RMT Construction Plc. Financial Condition Assessment

Running head: RESOURCES MANAGEMENT
Resources Management
Name of the Student:
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Author’s Note:

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Executive Summary
The aim of the assignment is to conduct a financial analysis on the RMT Construction Plc.
and asses the financial condition of the company with the help of ratio analysis. Ratio
analysis and financial assessment was done for the year 2017 and 2018 and the trend period
taken into consideration for the purpose of the analysis was 2015-18. Various aspects of
RMT Construction Plc. including profitability, liquidity and solvency ratio for the purpose of
analysis. Application of Capital Budgeting and various other investment appraisal tool for
RMT Construction Investment project was evaluated for the company. Risk and return of a
project plays a crucial role in the overall viability and sustainability of the project and the
same has been assessed by applying various investment assessment tools.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Financial Performance Evaluation.............................................................................................3
Ratio Analysis........................................................................................................................3
Trend Analysis.......................................................................................................................7
Capital Budgeting.......................................................................................................................7
Net Present Value...................................................................................................................9
Internal Rate of Return...........................................................................................................9
Payback Period.....................................................................................................................10
Accounting Rate of Return...................................................................................................10
Risk Analysis.......................................................................................................................11
Recommendation......................................................................................................................11
Conclusion................................................................................................................................12
Reference..................................................................................................................................13
Appendix..................................................................................................................................16

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Introduction
Financial Analysis of the RMT Construction Plc. was done with the help of ratio
analysis for the company for the period 2017 and 2018. Material Changes in the financial
statement of the company and the financial performance of the company in the trend period
were some of key aspect that are important for assessment of company. Ratio analysis is a
common analytical tool that is used for the purpose of the analysing and studying the past
trend or financial performance of the company (VOGEL 2016). Ratio analysis of the
company at various aspect including the profitability, liquidity and solvency were some of the
key role taken into account. Assessment of the various project that are available with the
company for the usage and application of various investment assessment tools like Net
Present Value, Internal Rate of Return, Payback Period and Accounting Rate of return.
Applying various investment tools would provide us the option and opportunity for selecting
the project that is financially viable. Selection of a viable investment project is a crucial
matter for the sustainability and growth of the company. Selection of the investment project
will be based on the current financial condition of the company and the performance of the
company. Various industry and business factors and outlooks are some of the crucial aspect
that will be taken into consideration while selecting the investment project.
Discussion
Financial Performance Evaluation
Ratio Analysis
Ratio analysis for Bitmap Construction Plc. was done for the year 2017 and 2018. The
quantitative analysis of the financial information presented by the company should be

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analysed for evaluation of various aspects of company operating condition and financial
condition of the company (ARSAD, SHAARI AND ISA 2017).
Ratio Analysis
Particulars 2018 2017
Gross Profit 1,575 505
Sales/Revenue 7,125 5,330
Gross Profit Margin 22% 9%
Operating Profit 1,143 125
Sales/Revenue 7,125 5,330
Operating Profit Ratio 16% 2%
Net Profit 1,046 60
Shareholder's Equity 1,407 744
Return on Capital Employed 74% 8%
Current Assets 2,209 1,879
Current Liabilities 1,909 1,607
Current Ratio 1.16 1.17
Cash 112 35
Short Term Investment 1,420 1,438
Current Liabilities 1,909 1,607
Quick Ratio/Acid Test Ratio 0.74 0.89
Total Debt 920 865
Total Shareholder's Equity 1,407 744
Gearing Ratio 40% 54%
Gross Profit Margin: The gross profit of a company shows the earnings available with the
company after paying off the cost of goods sold of the company. Ability of the company in
paying of the key expenses of the company indicating the operational performance of the
company can be seen by the gross profit earned by the company. (SHAH 2015). Gross profit
of the company has shown an increasing trend for the company in the trend period 2015-18.
RMT Construction Gross Profit was evaluated by dividing the gross profit with the total
sales. Gross profit was around 4.86% in the year 2015 which increased to 6.12% in 2016,
then the same moved to 9% in 2017 and 22% in the year 2018. Rising gross profit margin of

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the company could be attributed to rising revenue of the company in contrast to the cost of
sales for the company, which lead the company report higher gross margin thereby reflecting
operational efficiency (ZAINUDIN AND HASHIM 2016).
Operating Profit Margin: Operating profit ratio shows the ability of the company in
generating the profit after paying off with all the direct costs associated with the company.
Operating profit margin for the company was calculated after taking the operating income
earned divided by the total sales of the company (MURITALA 2018). RMT Construction
operating profit has shown a tremendous improvement in the trend period from a negative
trend to increasing positive trend for the company in the financial year 2015-18. Rise in
Operating profit Margin could be attributed to increasing operational efficiency of the
company and reducing expenses of the company in respect to the total sales or revenue of the
company. Operating expenses for the company was around -1.30% in the year 2015, 0.25%
in the year 2016, 2% in the year 2017 and a massive trend increase to about 16% in the year
2018 (GRECO, FIGUEIRA AND EHRGOTT 2016).
Return on Capital Employed: Return on capital employed by the company shows the return
generated by the company in the form of net profit on the total capital deployed by the
shareholders of the company. A key profitability measures indicating the efficiency of the
company in utilizing the key assets deployed by the shareholders of the company. ROCE is
used on a wide basis determining the financial performance and sustainability of the company
in terms of the growth and development of the company (LEE, LIN AND SHIN 2018).
Return on capital deployed was calculated after taking the net profit earned by the company
with respect to the total shareholder’s equity for the respective year. RMT Construction’s
Return on Capital Employed was around -8.42% in the year 2015, 1.17% in the year 2016,
8% in the year 2017 and increasing at a massive rate of about 74%. Substantial increase in the
return on capital employed of the company was due to the growth rate in the revenue and net

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profit of the company which was substantially higher than the previous years (THOMAS ET
AL. 2016).
Current Ratio: Current ratio for the company shows the ability of the company in paying off
with the current obligations of the company. Current ratio is a crucial ratio indicating whether
the company has a sufficient coverage of current assets in respect to the current liability of
the company. Calculation of the current ratio is done by taking the current assets of the
company by the current liabilities of the company. RMT Construction’s current ratio was
around 1.80 times in the year 2015, 1.13 times in the year 2016, 1.17 times in the year 2017
and 1.16 times in the year 2018. An optimal current ratio would be 2:1 for the company
indicating that the company has a sufficient amount of coverage of asset with respect to the
debt of the company. The current ratio has fallen for the company and the company may face
some financial risk in the future trend period. Operations of a company can be significantly
influenced if the company is not able to pay with the current obligation of the company
(MILLER-NOBLES, MATTISON AND MATSUMURA 2016).
Quick Ratio/Acid Test Ratio: Acid test ratio is a pure form of liquid ratio which takes only
key liquid assets of a company such as cash and cash equivalents, short term investments and
trade receivables. A key motto behind evaluating the ratio is to see whether the company is
able to quickly off with the current liability of the company without a substantial loss in the
value of the asset. Quick ratio or the Acid test ratio was evaluated by taking the Cash and
Cash Equivalents and Trade Receivables of the company with the current liability of the
company (Brigham et al. 2016). The quick ratio for the company has fallen consistently for
the company in the trend period 2015-18 indicating that the liquidity position of the company
may be worsening. RMT Construction’s quick ratio was around 1.1:1 times in the year 2015,
0.99:1 times in the year 2016, 0.89:1 in the year 2017 and 0.74:1 times in the year 2018.
RMT Construction Plc. should take a key focus on the improvement of the same so that the

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operations of the company does not get influenced from the same (SIMBOLON AND
SAMPURNO 2017).
Gearing Ratio: Gearing ratio shows the level and exposure of debt in the overall capital
structure of the company. Total level of debt in a business plays a crucial role and same
should be taken after analysing the factors and conditions that can significantly affect the
performance of the company. The gearing ratio was calculated after taking the total long-term
debt of the company divided by the shareholders equity. RMT Construction’s gearing ratio
was around 65% in the year 2015, 62% in the year 2016, 54% in the year 2017 and 40% in
the year 2018. The trend period has shown that RMT Construction Plc. is significantly
reducing the level of debt in the company, which may in turn reduce the financial risk
associated with the company.
Trend Analysis
The profitability of the company in the trend period of 2015-18 has shown a
consistent improvement where the year 2018 could be considered as a turning point and a
crucial year for the company. Revenue base for the company has increased consistently for
the company and the reduction of the costs associated with the same has lead the company
report higher and growth in profitability ratios. The liquidity of the company on the other
hand has decreased for the company in trend period for the company. Fall in liquidity can be
well attributed to the falling current asset in contrast to the current liability of the company
(ALPER ET AL. 2018). Leverage or Gearing ratio for the company has been fallen
constantly for the company implying the fall in the level of debt for the company.
Capital Budgeting
RMT Construction Plc. operating in the property investment company. In order to
achieve the growth objective of the company, they will be investing in significant investment

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property project so that the company is able to grow the profitability and market share of the
company. Analysis and evaluation of the property portfolio project was done for the RMT
Construction Plc. Company. Application of investment appraisal tools used by the company
for the purpose of evaluating the project was the Net Present Value, Internal Rate of Return,
Accounting Rate of Return and Payback Period of the company (ALMAZAN, CHEN AND
TITMAN 2017). Selection of the investment project would be based crucially on the project
that would provide higher profitability and early recovery of the initial invested capital.
Particulars Building A Payback Building B Payback
£m £m
Cash outflow: Year 0 (12) (12) (24) (24)
Cash inflows: Year 1 2 -10 8 -16
Year 2 3 -7 9 -7
Year 3 3 -4 7 0
Year 4 4 0 6
Year 5 5 4
Payback Period 4 Years 3 Years
Discounted Cash Flows Building A Building B
Cash outflow: Year 0 -12.00 -24.00
Cash inflows: Year 1 1.89 7.55
Year 2 2.67 8.01
Year 3 2.52 5.88
Year 4 3.17 4.75
Year 5 3.74 2.99
Net Present Value 1.98 5.18
Internal Rate of Return 4.81% 8.09%

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Net Present Value
Net present value for the project shows the profitability that will be generated by the
project after taking all the cash inflows and outflows of the project. Net present value is a key
investment appraisal tool applied for the analysis of the viability of the project. A key
advantage for the NPV method is that it captures all the conventional and non-conventional
cash flows into account for the analysis of the project (ALMAZAN, CHEN AND TITMAN
2017). The outcome of the project in numerical terms rather than percentage terms which is
easy to read and interpret is lacking in the investment appraisal tool. A discount rate of
around 6% was taken into consideration for the analysis of the company. The Net Present
Value of the Building A was £1.98 and for Building B was around £5.18. Profitability and
return generated by the Building B is considered to be more favourable as the acceptance of
Project B will create a higher value for the shareholders. The criteria for the investment
would also be met as the total amount available for investment is £24 million and the amount
to be invested in Building B itself is around £24 million. Thus, RMT Construction Plc. should
accept the Building B as the optimum project for investment (BURNS AND WALKER
2015).
Internal Rate of Return
Internal Rate of Return shows the return of the project in terms of the percentage
terms. The internal rate of return is the investment metric that makes the net present value of
all cash flows equal to zero. Return generated by Building A was around 4.81% while the
IRR of Building B was 8.09% (MALENKO 2018). The return will help the company in terms
of comparing the investment return between other projects so that the investment managers
are able to compare various investment projects.

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Payback Period
The payback period shows the recovery of the initial invested capital in a project in
the due course of time. The payback period is a key investment appraisal tool that will help
the company in getting the time taken by project for recovery of investment. The payback
period for both the building were analysed to see which of the investment project could lead
to early recovery of cash flows. Timing of cash flows is the key thing that is measured in the
investment appraisal form, which is a key benefit of the tool (DE ANDRÉS, DE FUENTE
AND SAN MARTÍN 2015). However, the investment appraisal tool does not consider the
effect of the time value of money, which would have given a clear picture the actual cash
flows to be received, based on a discounted basis. Payback period for the Building A was 4
Years of time and for Building B was 3 Years. This shows that Building B should be given
more emphasis considering the timing of the cash flows in the project. However overall
profitability and wealth creation are some of the important aspects that too needs to be taken
care.
Accounting Rate of Return
Accunting rate of return shows the average profit earned by the company with respect
to the average initial investment done by the company. The accounting rate of return takes
various aspects and factors into consideration like the depreciation, salvage value and the
average profit earned by the project in the due course of the project life. A key limitation of
the ARR is that it does not consider the time value of money into consideration for the
purpose of analysis and evaluation of the project. The accounting rate for the project were
determined by evaluating the average profit or the cash flow divided by the initial investment
of the company (ZHANG, HUANG AND ZHANG 2015).
Accounting Rate of
Return Building A Building B

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Initial Investment £12.00 £24.00
Average Profit £3.40 £6.80
ARR 28.33% 28.33%
The accounting rate of return for the both the Building A and Building B was done by
taking the initial investment of £12mn and £14mn respectively. The accounting rate of return
for both the project was around 28.33% this shows that according to the accounting rate of
return the management should be indifferent between selecting the two projects (Johnson and
Pfeiffer 2016).
Risk Analysis
Risk Analysis for the investment project will be conducted thereby analysing the
various factors and condition that can significantly affect the performance of the company.
Risk assessment in terms of the timing of the cash flow and the credit risk of the project.
Analysis of the timing of the various cash flow is a crucial aspect that was analysed with the
help of the payback period of the project (Burns and Walker 2015).
Recommendation
The acceptance or the rejection of the project will be significantly dependent on the
profitability and return created by the project. Risk and return are some of the crucial aspect
that can be taken into account for the selection of the project. The inclusion of the Building B
in the portfolio of the company can be the best available opportunity that will help them
create wealth for the stakeholders of the company (Regan et al. 2015). The various factors
like the risk and return associated with the project are some of the crucial aspects that was
taken into consideration while analysing the projects. The financial position and the
performance of the company has been stable and the profitability of the company has been
growing at a rapid stage in the trend period taken into consideration for the company. The

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loan consideration of £24 million will be fully utilized with the investment in Building B
allowing the company to fully utilize the available investment amount into utilisation. Project
B has been considered viable in every aspect and while analysing both the project from the
various investment assessment tool. The profitability, the timing if the cash flow of the
project and the return were all considered to be viable for the project.
Conclusion
The financial analysis of the RMT Construction Plc. was taken into consideration for
the company thereby applying the ratio analysis and the financial assessment of the company
was done in the terms of profitability, liquidity and gearing ratio for the company. The
profitability of the company has grown consistently for the company in the trend period
showing operational efficiency and effective utilisation of the assets of the company. The
liquidity of the company in terms of meeting the current obligation of the company has
declined for the company where the current assets of the company in contrast to the current
liability of the company has fallen for the company. The assessment of the investment
project was solely based on the common investment appraisal tools and relevant output such
as the profitability and the return generated by the project was taken into consideration for the
analysis and selection of the project. Risk and return of a project plays a crucial role and the
inclusion of the same in the financial analysis of the project are some of the crucial aspect
considered.

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Choices: A Top‐Down Theory of Capital Budgeting. The Journal of Finance, 72(5), pp.2179-
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ALPER, K., BINICI, M., DEMIRALP, S., KARA, H. AND ÖZLÜ, P., 2018. Reserve
requirements, liquidity risk, and bank lending behavior. Journal of Money, Credit and
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Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.
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Shipping Companies Using Entropy and Grey Relation Analysis. In Multi-Criteria Decision
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Appendix
1) Income Statement
Particulars 31.12.2018 31.12.2017
£m £m
Revenue 7,125 5,330
Cost of sales -5,550 -4,825
Gross profit 1,575 505
Net operating expenses (432) (380)
Profit (loss) from operations 1,143 125
Investment income 15 8
Finance costs (90) (57)
Profit (loss) before taxation 1,068 76
Taxation (22) (16)
Profit (loss) for the year 1,046 60

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2) Balance Sheet
31.12.2017
£m
Non-current assets
Intangible assets 120
Property, plant and equipment 1,185
Investment properties 32
1,337
Current assets
Inventories 406
Trade and other receivables 1,438
Cash and cash equivalents 35
1,879
Total assets 3,216
Current liabilities
Trade and other payables 1,545
Short-term borrowings 62
1,607
Non-current liabilities
Long-term borrowings 865
Total liabilities 2,472
Net assets 744
Equity
Called-up share capital 550
Share premium account 150
Retained profits and other reserves _44
Total equity 7441,407
1,909
920
2,829
1,407
550
150
707
175
202
2,027
677
1,420
112
2,209
4,236
1,734
31.12.2018
£m
240
1,585
Table 2 Extract from Balance Sheet

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3) Ratio Analysis
Particulars 2018 2017
Gross Profit 1,575 505
Sales/Revenue 7,125 5,330
Workings =B3/B4 =C3/C4
Gross Profit Margin 22% 9%
Operating Profit 1,143 125
Sales/Revenue 7,125 5,330
Workings =B8/B9 =C8/C9
Operating Profit Ratio 16% 2%
Net Profit 1,046 60
Shareholder's Equity 1,407 744
Workings =B13/B14 =C13/C14
Return on Capital Employed 74% 8%
Current Assets 2,209 1,879
Current Liabilities 1,909 1,607
Workings =B18/B19 =C18/C19
Current Ratio 1.16 1.17
Cash 112 35
Short Term Investment 1,420 1,438
Current Liabilities 1,909 1,607
Workings =B24/B25 =C24/C25
Quick Ratio/Acid Test Ratio 0.74 0.89
Total Debt 920 865
Total Shareholder's Equity 1,407 744
Workings =B29/(B29+B30) =C29/(C29+C30)
Gearing Ratio 40% 54%
Ratio Analysis
Gross Profit Margin: Gross Profit/Sales*100
Operating Profit Ratio: Operating Profit/Sales *100
Return on Capital Employed: Net Profit/Shareholders Equity
Current Ratio: Current Assets/Current Liabilities
Quick Ratio: (Cash + Short Term Investment)/Current Liabilities.
Gearing Ratio: Total Long Term Debt/ Shareholder’s Equity.

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4) Capital Budgeting
Net Present Value: Cash Flows/(1+i)^t- Initial Investment.
Accounting Rate of
Return Building A Building
B
Initial Investment £12.00 £24.00
Average Profit £3.40 £6.80
ARR 28.33% 28.33%
Discounted Cash
Flows
Building A Building B
Cash outflow: Year 0 -£12.00 -£24.00
Cash inflows: Year 1 £1.89 £7.55
Year 2 £2.67 £8.01
Year 3 £2.52 £5.88
Year 4 £3.17 £4.75
Year 5 £3.74 £2.99
Net Present Value £1.98 £5.18
Net Present Value =SUM(B11:B16) =SUM(C11:C16)
Internal Rate of
Return 4.81% 8.09%
Internal Rate of Return =IRR(B11:B16,3) =IRR(C11:C16,3)
Particulars Building A Payback Building B Payback
£m £m
Cash outflow: Year 0 -£12.00 -£12.00 -£24.00 -£24.00
Cash inflows: Year 1 £2.00 -£10.00 £8.00 -£16.00
Year 2 £3.00 -£7.00 £9.00 -£7.00
Year 3 £3.00 -£4.00 £7.00 £0.00
Year 4 £4.00 £0.00 £6.00
Year 5 £5.00 £4.00
Payback Period 4 Years 3 Years

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