HI5002 Finance for Business: Xero Ltd. Company Performance Analysis

This report provides a detailed financial analysis of Xero Ltd., a software company. It begins with an overview of Xero's business and comparative advantages. The analysis includes ratio analysis, evaluating efficiency and profitability ratios from 2016 to 2018, with graphical representations of trends. The report also addresses cash management practices, emphasizing the importance of maintaining adequate cash balances and investing in liquid securities. Sensitivity analysis is performed to identify the most sensitive elements affecting the net present value, and systematic and unsystematic risks are discussed. The dividend payout ratio and dividend policy are also examined, concluding that no dividends were paid due to the company's losses. Recommendations are provided to improve the company's financial position, emphasizing the need to reduce expenses and manage risks effectively. The report utilizes financial data and calculations to support its findings and recommendations.

Running head: Finance for business
Finance for business

Finance for business
Abstract
The aspects include in the financial analysis have been discussed in this report in the context of
Xero limited. In that, the company related information is discussed and with that, the financial
performance of the business is evaluated by using the ratio analysis. Then the analysis of
sensitivity has been undertaken in which the most sensitive element has been identified. The cash
management has been also used in the report in which all the securities which have been liquid
are considered. The systematic and unsystematic risks have been identified and reported in an
effective manner. The last part consisted of the dividend payout ratio which has been calculated
in relation to the past three years.
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Table of Contents
Abstract............................................................................................................................................2
Introduction......................................................................................................................................4
Financial analysis in the context of Xero Ltd..................................................................................4
Company's summary....................................................................................................................4
Ratio analysis...............................................................................................................................4
Analysis of Cash management.....................................................................................................7
Sensitivity analysis......................................................................................................................8
Systematic and un-systematic risk...............................................................................................9
Dividend payout ratio and dividend policy.................................................................................9
Recommendations..........................................................................................................................10
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
Appendix 1.....................................................................................................................................13
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Finance for business
Introduction
The manner in which the company and its performance are to be evaluated will be discussed in
this report. There will be consideration of the ratio analysis in which the performance of the
company will be analyzed. The operations of the company will be identified and also the
advantages which are received by it in comparison to others will also be discussed. The test of
sensitivity for the net present value will be carried out and in that proper ascertainment of the
sensitive variable will be made. There will be the calculation for the payout ratio also by which
the amount that is distributed by the company will be taken into consideration. The involvement
of the risks will be made in which all types of risks will be considered.
Financial analysis in the context of Xero Ltd
Company's summary
Xero limited is the software company which provides the services in relation to the software. The
company is established in New Zealand and is involved in this business from 2006. There are
several subsidiaries which are consisted of this and all the operations are performed through
them (Xero Limited, 2016). The software Xero is the one in relation to which services are
provided and it is based on cloud-based accounting by the help of which connection is
established between the advisors and small businesses. The main services which are provided by
it include high tech, retail, legal, hospitality, construction, healthcare, manufacturing, and various
others.
The company enjoys various comparative advantages such as it focuses on small businesses and
provides the best services as it has all highly skilled employees (Bloomberg, 2019). It is
considered as the company with the highest innovative growth. Due to this, it is able to attract
more customers and attain the benefit of the same.
Ratio analysis
The company is required to analyze the performance on the regular interval and for that, there
will be the use of the ratio analysis. There will be the inclusion of the efficiency ratios and
profitability ratios under this as they are the most important to evaluate the overall financial and
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operational performance of the company (Adam, 2014). The calculation which will be required
in this regards is represented below in the required manner.
Particulars 2015 2016 2017 2018
Gross profit 157179 226004 330333
Net profit/loss -82464 -69057 -27843
Sales 207060 295389 406579
Total assets 378398 328101 293250 289076
Average
assets
353249.5 310675.5 291163
Receivable 21499 27098 32817 34523
Average Receivable 24298.5 29957.5 33670
Efficiency ratios
The ratios which will be providing the company the decision about the efficiency of the working
will be covered under this. There will be the use of the sales and other variables in this and their
calculations and results are presented below.
Particulars Formula 2016 2017 2018
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Asset turnover ratio Net sales/Average Total assets 0.59 0.95 1.40
Receivable turnover Net sales/Average Receivable 8.52 9.86 12.08
2016 2017 2018
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Asset turnover ratio
Linear (Asset turnover
ratio )
Receivable turnover
Linear (Receivable
turnover)
It can be noted that there is an upward trend in both asset turnover and receivable turnover. This
shows that the company is having good efficiency level and will be performing even well in the
coming period as there is continuous growth which is experienced.
Profitability ratios
The manner in which profit trend is going in the company is identified with the help of these
ratios. In them, the profit or loss which is made by the business is identified and the comparison
of them is made (Ahrendsen and Katchova, 2012). The financial performance will be evaluated
with the help of them only.
Particulars Formula 2016 2017 2018
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Return on assets Net profit/Total assets*100 -25.13% -23.55% -9.63%
Gross profit
ratio
Gross profit/Sales*100 75.91% 76.51% 81.25%
2016 2017 2018
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Return on assets
Linear (Return on assets)
Gross profit ratio
Linear (Gross profit ratio)
The graph presented above shows that there is a rise in the gross income as there is an upward
trend but in the case of return on assets, there is a negative result. The losses are made by the
company and there is a decline in them which is noticed.
Analysis of Cash management
The cash is the most crucial asset for any business as all the operations will be performed by the
use of that. It is necessary that the company maintains the cash balance in an adequate manner
and for that cash management will have to be made in a proper manner (da Costa Moraes and
Nagano, 2014). For this, there are various decisions which are made and in that investment in
certain securities is made which can be converted into cash in an easy manner. There are the
deposits which are made and it is in the current assets. By this the company will be having the
cash security as all of them will be converted into cash in an easy manner and it can be used in
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the required manner. This will be bringing additional income to the business in the form of
interest (Kroes and Manikas, 2014). The amount can be used by the company for the undertaking
of various other processes by which the company can expand the business and earn more.
Sensitivity analysis
The test of sensitivity will be undertaken in the company so that all the available variables in the
business can be evaluated in an adequate manner. All of the elements which are involved in this
process will have to be identified so that the test can be conducted on them. In the given case the
elements of net present value will be discussed which include the fixed and variable cost, sales
units and selling price (Iooss and Lemaître, 2015). They all are the inputs and will be affecting
the results of any process and so shall be taken into consideration. In this sensitivity analysis will
be performed and in that the change in the input and with that the corresponding change in the
output will be compared. The calculation will be made for this and in that the amount which will
be available as the net present value in all the options will be identified as presented in Appendix
1. The outcome will then be used and the change will be evaluated and this will be considered
together with the input (CFI, 2019). By this, the sensitivity will be determined and the element
which will be affecting the results most will be considered. the calculations for this are as shown
below:
Particulars Original Option 1 Option 2 Option 3 Option 4
NPV 3497442 2964905 2166099 2698636 3430875
% Change in NPV (A) -15.226 -38.066 -22.84 -1.9033
Input changing Sales units selling
price
variable cost fixed cost
% change in Input (B) 10 10 10 10
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Sensitivity (A/B) -1.5226 -3.8066 -2.284 -0.1903
Systematic and un-systematic risk
The risks which are included in the business are required to be taken into account in an effective
manner and for that, there will be the identification of them which shall be undertaken. There
will be an undertaking of the proper risk management process under this in which two types of
risks which are involved will be identified. They are systematic and unsystematic risks in which
the one which is associated with the business only will be considered as the unsystematic risk.
This is the one which is in the control of the business as the same can be determined. The other
remaining risks are the systematic risks which will be in relation to the complete market and it is
not possible for the company to take control of them (Gagliardini and Gouriéroux, 2013). They
are under the control of the market and so will be harming the business. So the company will be
required to undertake the process by which all of them will be identified and controlled in the
most effective and efficient manner. There will be an undertaking of the research by which all of
them will be determined.
In the given case also there are several such risks which are faced by the Xero limited. They
include liquidity risk, interest rate risk, foreign exchange risk, and credit risk. All of them are in
the company and have been presented in the report. There will be decisions which will be taken
in this respect so that the required benefit can be attained and the negative impact can be
reduced.
Dividend payout ratio and dividend policy
In all the companies there is the dividend policy which is required to be followed. In that, all the
aspects in relation to the dividend are taken into consideration. There is the proper manner in
which the earning which is made is to be utilized. Most of the companies retain some of the
portions and the remaining is distributed among all the shareholders that are known as the
dividend and this is necessary to maintain the interest of investors. The rate at which the
distribution will be made is identified as the dividend payout ratio (CFI, 2019). In the given case
the company is not making any earnings and there are the losses which are incurred. Due to this,
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there will be no dividend which will be provided to the investors as the earnings required to
make this is not available. Therefore there will be no calculation which will be made in relation
to the ratio and the company will be free from the requirement of payment of dividend. There
will be a disadvantage of this as the investors will not be receiving any amount so they will be
less willing to make the investment in the company which is not in the interest of the company.
Recommendations
The company is required to improve the overall position and for that, there will be various steps
which will be required to be taken. It has been identified that the company is not having the
profits and there are the losses which are involved. There is a bad position of the company in
terms of profitability and so that will be required to be improved. There will be effective
measures which will be taken so that profits are made and for that, the expenses which are made
will have to be reduced. The sensitivity is mostly in case of the selling price and so it will be
considered that less number of changes shall be made under that. If there is any modification in
relation to this then it will be required to be taken into notice and proper evaluation shall be
made. The proper policy for the risks which are involved will have to be taken so that they can
be eliminated and growth can be made. The dividend policy will be made in which all the aspects
in this respect will have to be considered.
Conclusion
The report presented above provided all the information in relation to the financial performance
of the company. In that proper analysis has been undertaken in which all the required concepts
have been identified and considered. There has been the determination of the ratios in relation to
all them and by that it has been identified that the company is not having a good profitability
position and needs to improve that. The cash management has been made and in that, all the
required information is collected. After that the sensitivity analysis is performed and in that the
element which affects the outcome the most is identified and that is recognized as a sensitive
element. The risk identification is made and by that the same will be controlled so that no
adverse impact is faced. The dividend policy is identified and also it is seen that there is no profit
and so no dividend has been paid by the company.
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References
Adam, M.H.M. (2014) Evaluating the financial performance of banks using financial ratios A
case study of Erbil bank for investment and finance. European Journal of Accounting Auditing
and Finance Research, 2(6), pp.162-177.
Ahrendsen, B.L. and Katchova, A.L. (2012) Financial ratio analysis using ARMS
data. Agricultural Finance Review, 72(2), pp.262-272.
Bloomberg. (2019) Company Overview of Xero Limited. [Online] Available at
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=34511684
[Accessed 27 May 2019]
CFI. (2019) Dividend Payout Ratio. [Online] Available at:
https://corporatefinanceinstitute.com/resources/knowledge/finance/dividend-payout-ratio-
formula/ [Accessed 27 May 2019]
CFI. (2019) What is Sensitivity Analysis?. [Online] Available at
https://corporatefinanceinstitute.com/resources/knowledge/modeling/what-is-sensitivity-analysis/
[Accessed 27 May 2019]
da Costa Moraes, M.B. and Nagano, M.S. (2014) Evolutionary models in cash management
policies with multiple assets. Economic Modelling, 39, pp.1-7.
Gagliardini, P. and Gouriéroux, C. (2013) Granularity adjustment for risk measures: Systematic
vs unsystematic risks. International Journal of Approximate Reasoning, 54(6), pp.717-747.
Iooss, B. and Lemaître, P. (2015) A review on global sensitivity analysis methods.
In Uncertainty management in simulation-optimization of complex systems, 59, pp.101-122.
Kroes, J.R. and Manikas, A.S. (2014) Cash flow management and manufacturing firm financial
performance: A longitudinal perspective. International Journal of Production Economics, 148,
pp.37-50.
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