Bertie plc: Analysis of Business Performance and Investment

This report provides a comprehensive analysis of Bertie plc's financial performance, covering the period of 2014 and 2015. The report begins with an executive summary highlighting key findings, including a decline in gross and net profit ratios, negative trends in liquidity, and varying performance across different market segments. Part 1 delves into the interpretation of the statement of profit or loss, market segment analysis, statement of cash flows, and an assessment of liquidity and solvency. The analysis reveals an increase in revenue, but a higher increase in the cost of sales, leading to reduced gross profit margins. The report also examines the impact of increased overheads and long-term borrowings on profitability. Market segment analysis highlights the growth in the US market while the UK and rest of the world experienced a decline. The report further examines the statement of cash flows and the company's liquidity and working capital. Part 2 focuses on investment appraisal, specifically the use of techniques such as payback period, NPV, and IRR, to evaluate a potential investment in the US market. It also discusses the challenges in management forecasting and sources of internal finance.

Accounting and Decision
Making

EXECUTIVE SUMMARY
The business decision making is identified as the most crucial part of business
management. The profit value of Bertie plc is reduced in 2015. The gross profit ratio of 2015 and
2014 is respectively 6.31% and 8.44%. This aspect shows that there is decline of 2.13% and
along with this net profit of business is reduced by 2.67%. Moreover, liquidity ratios have shown
negative trends that indicates reduction in liquidity position of firm. Further it has been analyzed
that business entity has recorded growth in revenue of company in US market so as gross profit
percentage is increased in US that is increased to 3.53% from 3.16% of 2014. But, in UK and
rest of the world, company is facing reduction in gross profit margin which is decreased to
6.31% in 2015 from 8.44% of 2014. In addition to that investment approaches such as NPV, IRR
etc. has played important role in evaluation of profitability of investment.

TABLE OF CONTENTS
PART 1: BUSINESS PERFORMANCE ANALYSIS....................................................................4
Interpretation of the Statement of Profit or Loss ........................................................................4
Market Segment Analysis............................................................................................................5
Statement of Cash Flows.............................................................................................................6
Liquidity And Working Capital...................................................................................................6
Solvency.......................................................................................................................................7
PART 2 ...........................................................................................................................................8
Investment Appraisal...................................................................................................................8
Sources Of Internal Finance.........................................................................................................9
REFERENCE ................................................................................................................................11

PART 1: BUSINESS PERFORMANCE ANALYSIS
Interpretation of the Statement of Profit or Loss
Sales revenue
It can be interpreted that the revenue of Bertie plc is increased by 1.42%. This thing
reflects increment in sales of company. On the basis of these data, it can be stated that business
entity has identified positive trend in revenue in 2015 as compared 2014. This thing reflects that
organization is managing appropriate growth due to company is expanding business in new
overseas market. The reason of increase in sale is increase in demand of different goods and
services in all over the world.
Cost of sales
The comparison of increment cost of sales with increment in sales volume has found that
cost of sales in 2015 is much higher than 2014 by 3.79% which have reduced the gross profit
margin. The increase in cost of raw material has led negative impact on the profit generation
capabilities of organization. There is increase is cost because of global recession in economy.
This aspect had made increase in cost of fuel charges, transportation and basic raw material.
Overheads
By considering financial data of the company, it can be said that there is increase in
financial and administrative cost of business. Increase in overhead is due to the increase in long
terms borrowings and noncurrent assets of the business. The long term borrowing has enhanced
cost of finance that has created significant impact on net profit of company.
Profitability
As per the Profit and Loss statement, the gross profit ratio of 2015 and 2014 is
respectively 6.31% and 8.44%. This aspect shows that there is decline of 2.13% and along with
this net profit of business is reduced by 2.67%. Gross profit margin of company is reduced in
2015 that indicates increase cost of production and increase in cost of raw material that has led
adverse impact on gross profit of company. Due to this aspect, there is overall reduction in
efficiency as net asset turnover ratio is declined by 0.46%. Further, reduction in net profit of
company, return of capital employed ratio also determines reduction in profitability or income
generation capacity of business entity. Consequently, capital employed has been declined by
approximately 50%. This is because reduction in new profit has reduced the value of return of
capital employed which is reduced to 7.06% from 14.81%. This evaluation has found that
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increase in cost of sales along with increase in operating expenditures has reduced net profit after
increase in revenue of company.
Net assets turnover
The net assets turnover is reduced to 1.73 times in 2015 as compared to 2.19 times. This
is because value of total assets is increased in 2015 in comparison to total revenue of company.
In this regard, balance sheet of the company determines the value of non-current assets such as
plant, property etc. is increased by approximately 29% since the management has purchase more
assets for company.
Market Segment Analysis
As per the segmented accounting figures of Bertie plc, there is significant variation in
financial data and performance of business entity in different countries of the world. UK market
has generated 72% of total revenue of the company. Further, it has been analyzed that business
entity has recorded growth in revenue of company in US market so as gross profit percentage is
increased in US that is increased to 3.53% from 3.16% of 2014. But, in UK and rest of the world,
company is facing reduction in gross profit margin which is reduced to 6.31% in 2015 in all over
the world from 8.44% of 2014 due to increase in production cost.
Reasons of inferior performance of company in US market Market image-In US, competing firms has better brand image due to which management
of Bertie Plc is not able to attract consumers. Therefore, company has invested lots of
funds to purchase assess that increased the total value assets by 426% in 2015. It also
increases the cost of finance and lowers the net profit of company in US. Ineffective operational strategies- Poor performance of company is not only due to
external factors. It is because; internally also company is not operating in an effective
manner. This aspect can be considered through operating activities In US market. Further
analysis of financial statements has found that Bertie plc has made huge investment in US
for business expansion that has increased the finance cost by 100% which have lowered
the profit margin after positive trends are addressed in revenue and sales of company.
The value of total assets is increased to £87, 34,000 in 2015 from £16, 58, 000 of 2014.
The huge investment in assets in 2015 as compared to 2014
 High competition: Another reason of inferior business performance in US market is that
Bertie plc has started business in 2014. In the contrary, competitive organization is
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operating business in Europe form 32 years and in Asia from 18 years and in UK from
more than 100 years or since inception. By considering market data of US, it can be said
that 55% of share had been captured by top 6 competitors. Due to this aspect, remaining
organization has less opportunity for earning profitability and growth of business.
Statement of Cash Flows
As per cash flow statement of Bertie plc 2015, it has been addressed negative trends in
cash and cash equivalents. During the beginning of financial year, organization has recorded £23,
05,000 as opening cash balance. At the end of financial years, the value of cash is decreased by
£1, 42,000 and reached to £21, 63,000. In this context, there are various reasons addressed that
indicate reduction in liquidity position even company is generating profit. The increment in
finance cost which is increased to £4, 43,000 from £2, 98,000 and company has invested huge
funds in assets. All these elements have reduced the cash flow even if company is making good
profits. In 2015, business entity has kept less profit before interest and taxation as compared to
2015 but the reduction in value of inventories has increased the value of cash flow from
operating activities. Further cash was generated from financing activities as company had made
equity and debt issue. In order to manage this investment, organization has generated funds by
issuing equity share along with long term borrowing. Therefore, the value of long term
borrowing is increased to £72, 19,000 in 2015 from £8, 57,000 of 2014. However, there is
reduction is closing balance of cash because organization has made significant investment in
property and plant in 2015. Therefore, cash flow from investment activities is recorded negative
values. It could lead liquidity related to issues.
Liquidity and Working Capital
By considering liquidity position of the company, it can be said that working capital of
the company is not in alignment with the standards described by industry. As per the current
ratio of Bertie plc, it can be stated the liquidity position of organization is not good. It is because,
ideal current ratio is 2:1 and the current ratio of the firm is respectively 0.39 and 0.46 for the
period of 2015 and 2014. In similar way, quick ratio is also indicating negative trends which are
reduced to 0.18 in 2015 as compared to 0.19 of 2014. Therefore, it is interpreted that Bertie plc is
not able to meet its all current liabilities from current assets. Working capital cycle of the
company shows increment of 6 days. Due to this aspect, cash generation capacity of the entity
has been reduced. Further, this fact has adverse impact on the liquidity position of business. The
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overall assessment of liquidity position has not well in 2014 and it become wore in 2015. This
approach will assist management in order to avoid shortage of funds. In addition to that payment
payable period is showing some positive data which is increased to 78.20 days from 77.75 days.
This is because company has managed good relationship with suppliers. Therefore, it can be
stated that there is slight reduction in addressed in liquidity position of company.
Solvency
As per the gearing ratio, there has been approximate increase of 10% and interest
coverage ratio has been reduced by 11.65%. It is because; the value of debt is increased to
47.08% with reference to total equity of company in 2015. This is because company has raised
the capital of company through long term borrowing. Due to this policy, company is required to
pay high financial charges. In this context, the income statement has determined that company
has paid interest of £4, 43,000 in 2015 in comparison of £2, 98, 000 of 2014. This thing increases
overall expenditure of company. In addition to this, capital structure of organization is not
effective as there is not proper balance between debt and equity.
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PART 2
Investment Appraisal
Management of Bertie plc is planning for making investment in £10 million in US market
for the enhancement in profitability and productivity of business. It is a crucial decision for
business entity because huge amount is involved in this project. The evaluation of different
investment appraisal is carried out below with reference to investment appraisal decision to
purchase Hill Ranch.
Management forecast:
 Challenges in management forecast: Management forecasting is carried out as per the
certain assumptions that are developed by considering situation in market. These
assumptions are not accurate because external environmental factors are dynamic in
nature. In addition to that evaluation of current market trends such as competition,
demand etc. is not easy task.
According to management forecast, in initial year’s organization will not be able to earn higher
return due to high variable cost. As a result, in initial three years’ profit gained by firm will be of
10% of the revenue. In further years, company will maintain proper balance in both fixed and
variable and organization will be able to earn high profits with the help of increased revenue.
Payback period
It is identified as an important investment appraisal technique which is applied for
estimation of time period in which management will be able to recover whole initial investment. Advantage: Main advantage of this method is that it supports management in business
decision related to liquidity management as it provides attention on liquidity rather than
profitability.
 Barrier: However, disadvantage of this approach is that it does not consider time value of
money.
As per the calculation of payback period for the purchase of Hill Ranch, it has been found that
business entity would recover whole initial investment with 7 years and 10 months. As per the
current market trends, organization will be recover initial investment in good time. Therefore, it
can be stated that this investment decision would provide significant benefits to company.
Accounting Rate of Return
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 Advantage: It is an important investment evaluation technique through which
management is able to measure performance of the project by comparing targeted
ARR with Actual ARR. This method is easy to apply for the financial evaluation of
project.
 Barrier: This method ignores time value of money as well as it also avoids the cash
flow from investment.
The evaluation of ARR for the project of Hill Ranch has found that business entity would
generate 52% ARR as compared to 50% predetermined ARR in ten years. Furthermore, it is
addressed that business entity would generate average profit of £2.6m with the help of average
investment or assets value of £5m. On the basis of this assessment, it can be stated that this
project would generate significant profit.
Net Present Value; Advantage: This approach plays important role during the capital budgeting for analyzing
the profitability of particular investment proposal as it provides information about time
value of money by giving high priority to profitability and risk of the projects.
 Barrier: This technique is very difficult to understand and calculation of appropriate
discount rate is not easy task. This is because results from NPV are mainly influenced by
an appropriate discount rate.
The evaluation of investment appraisal decision regarding the purchase of Hill Ranch with the
10% discount rate has found positive net present value. The NPV of current project is positive
£69, 15,000 that indicates that this investment decision would be beneficial for company.
Sources of Internal Finance
As per the requirement of business, management considers different sources of finance.
Therefore, wide range of internal and external source of finance is preferred by company for
attainment of short term and long term business requirement. In this regards, the evaluation of
viability of some short term sources of finance is carried out below:
 Reduce Inventory Holding: By reducing inventory through different inventory
management tactics and improving efficiency of supply chain management, Bertie plc
will be able to generate more funds for accomplishment of short term requirement of
finance. This is because reduction in inventory decreases the investment of company in
raw material that would assist management for generation of more liquid funds. In this
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process, business entity has to apply some new strategies of inventory management such
as just in time. By reducing inventory, the management of Bertie plc would face some
adverse outcomes such as shortage of raw material, increasing dependence of supply
chain management, etc. In addition to that company has to carry out extra investment for
developing of new to ensure continuous flow of different material that increases finance
cost.
 Extending Supplier Payment terms: Bertie plc can increase supplier payment period by
establishing good relationship with suppliers and developing an appropriate conversation.
In the process, past relationship of company with suppliers plays important role. With the
help of this tool, business entity would assess some extra time regarding payment to
suppliers so as management can easily manage short term requirement of funds for
different business objectives. However, this approach resolves issues related to liquidity
only some extend. In addition to that creditors will increase interest rate for extension of
payment period. In addition, that management needs to lower collection period which is
provided by company to debtors. This process leads some negative consequences in the
form of clients of company would cancel future orders with Bertie plc.
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REFERENCE
Bougheas, S., Mizen, P. and Yalcin, C., 2006. Access to external finance: Theory and evidence
on the impact of monetary policy and firm-specific characteristics.Journal of Banking &
Finance. 30(1). pp. 199-227.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Drury, C. M., 2013. Management and cost accounting. Springer.
Jin, J., 2012. Commercial bank credit risk management based on grey incidence analysis. Journal
of Grey Systems: Theory and Application. 2(3). pp.385 – 394.
Molina-Azorín, J. F. and et.al., 2009. Green management and financial performance: a literature
review.Management Decision. 47(7). pp. 1080-1100.
Vance, D., 2012. Financial Analysis and Decision Making. McGraw Hill Professional.
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APPENDIX
Conclusion and recommendations
As per the above assessment, it can be concluded that Bertie plc has kept growth in
revenue due to increase in demand of different products in new overseas market. Organization
has recorded strong management control on various aspects of business such expansion, cost
management etc. However, the gross profit of company is reduced to 6.31% in 2015 as compared
to 8.44% of 2014.
The management should pay extra attention for managing cost of production due to it has
hampered overall profitability of firm. Apart from that organization needs to consider new source
of finance for lowering cost of funds that would enhance overall efficiency of business.
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