps the company in building and maintaining highly effective
capital structure.
Recommendation: From overall evaluation, it is recommended to MagicWorks to
employ equity source for generating fund. This in turn enables the firm to reduce burden of debt
and interest. In this way, such source will aid the corporate in enhancing profit margin to the
significant level.
CONCLUSION
From the above report, it has been concluded that by employing technique of ratio
analysis, it provides high level of assistance in managing financial resources. Besides this, it can
be inferred that financial health and performance of ARM Holdings Plc was sound during the
period of 2014 and 2015. Further, it has been articulated from the report that strategic and policy
framework of business unit was sound during such period. It can be revealed from the report that
MagicWorks Ltd needs to place emphasis on undertaking equity source and trade receivables. By