Financial Analysis and Economic Indicators

This assignment delves into financial analysis techniques and their application in understanding economic trends. It investigates key economic indicators like GDP growth and Purchasing Managers' Index (PMI) for major economies like China, the USA, and the UK. The analysis also probes the connection between corporate financial decisions, such as investment strategies and capital budgeting methods (e.g., Accounting Rate of Return, Net Present Value), and broader macroeconomic performance.

MANAGING FINANCIAL RESOURCES AND
DECISION

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
INVESTMENT APPRAISAL 1......................................................................................................1
1.1 & 2.1 Identifying different sources of finance and analysis of their cost.........................1
1.2 Implications of different sources of finance.....................................................................2
INVESTMENT APPRAISAL 2......................................................................................................3
2.2 & 2.3 Importance of financial planning and information needs of different decision
makers.....................................................................................................................................3
1.3 Appropriateness of source of finance...............................................................................4
2.4 Impact of finance on financial statements........................................................................6
4.1 & 4.2 Main financial statements and their appropriateness for different business
organizations...........................................................................................................................6
4.3 Calculation of ratios of Apple Ltd....................................................................................7
3.1 & 3.2 Analysis of budget and calculation of unit cost.....................................................9
3.3 Project evaluation techniques.........................................................................................10
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INDEX OF TABLES
Table 1: Comparison of economic performance of world leading economies................................4
Table 2: Ratio analysis of Apple Ltd...............................................................................................7
Table 3: Cash budget.......................................................................................................................9
Table 4: Calculation of per unit cost..............................................................................................10
Table 5: Calculation of ARR.........................................................................................................10
Table 6: Calculation of NPV.........................................................................................................11
Table 7: Calculation of payback period.........................................................................................12
Table 8: Calculation of IRR...........................................................................................................12
ILLUSTRATION INDEX
Illustration 1: China, USA and UK PMI.........................................................................................5
Illustration 2: China, USA and UK GDP.........................................................................................5

INTRODUCTION
This report is prepared to create a broad understanding about the source of finance among
readers. In relation to this, implications of different sources of finance are also described in
detail. In order to comprehend the suitability of source of finance, economic indicators are also
used and their data is interpreted. Apart from this, ratio analysis is also done and their results are
interpreted to understand the economic condition of Apple Ltd. At the end of report, project
evaluation techniques are applied and viability of project is determined on the behalf of results of
various techniques of project evaluation.
INVESTMENT APPRAISAL 1
1.1 & 2.1 Identifying different sources of finance and analysis of their cost
In today’s era, raising finance is a basic problem for every company. Along with this,
selection of specific source of finance is a complicated task. Mainly, all sources of finance falls
in two categories namely equity and debt. This source of finance and their sub categories are
described as below:
Equity:
1. IPO or FPO- Firm can raise the capital by issuing shares through IPO or FPO. It is a
common source of finance for large sized firms. However, this source of finance has
some merits and demerits. Therefore, firms must cautiously use this source of finance
(Du and Girma, 2012).
2. Private equity- In order to raise the capital through IPO, firms needs to fulfil all
eligibility criteria of listing stock market indices. Firm uses this source of finance when
their fundamentals are strong but they are not eligible to raise the capital. Under this
mode of finance, private equity firm provides capital to the firm by purchasing stock in
the organization that approaches PE firm for equity.
Debt:
1. Long term and short term debt- Under this mode of finance, firms take a loan for long
and short term from banks and NBFC'S. In return, firm has to give debt at fixed or
floating interest rate.
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2. Consortium finance – It is a new mode of finance under which a cartel is formed by the
banks and they collectively provide debt to the firm (Collier, Hoeffler, 2004). One of
these banks acts as a lead bank and coordinates all activities regarding allotment and
monitoring of loan.
Cost of finance:
1. Cost of equity- It refers to the cost that firm has to bear in order to raise the capital from
equity. Firm pays dividend as a percentage of net profit to its shareholders either half
yearly or annually. Therefore, it is termed as the cost of equity. Cost of equity is also
calculated by using CAPM model. Under this model, minimum return that an investor
must earn on its investment is calculated. It is also termed as the cost of equity.
2. Cost of debt- Firm pays interest to the banks, NBFC'S and creditors for the loan that these
entities give to the firm for specific duration. Interest may be given at a fixed cost of
floating interest rate. Sometimes, problems prompted due to change in domestic and
international interest rate structure. In order to protect itself from negative change in the
interest rates, firms (large size) take their positions in forward and future contracts
(Auerbach and Hassett, 2003). But sometimes, perception proves to be wrong and firm
faces a heavy loss in its business. Therefore, it is recommended that firms must raise loan
at floating interest rate after considering their financial conditions.
1.2 Implications of different sources of finance
Basis Equity Debt
Downturn in
economy
In any case if firm raises capital from
equity and if economic downturn
happens then it is not compelled to
pay dividend to its shareholders.
Hence, burden of cost of finance is
not created on the firm in case of
equity (Carlin and Mayer, 2003).
In case of downturn in economy,
central banks many times change their
interest rates and this cause change in
the bank’s interest rate. In case of
floating interest rate, such changes
sometimes escalate the cost of finance
for the firm.
Strict payment In case of equity as mentioned above,
payment of dividend depends on the
But in case of debt, firm has to pay
interest in every condition irrespective
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firm’s discretion. of its profitability.
Dilution of
control
Issue of shares dilute the control of
existing shareholders and their
decision making power gets reduced.
In case of debt, this problem do not
come in existence and decision
making power completely lie in the
hands of top management.
Debt equity
proportion
Firms must review their current
capital structure before taking finance
related decisions. If proportion of
equity in the firm capital structure is
already high then further issue of
shares can be said as wise decision
because issue of shares reduce the
control of existing shareholders in the
firm.
If proportion of debt is already high
and economic conditions are also not
favourable then further taking debt
will certainly make debt problem
cumbersome in nature (Tarca, Morris.
and Moy, 2013). Hence, by
considering the current debt, equity
mix firm must make its finance related
decisions.
INVESTMENT APPRAISAL 2
2.2 & 2.3 Importance of financial planning and information needs of different decision makers
Financial planning plays an important role in the utilisation of funds. Money is a resource
for the firm which needs allocation and utilization in a prudent manner. Under financial
planning, firm needs to prepare plan under which it will determine the sources from which funds
can be raised and channels will also be determined where it needs to be utilised. Large sized
firms purchase huge amount of metals for the production of goods (Galia and Legros, 2004).
Fluctuation in their prices at international level affects the prices of commodity in domestic
market. Therefore, these firms create hedging position by buying contracts in future and options
of commodity. In financial planning, firms also prepare a plan about the amount that will be
needed for the investment in these derivative contracts. Every year, these firms allocate huge
amount of fund in this regard. Similarly, firms make allocation of fund in various activities of an
organization (Auerbach and Hassett, 2003). Mostly firms on the basis of their priority determine
the amount for each individual activity and also plan a way in which these allocated funds will
be utilised for an individual activity.
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Information needs of different decision makers
1. Managers- Managers need various kinds of financial statements like balance sheet, P&L
and cash flow statement in order to take financial as well as strategic decisions (Carlin
and Mayer, 2003). Review of these statements attracts the attention of firm towards
current problems and issues that may create hindrances in the growth of organization in
the upcoming time period.
2. Employees- Employees are an important resource of firm and they are interested in
knowing about the firm’s condition especially when it is severely sick. Many times, due
to consistent loss and failure of measures, organization compelled to cut its cost in order
to extend its survival period (Tarca, Morris and Moy, 2013). Under this policy, firm
sometimes do not pay salary to its employees. By reviewing financial statements,
employees can determine and predict the management action regarding their salary.
3. Creditors- Creditors are always interested in getting information about the firm’s
financial condition because on the basis of these statements, suppliers determine the
firm’s capability to pay amount for which firm apply before supplier. In this regard, firm
conducts ratio analysis and on the basis of results, they take debt related decisions.
1.3 Appropriateness of source of finance
Every source of finance has some pros and cons and selection of any specific source of
finance or multiple source of finance depends on the firm current debt equity mix, current debt
burden, finance cost and prediction about movement in the domestic and international economy.
In order to access the economic environment at domestic and global level, firm can use following
economic information:
Table 1: Comparison of economic performance of world leading economies
China USA UK
PMI 47 53 51
GDP 7 3.7 0.7
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China
USA
UK
44 45 46 47 48 49 50 51 52 53
PMI
Illustration 1: China, USA and UK PMI
China USA UK
0
1
2
3
4
5
6
7
GDP
Illustration 2: China, USA and UK GDP
From the above report, it can be seen that PMI of China is below 50 and this reflects that
manufacturing activity in China contracts in comparison to previous quarter whereas, in USA
and UK, situation is quite good. In front of GDP, China performs well and USA also has high
growth in its GDP from 0.6 to 3.7. But GDP in UK is very low (UK GDP growth rate, 2015).
Further, negative change in China’s economy may create a lot of problems in the international
market for other countries. Consequently, firm’s profitability may erode if China and UK
economic conditions become worse in the upcoming quarters.
1. Equity- Suppose, firm plans to bring its IPO in UK and economic conditions become
worse due to weakness in Eurozone and China fundamentals (low PMI and estimation of
fall in GDP by credit rating agencies) then in such kind of case, it is possible that firm’s
IPO would remain unsubscribe or after IPO, existing shareholders sell their stake in
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company (Galia and Legros, 2004). If such thing happens then all efforts will get waste in
terms of time and money. This mode of finance is appropriate only when there is stability
in the domestic and international economy. Therefore, firm needs to identify a perfect
time for bringing its IPO in the primary market.
2. Debt- It is a source of finance that is commonly used by the firms irrespective of their
size and business. In every company’s balance sheet, this name can be seen even if it
earns good amount of profit in its business consistently. This source of finance is readily
available but sometimes, it creates a lot of problems for company specially when debt is
taken at floating interest rate and economic condition of country is not in favour of the
firm’s profitability. So, this source of finance is appropriate for everyone but it needs to
be taken from financial institutes after considering the firm’s condition and
macroeconomic data of country.
2.4 Impact of finance on financial statements
Finance to a large extent brings changes in the financial statements. When any firm takes
loan or raises capital through IPO then it has to pay return on it. These two variables bring
change in the financial statements. When firm takes loan, value of creditors increased in the
balance sheet and amount of interest that is paid on loan is mentioned in the debit side of P&L
account (Pacione, 2001). As a result, firm’s net profit gets reduced. If firm issues equity shares
through FPO or IPO then amount of shareholder’s equity gets increased and dividend paid on it
is shown in the debit side of P&L account.
4.1 & 4.2 Main financial statements and their appropriateness for different business
organizations
Following are the major financial statements that firms use for taking financial decisions:
1. P&L account- It is a financial statement that indicates the income and expenses which a
firm earns and incurred during entire financial year. Mostly expenses cover a specific
percentage of revenue in P&L account (Mitchell and Utkus, 2004). But sometimes, this
percentage gets enhanced. By taking a look at these expenses, management easily
identified expenses on which it makes extravagance. After identification of increase in
expenses, management takes an action to curb the traction in specific expenses for the
next financial year.
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2. Balance sheet – It is a statement that indicates the financial position of firm at the end of
financial year. By reviewing the balance sheet, firm gets information about the loan that it
takes and gives to the firm (Oostenbrink, Koopmanschap and Rutten, 2002). By applying
the ratio analysis, firms analyse their business from various angels and takes financial
decisions to improve their condition in the upcoming financial year.
3. Cash flow statements- It is a statement that indicates firm’s operations related to
operating, investing and financing activity (Pierce and O'Dea, 2003). This statement
reflects the firm’s cash and cash equivalents at the beginning and end of year. In other
words, it can also be said that cash flow statement indicates the steps that firm takes to
improve its business performance in the entire year.
Appropriateness for different organization
1. Sole trader – Normally, business of sole trader is small in size and due to this reason, he
is always keep an eye on the income and expenses amount that is revealed in the P&L
account (Edmunds and Morris, 2000). Therefore, sole trader gives priority to P&L
account in comparison to the balance sheet and cash flow statement.
2. Partnership- In partnership, business partners share profit and loss in the agreed
proportion. Hence, they give importance to the balance sheet in comparison to P&L
account and cash flow statement.
3. Public company- It is large in size and they give importance to the balance sheet, P&L
statement and cash flow statement (Mitton, 2002). Through analysis of these statements,
management measures the performance from various angels.
4.3 Calculation of ratios of Apple Ltd.
Table 2: Ratio analysis of Apple Ltd
2012 2013 2014
Current assets 57653 73286 68531
Current liabilities 38542 43658 63448
Current ratio 1.50 1.68 1.08
Net income 41733 37037 39510
Shareholder equity 118210 123549 111547
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ROE 0.35 0.29 0.35
Debt 57854 83451 120292
Equity 118210 123549 111547
Debt equity ratio 0.48 0.67 1.07
Revenue 156508 170910 182795
Average inventory 783 1277 1937
Inventory turnover
ratio
199.8 133.8 94.37
Gross profit 68662 64304 70537
Net sales 156508 170910 182795
Gross margin ratio 43.87 37.62 38.58
Net profit 41733 37037 39510
Net sales 156508 170910 182795
Net profit ratio 26.67 21.67 21.61
Interpretation
1. Current ratio- Current ratio indicates the firm’s capability to pay its current liabilities by
using the available amount of current assets. In all three consecutive years, firm’s current
ratio was above one and this indicates that firm has sufficient amount of current assets
and it can easily pay its current liability on time (Current ratio, 2013). However, in FY
2014, this ratio has declined to some extent to 1.08 from previous figure that was 1.68.
But even though, it is not a matter of concern.
2. ROE- ROE is also known as return on equity and this ratio indicates the return that firm
gives to its shareholders on the investment that they made in the firm’s equity. ROE is
steadily revolving in a range of 0.29 to 0.35 and it reflects that there is stability in return
that organization gives to its shareholders.
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3. Debt equity ratio- This ratio reveals the capital structure of firm and also indicates the
proportion of debt to equity in the current capital structure (Debt to equity ratio, 2015). In
FY 2012 and 2013, this ratio number was quite impressive and proportion of debt relative
to equity was low. But in FY 2014, seen had changed and debt value to some extent
exceeded the equity value. Consistent dependency of Apple on debt has increased and
ratio more than one in FY 2014 to some extent gives danger signal for Apple in FY 2015.
4. Gross margin ratio- This ratio reflects the firm’s ability to control its direct expenses.
Gross margin ratio of firm consistently increased for two years and in FY 2014, slight
traction in this ratio is observed. Further, unhealthy global economic condition can
deteriorate the firm’s profitability and taking a loan in upcoming years especially at
floating interest rate may lead to make firm’s financial fundamentals worse.
5. Net profit ratio- Net profit ratio of firm falls consistently over the mentioned years due to
weak global demand and escalation in the finance cost. Apart from this, increase in
indirect expenses or lack of control on same is also the basic reason that is responsible for
sharp respite in firm’s net profit from FY 2012 to 2014.
3.1 & 3.2 Analysis of budget and calculation of unit cost
Table 3: Cash budget
Jan Feb March April May
Opening balance 10600 8800 9900 17600 22100
Sales 17000 22000 26000 26000 23000
Debtors 9500 12000 14000 15200 11000
Cash inflow A 37100 42800 49900 58800 56100
Creditors 9900 11500 12000 14000 10000
Raw material 8500 10000 9500 10700 8000
Other production
expenses
9900 11400 10800 12000 9000
Cash outflow B 28300 32900 32300 36700 27000
Net cash available (A –
B)
8800 9900 17600 22100 29100
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Interpretation
From trends, we can see that from month of January to March, sales have increased and
in the month of April, sales remain unchanged. During this period of time, debtors and creditors
have been increased consistently (Einsele, 2000). On the basis of stability in sales, firm make
anticipation that in upcoming month, sales may get declined. Therefore, it reduces both; its
debtors and creditors and their perception about future scenario proves to be correct.
Table 4: Calculation of per unit cost
Transportation cost 40000
Raw material cost 20000
Labour cost 260000
Total cost 320000
Unit produced 15000
Per unit value 21.3
Per unit cost= (Transportation cost + raw material cost+ labour cost) / number of units produced
(Brealey, 2012)
3.3 Project evaluation techniques
Table 5: Calculation of ARR
Project A Project B
Initial
investment 569510 783750
1 200000 200000
2 160000 333000
3 140000 378000
4 100000 220000
5 100000 150000
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6 60000 100000
Total return 760000 1381000
Average return 126666.67 230166.67
ARR 22.24 29.37
Interpretation
ARR indicates the average return that firm earns on the investment made by it on the
specific project (Accounting rate of return method, 2015). ARR of project B is greater than
project A and due to this reason, former project is considered to be more viable then the later
project.
NPV (Net present value) method
Table 6: Calculation of NPV
Project A Project B
Initial investment 569510
PV @
11% Present value 783750
PV @
11%
Present
value
1 200000 0.901 180200 200000 0.901 180200
2 160000 0.812 129920 333000 0.812 270396
3 140000 0.731 102340 378000 0.731 276318
4 100000 0.659 65900 220000 0.659 144980
5 100000 0.593 59300 150000 0.593 88950
6 60000 0.535 35580 100000 0.535 53500
Total cash inflow 573240 1014344
569510 783750
NPV 3730 230594
Interpretation
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NPV refers to the value of project that remains after deducting initial investment amount
form the present value of future cash inflows (Net present value, 2013). NPV of both projects is
positive and project B is having NPV higher than project A. Therefore, project B is considered to
be more viable than project A.
Payback period method
Table 7: Calculation of payback period
Project A Project B
Initial investment -569510 -783750
1 200000 -369510 200000 -583750
2 160000 -209510 333000 -250750
3 140000 -69510 378000 127250
4 100000 30490 220000 347250
5 100000 130490 150000 497250
6 60000 190490 100000 597250
429510 450750
Payback period 3.06 1.35
Interpretation
This method indicates the time period within which project can cover its investment
amount. Payback period of project A is three year six month whereas same of project B is one
year and three months. Therefore, project A is more viable in comparison to project B.
IRR (Internal rate of return)
Table 8: Calculation of IRR
Project A Project B
Initial investment -569510 -783750
1 200000 200000
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2 160000 333000
3 140000 378000
4 100000 220000
5 100000 150000
6 60000 100000
11.01% 21.84%
Interpretation
It reflects the actual return that firm earns on the investment that it made on the specific
project. IRR of project B is double of project A and due to this reason, project B is more viable
then the later project.
CONCLUSION
On the basis of above report, it is concluded that firms must select an appropriate source
of finance on the basis of their current economic conditions and results of economic indicators.
Firms must select an appropriate project by using project evaluation techniques. Apart from this,
it is also recommended that firms must conduct ratio analysis time to time and should take
financial decisions in a prudent manner so that they can run the business smoothly even if
business conditions are not favourable.
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REFERENCES
Books & Journals
Auerbach, A. J. and Hassett, K. A., 2003. On the marginal source of investment funds. Journal
of Public Economics. 87(1). pp. 205-232.
Brealey, R. A., 2012. Principles of corporate finance. Tata McGraw-Hill Education.
Carlin, W. and Mayer, C., 2003. Finance, investment, and growth. Journal of financial
Economics. 69(1). pp. 191-226.
Collier, P. and Hoeffler, A., 2004. Greed and grievance in civil war. Oxford economic papers.
56(4). pp. 563-595.
Du, J. and Girma, S., 2012. Firm size, source of finance, and growth-evidence from china.
International Journal of the Economics of Business. 19(3). pp. 397-419.
Edmunds, A. and Morris, A., 2000. The problem of information overload in business
organisations: a review of the literature. International journal of information
management. 20(1). pp. 17-28.
Einsele, G., 2000. Sedimentary basins: evolution, facies, and sediment budget. Springer Science
& Business Media.
Galia, F. and Legros, D., 2004. Complementarities between obstacles to innovation: evidence
from France. Research policy. 33(8). pp. 1185-1199.
Mitchell, O. and Utkus, S. P., 2004. Pension design and structure: New lessons from behavioral
finance. Oxford University Press.
Mitton, T., 2002. A cross-firm analysis of the impact of corporate governance on the East Asian
financial crisis. Journal of financial economics. 64(2). pp. 215-241.
Oostenbrink, J. B., Koopmanschap, M. A. and Rutten, F. F. 2002. Standardisation of Costs.
Pharmacoeconomics. 20(7). pp. 443-454.
Pacione, M., 2001. Geography and public finance: planning for fiscal equity in a metropolitan
region. Progress in Planning. 56(1). pp. 1-59.
Pierce, B. and O'Dea, T., 2003. Management accounting information and the needs of managers:
Perceptions of managers and accountants compared. The British Accounting Review.
35(3). pp. 257-290.
Tarca, A., Morris, R. D. and Moy, M., 2013. An investigation of the relationship between use of
international accounting standards and source of company finance in Germany. Abacus.
49(1). pp. 74-98.
Online
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