Bitmap plc Financial Performance Evaluation Report

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ACCOUNTING AND FINANCE
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Table of Contents
Part A...............................................................................................................................................3
Part B.............................................................................................................................................10
Part C.............................................................................................................................................18
Reference List................................................................................................................................20
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Part A
1. Prepare a structured report for Board of Bitmap plc, which evaluates the performance
of the company in relation to profitability, liquidity, gearing, asset utilisation and investors
potential
Introduction
Financial ratios act as one of the most significant means that help in evaluating financial
performance of enterprises (Penman, 2015). This report will be evaluating the financial
performance of Bitmap Plc, a furniture manufacturing enterprise for the past two accounting
years 2016 and 2017.
Evaluation of the performance of Bitmap Plc based in relation to profitability
The accounting ratios with which an enterprise’s capacity for the generation of earnings
associated with operating costs, revenue and such aspects is known as profitability ratios
(Rahman, 2017). Profitability ratios of Bitmap Plc have been shown below -
Profitability ratios 2017 2016
Gross profit ratio 53.04 % 50.56 %
Operating profit ratio 29.57 % 28.33 %
Net profit ratio 17.65 % 17.89 %
Table 1: Profitability ratios of Bitmap Plc
(Source: Created by the learner)
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Gross profit ratio Operating profit
ratio Net profit ratio
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2017
2016
Figure 1: Graph contrasting the profitability ratios of the enterprise Bitmap Plc
(Source: Created by the learner)
Contrasting the profitability ratios of Bitmap Plc in 2016 and 2017 show that there have been
improvements in the operating and gross profit of the enterprise while its net profit remains
almost the same.
Evaluation of the performance of Bitmap Plc based in relation to liquidity
Liquidity ratios refer to accounting ratios using which an enterprise is able to evaluate whether
its current assets will be enough to meet its present obligations (Chiaramonte and Casu, 2017).
Liquidity ratios of Bitmap Plc have been shown below -
Liquidity ratios 2017 2016
Current ratio 4.69 2.77
Quick ratio 2.55 1.57
Table 2: Liquidity ratios of Bitmap Plc
(Source: Created by the learner)
4

2017 2016
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Current ratio
Quick ratio
Figure 2: Graph contrasting the liquidity ratios of the enterprise Bitmap Plc
(Source: Created by the learner)
Contrasting the liquidity ratios of Bitmap Plc in 2016 and 2017 show that the liquid position of
the enterprise is quite good and both the quick and current ratios have largely improved between
these two years.
Evaluation of the performance of Bitmap Plc based in relation to gearing
Gearing ratios are the ones that help in understanding the capacity enterprises possess for
meeting all their dues and indicate their financial leverage (Muthee et al., 2016). Gearing ratios
of Bitmap Plc have been shown below -
Gearing ratios 2017 2016
Debt to Equity ratio 0.29 0.29
Debt ratio 0.23 0.23
Table 3: Gearing ratios of Bitmap Plc
(Source: Created by the learner)
5

2017 2016
0
0.05
0.1
0.15
0.2
0.25
0.3
Debt to Equity ratio
Debt ratio
Figure 3: Graph contrasting the gearing ratios of the enterprise Bitmap Plc
(Source: Created by the learner)
Contrasting the gearing ratios of Bitmap Plc in 2016 and 2017 also show a good financial
performance of the enterprise. This is because both the gearing ratios presented above show that
the enterprise is quite capable in terms of payment of their both long-term and short-term dues.
Evaluation of the performance of Bitmap Plc based in relation to asset utilisation
Asset utilisation ratios are an indication of how well an enterprise can make the use of its assets
for earning profits (Shaik and Maheswaran, 2016). Asset utilisation ratios of Bitmap Plc have
been shown below -
Asset utilisation ratios 2017 2016
Inventory turnover 4.58 days 4.94 days
Total asset turnover 1.13 days 1.16 days
Table 4: Asset utilisation ratios of Bitmap Plc
(Source: Created by the learner)
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2017 2016
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Inventory turnover
Total asset turnover ratio
Figure 4: Graph contrasting the asset utilisation ratios of the enterprise Bitmap Plc
(Source: Created by the learner)
Contrasting the asset utilisation ratios of Bitmap Plc in 2016 and 2017, however, do not indicate
good performance of the enterprise. This is because on the first place, both asset and inventory
turnovers of the enterprise are poor and have decreased from 2016 to 2017 as well.
Evaluation of the performance of Bitmap Plc based in relation to investors potential
The investor potential ratio helps enterprises in finding out the current state of their share prices,
which are publicly held and their performance in the share market (Fecht et al., 2018). Investor
potential ratios of Bitmap Plc have been shown below -
Investor potential ratios 2017 2016
Book value per share 1.58 1.2
Earnings per share 0.41 0.32
Table 5: Investor potential ratios of Bitmap Plc
(Source: Created by the learner)
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2017 2016
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Book value per share
Earnings per share
Figure 5: Graph contrasting the investor potential ratios of the enterprise Bitmap Plc
(Source: Created by the learner)
Evaluation of the investor potential ratios of Bitmap Plc in 2016 and 2017 indicate that the
market value of its shares is not considerable. This major factor can be affecting its financial
performance in the future. This is because both the earnings per share and book value per share
of the enterprise have improved from 2016 to 2017 but are still quite low.
Conclusion
Thus, from this report, it can be evaluated that the financial performance of Bitmap Plc is good
in terms of liquidity, gearing and profitability. However, the enterprise requires focusing on
taking necessary steps with which it can bring about improvements in its investor potential as
well as its asset utilisation to ensure better financial performance in the future.
2. Calculate working capital cycle in days for the Bitmap plc based on the information
above, assuming 365 days, for the years 2017 and 2016, you are also required to evaluate
results briefly.
According to Mathuva (2015), the span of time needed for turning an enterprise’s working
capital to revenue or cash is known as the working capital cycle. It is also called operating cash
cycle. The following is the computation of working capital cycle of Bitmap Plc -
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Particulars 2017 (’000) 2016 (’000)
Accounts receivable or debts outstanding £ 2300 £ 1600
Sales made on credit £ 23,000 £ 18,000
Accounts payable or payments outstanding £ 1100 £ 1500
Purchases made on credit £ 10,800 £ 8,900
Inventory turnover ratio [Cost of goods sold / Stock-in-hand] 4.57627 4.94444
Receivable days (A) [Accounts receivable / Sales made on
credit * 365]
36.5 days 32.44 days
Payable days (B) [Accounts payable / Purchases made on
credit * 365]
37.18 days 61.52 days
Inventory days (C) [365 * Inventory turnover] 79.8 days 73.82 days
Working capital cycle [A + C - B] 79.08 days 44.75 days
Table 6: Working capital cycle computation of Bitmap Plc
(Source: Created by the learner)
The working capital cycle of an enterprise must always be low (Uzoamaka et al., 2017). The
evaluation and contrast of Bitmap Plc’s working capital cycle for 2016 and 2017 shows that the
time span taken by the enterprise for turning its working capital into revenue form has increased
considerably from 2016 to 2017. This is a negative point in its performance and shows
deterioration in the financial performance of the enterprise.
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Part B
Introduction
The use of the “investment appraisal technique” is a very significant thing that is generally
performed by the investors before investing their money in buying anything for the business.
This helps them to get to know about all the different aspects of the business that is necessary for
the business organisation to perform. These are very significant for the business organisations in
order to decide which project to choose that will give the best results. This part of the report will
consist of the different aspects of the “investment appraisal” that are necessary for the business
to choose. These help in the analysis of the performance of the projects that will be bought by the
business on the basis of their workings.
1. Calculate using the following investment appraisal techniques, and provide
recommendations as to the economic feasibility of acquiring the suitable machine
a. The Payback Period
The payback period is such an activity of the investment appraisal that helps the business
organisations in checking the time within which the amount of money that is invested will be
received by the investors (Pivorienė, 2017). This is very important for the investor to perform
this calculation as this provides a detailed view of the different aspects of the investment. These
are necessary for the business organisation to perform well in order to pay the amount of money
back to the investor. The less the time that is taken by the business organisation the better it is for
the investor.
Year Projected Cash Flow (Machine
A)
Projected Cash Flow (Machine
B)
0 -500000 -500000
1 300000 20000
2 250000 50000
3 200000 150000
4 150000 200000
10

5 50000 250000
6 20000 300000
7 50000 50000
Payback Period 2.04 2.04
Table 1: Tabular Representation of the calculation of Payback Period
(Source: Created by the Learner)
b. The Discounted Payback Period
This is another significant aspect of the business to check the “discounted payback period”. This
gives a proper view of the investment if there is a discount of time provided to the machines.
There are certain periods when the machines do not perform well. Keeping this thing in mind,
this activity is done by the investors. This gives an extra advantage for the machinery to pay back
the amount within some extra year.
Year Projected Cash Flow (Machine
A)
Projected Cash Flow (Machine
B)
0 -500000 -500000
1 300000 20000
2 250000 50000
3 200000 150000
4 150000 200000
5 50000 250000
6 20000 300000
7 50000 50000
Discounted Payback
Period
0.5 0.5
Table 2: Tabular Representation of the calculation of Discounted Payback Period
(Source: Created by the Learner)
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c. The Accounting Rate of Return
The “accounting rate of return” is another significant aspect of the “investment appraisal” that is
necessary for the business organisations to perform. This is done to check the average return that
the machines can give to their investors. These are also significant for the investors, as they need
to check the “average return” that they will get from the business for which they have invested a
lot of money. These provide a very clear view of the “average return” that is being paid by the
business organisation. These are important for the investors to calculate.
Year Projected Cash Flow
(Machine A)
Projected Cash Flow
(Machine B)
0 -500000 -500000
1 300000 20000
2 250000 50000
3 200000 150000
4 150000 200000
5 50000 250000
6 20000 300000
7 50000 50000
Accounting Rate of
Return
29% 29%
Table 3: Tabular Representation of the calculation of Accounting Rate of Return
(Source: Created by the Learner)
d. The Net Present Value
The “net present value” is another important aspect of the business that is necessary for the
business entities to perform (Jorge-Calderón, 2016). These provide good and proper view of the
“present value” of the product on which the investor is going to invest. The investor to check his
investment that he needs to perform in order to get proper return from the business calculates
this. This shows the “present value of the product” so that he gets to know that he is profitable or
not. These are generated to have a clear view of the “appraisal of investment” in order to have
proper “utilisation of resources”.
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