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Strategic Analysis Project Report: Strategic Analysis Contents

   

Added on  2020-05-16

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Running Head: Strategic Analysis 1Project Report: Strategic Analysis

Strategic Analysis 2ContentsIntroduction......................................................................................................................3Critical review of financial analysis’s traditional methods...............................................4Horizontal analysis........................................................................................................4Vertical analysis............................................................................................................6Traditional ratio analysis...............................................................................................8Contemporary methods of financial analysis.................................................................10Capital asset pricing model.........................................................................................11Dividend growth model..............................................................................................12Effective market hypothesis.......................................................................................13Conclusion.......................................................................................................................13References......................................................................................................................15Appendix.........................................................................................................................17

Strategic Analysis 3Introduction:This report has been described about the critically analyse of the financial and operating position of corporations which is shepherding by the different traditional and contemporary methods. Financial statement is apprehended four vital business actions: Forecasting, Capitalising, funding and operation. To make Effective economic decisions, financial statement analysis is the effective process by reviewing and analysing financial statements. Financial statement consists of thestatement of financial performance, statement of financial position,statement of cash flows, and statement of changes in equity. Financial statement analysis has described a technique or way which involved identifying the risks, evaluating the performance, financial condition, and forthcoming predictions of the corporation. Actually, this analysis has been used by the multiplicity of interested party, as per investors of all categories, the supervision authority, and mainly the management of the company. Usually, to analyse the financial statements, most popular two types of method has been used. One is called Traditional Methods and another is called Contemporary methods. The Most common process for financial statements analysis is been the practise the numerous ofratios. Mainly, the Ratios are using to compute the comparative dimensions of the individual amount in kin to a different. Principally, Ratios are easily compared to the same ratio which is calculated for the prior period, otherwise established of the average for the industry. It helps to measure that company is carrying out their activities according the expectations or not. The ratios change of the figure can take the attention of the commentator. Other method isto calculation is horizontal and vertical analysis1.Horizontal analysisis judge by the financial information which is presented sequence of reporting periods. Vertical analysishas been done of the financial statement analysis followed by the comparative.It describes like every item of the financial statement is listed as a percentage of another item. In the contemporary methods, CAPM is very popular for analysis the risk effectively. DGM shows that how to grow the company dividends2. It grows the 1Charles H Gibson.Financial reporting and analysis. South-Western Cengage Learning, 2011.2TonyDavies, and CrawfordIan.Business accounting and finance. Pearson, 2011.

Strategic Analysis 4perpetuity basis or different rates. And the last but not the list is EMH which idea is partly established by the Eugene Fama in the 1960s. Critical review of financial analysis’s traditional methods:Financial analysis could be done through traditional as well as contemporary methods. Following study explains about the traditional method of the company and its critical evaluation: Horizontal analysis: Horizontal analysis or trend analysis is a financial tool which is used to evaluate afinancial statement data in excess of certain period of time. The purpose of the calculation isto evaluate the increase or the decrease and mainly used in intra company comparison. Thechanges of the amount are easily identified and it is the most advantage in this financialtools. . But, sometimes difficulties create to do the calculations3. As an example, there is novalue an asset item has in the previous year but value is created in the next year, so theproblem is percentage don’t calculated. On the other hand, the negative figures give theimpression in the previous years and a positive figure exists the following year, but thepercentage change cannot figure. The following is the formula of horizontal analysis:4Figure 1: Horizontal Analysis FormulaAccording to the Charles5, horizontal analysis is one of the best financial evaluation method because it makes it easy for the company to evaluate the financial data of the 3Charles H Gibson.Financial reporting and analysis. South-Western Cengage Learning, 2011.4David Alexander, Britton Anne, and Jorissen Ann.International financial reporting and analysis. Cengage learning eMeA, 2007.

Strategic Analysis 5company and evaluate it with the past year data of the company. Further, Barry6 has added into his study that performance of the company could be easily evaluated through the horizontal analysis. In addition, Charles7 has added that horizontal analysis is one of the most used tools when the change into the financial performance of an organization is to be done. Further, Joshua8 has described that horizontal analysis assist the company to make strategic financial planning. In addition, shortcomings of the horizontal analysis have been studied. Husayn9 has described that horizontal analysis could not be used to evaluate and compare the performance of the company with competitive company. Further, it has been explained by David10 that it is tough to choose the base year for the horizontal analysis study. More, it hasbeen said that the various assumptions are required to be made for this study. The study of horizontal analysis has been done on Tate and Lyle & Wolseley and it has been found that the financial performance of Tate and Lyle plc has been worst in 2016 in comparison of last 5 years. Currently, the gross profit of the company has been lowered by 5.25% and the net profit of the company has been lowered by 47.25%. Company is required to focus on this point. 5Tony Davies, and Crawford Ian.Business accounting and finance. Pearson, 2011.6Barry Elliott, and Elliott Jamie.Financial accounting and reporting. Pearson Education, 2007.7Charles Gibson.Financial reporting and analysis. Nelson Education, 2012.8Joshua Margolis, Anger Elfenbein Hillary, and Walsh James P.. "Does it pay to be good... and does it matter? A meta-analysis of the relationship between corporate social and financialperformance." (2009).9Husayn Shahrur. "Industry structure and horizontal takeovers: Analysis of wealth effects on rivals, suppliers, and corporate customers."Journal of Financial Economics76.1 (2005): 61-98.10David Alexander, Britton Anne, and Jorissen Ann.International financial reporting and analysis. Cengage learning eMeA, 2007.

Strategic Analysis 6On the other hand, the study of horizontal analysis has been done on Wolseley and ithas been found that the financial performance of Wolseley plc has been better in 2016 in comparison of last 5 years. Currently, the gross profit of the company has been enhanced by10.33% and the net profit of the company has been enhanced by 1056.14%. Company is required to manage the same level. Vertical analysis: Vertical analysis is a financial tool which is used to evaluate a financial statementdata in excess of certain period of time. The purpose of the calculation is to evaluate thecompetition level of the company in the industry and the changes into the financialperformance of the company from last year11. The changes of the amount are easilyidentified and it is the most advantage in this financial tools. . But, sometimes difficultiescreate to do the calculations. As an example, there is an expense which has not beenoccurred in a company but has taken place into other company, so the problem occurs whileevaluating the data. The following is the formula of vertical analysis:12Figure 2: Formula of vertical analysis According to the Mario13, vertical analysis is one of the most used financial evaluation method by professionals because it makes it easy for the company to evaluate the financial data of the company and evaluate it with the competitive company’s data of 11Charles H Gibson.Financial reporting and analysis. South-Western Cengage Learning, 2011.12Robert M Grant.Contemporary strategy analysis: Text and cases edition. John Wiley & Sons, 2016.13Mario C Deng. "Mechanical circulatory support device database of the International Society for Heart and Lung Transplantation: third annual report—2005."The Journal of heart and lung transplantation24.9 (2005): 1182-1187.

Strategic Analysis 7the company. Further, Tobias14 has added into his study that performance of the company and its financial performance in the industry could be easily evaluated through the vertical analysis. In addition, vertical analysis is one of the most used tools when the change into thefinancial performance of an organization is to be done in context with the competitive companies. Further, it has described that vertical analysis assist the company to make strategic financial planning15. In addition, shortcomings of the vertical analysis have been studied. It has described that vertical analysis could not be used to evaluate and compare the performance of the company with past year data16. Further, it has been explained that it is tough to choose the competition company as the operations are quite different of each company. More, it has been said that the various assumptions are required to be made for this study17. The study of vertical analysis has been done on Tate and Lyle & Wolseley and it has been found that the financial performance, income and expenses have not been managed by the company in a better way. The gross profit and net profit of the company has been lesser in comparison with last year’s data. Further, the balance sheet of the company explains about the negative changes into the current assets, total debts etc of the company. On the other hand, the study of vertical analysis has been done on Wolseley and it has been found that the financial performance, income and expenses have been managed by the company in a better way. The gross profit and net profit of the company has been 14Tobias Adrian, and Shin Hyun Song. "Liquidity and financial cycles." (2008).15Barry Elliott, and Elliott Jamie.Financial accounting and reporting. Pearson Education, 2007.16Shiguo Wang. "A comprehensive survey of data mining-based accounting-fraud detection research."Intelligent Computation Technology and Automation (ICICTA), 2010 InternationalConference on. Vol. 1. IEEE, 2010.17Mario C Deng. "Mechanical circulatory support device database of the International Society for Heart and Lung Transplantation: third annual report—2005."The Journal of heart and lung transplantation24.9 (2005): 1182-1187.

Strategic Analysis 8better in last year’s data. Further, the balance sheet of the company explains about the positive changes into the total assets, liabilities and equity of the company. Traditional ratio analysis:Traditional ratio analysis is a financial tool which is used to evaluate a financialstatement data in terms of other financial figures of the company. The purpose of thecalculation is to evaluate the competition, liquidity, stability, profitability etc level of thecompany in the industry and the changes into the financial performance of the companyfrom last year. The changes of the amount could be easily identified through this tool. But,sometimes difficulties create to do the calculations. The following is the formula of few partsof traditional ratio analysis:ProfitabilityNet marginNet profit/revenuesReturn on equityNet profit/Equity18LiquidityCurrent ratioCurrent assets/current liabilitiesQuick RatioCurrent assets-Inventory/current liabilitiesEfficiencyReceivables collection periodReceivables/ Total sales*365Payables collection periodPayables/ Cost of sales*365Asset turnover ratioTotal sales/ Total assetsSolvencyDebt to Equity RatioDebt/ EquityDebt to assetsDebt/ Total assets 18Tobias Adrian, and Shin Hyun Song. "Liquidity and financial cycles." (2008).

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