Financial Analysis and Capital Budgeting: A Case Study of Shimen Ltd

This report provides a financial analysis of Shimen Ltd for the years 2020 and 2021, employing ratio analysis to assess the company's performance against industry benchmarks. Key ratios such as gross profit margin, net profit margin, current ratio, and earnings per share are calculated and interpreted. The report also evaluates investment appraisal techniques, including accounting rate of return and payback period, for a fast food and coffee house venture. Furthermore, it explains the capital budgeting process and examines various short-term financing options available to support the entity's working capital requirements, offering a comprehensive overview of Shimen Ltd's financial management and control strategies.

FINANCIAL
MANAGEMENT
& CONTROL

Contents
INTRODUCTION...........................................................................................................................3
TASK:..............................................................................................................................................3
Part 1:......................................................................................................................................3
1.Calculation of Ratios for Shimen Ltd: (In Pounds / £)........................................................3
2.Interpretation of the ratio considering the industries ratios:................................................4
Profitability ratio:...................................................................................................................4
3.Suggestion on Improvement in Ratio to Shimen Ltd:.........................................................6
Part 2:......................................................................................................................................6
1.Accounting rate of return:...................................................................................................6
2.Payback period:...................................................................................................................7
3.Critical evaluation of above technique for the organisation:...............................................8
Part 3:......................................................................................................................................9
1. Explanation of the process of capital budgeting and critical evaluation of its process:.....9
2.Explantion and critical evaluation main source of finance for the entity working capital:10
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial control is the manner of handling the finance in an agency in order that misuse of the
finances does now no longer be made as beneath Neath usage and over usage of those finances
isn't always accurate for the fitness of the agency withinside the lengthy run. These budgets are
being controlled with the aid of using the agency with the aid of using the finance supervisor
who's answerable for allocation and department of finances in all of the departments so that
everyone the divisions will paintings with complete capacity. This file includes ratio evaluation
of Shimen Ltd for the 12 months 2020 and 2021 and after calculation of such ratio the evaluation
has been made with the enterprise overall performance to choose their overall performance.
Afterword’s the funding appraisal strategies withinside the shape of common price of go back
and payback length has been carried out to choose rapid meals and espresso residence overall
performance and judgement has been taken accordingly. At the quilt of this file the capital
budgeting manner has been evaluated such as the manner concerned with it at the side of
clarification of diverse quick time period finance to be had to the enterprise if you want to aid
their running capital requirement (Bondarenko, Voronov, and Penyugalova, 2018).TASK:
Part 1:
1.Calculation of Ratios for Shimen Ltd: (In Pounds / £)
Particular Formula of Ratios 2020 2021
Gross Profit Margin (Revenue – Cost of
goods sold) / Revenue
* 100
= (30000 – 8000) /
30000) * 100
= 73.33 %
= (40000 – 9000) /
40000 * 100
= 77.35 %
Net Profit Margin Net Profit / Net Sales
* 100
= 16000 / 30000 * 100
= 53.33 %
= 18500 / 40000 * 100
= 46.25 %
Current Ratio (Current Assets /
Current Liabilities)
= 30200 / 16700
= 1.81 Times
= 41000 / 30800
= 1.33 Times
Acid Test Ratio (Current Assets –
Inventory) / Current
Liabilities
= (30200 – 4900) /
16700
= 1.51 Times
= (41000 – 13700) /
30800
= .89 Times
Receivables Average Receivables / = 8800 / 30000 * 365 = 11600 / 40000 *

Collection period Credit Sales * 365 = 107 Days 365
=106 Days
Earnings per share Earnings available to
equity holders /
Weighted average
shares
= 16000 / 20000
= .80 per share
= 18500 / 20000
= .925 per share
Price earnings ratio MPS / EPS = 2.50 / .80
= 3.125 Times
= 3.30 / .925
= 3.568 Times
Dividend Yield DPS / MPS = 12 / 2.50
= 4.80 times
= 18 / 3.30
= 5.45 times
2.Interpretation of the ratio considering the industries ratios:
 Profitability ratio: The profitability ratio suggests the overall performance of the
organization for the duration of the accounting duration in phrases of the earnings they
earned through using their belongings. The greater the powerful and green utilisation of
belongings made through the entity the greater earnings they're capable of generate of
their commercial enterprise all through the 12 months after deducting their running fee.
 Gross Profit Margin Ratio: This ratio suggests the fitness of the enterprise through
analysing the quantity that has been left with the enterprise after subtracting fee of
products offered from income figure. The gross earnings margin of the Shimen restricted
has been higher as evaluate to enterprise that is simplest 65 % while their gross earnings
margin is being 73.33 % withinside the 12 months 2020 and 77.35 % withinside the 12
months 2021 which suggests that organization has been appearing well.
 Net Profit Margin Ratio: It actually way how an awful lot the earnings is generated
through the enterprise as the share of sales. This ratio suggests the relation of internet
earnings with the sales of the commercial enterprise segment. The internet earnings
margin they're getting is round 53.33 % and 46.25% respectively withinside the 12
months 2020 and 2021 which suggests moderate decline of their overall performance
evaluate to preceding 12 months however the enterprise common has been 55% which
suggests that margins are being maintained through them whilst enterprise overall
performance has been considered.

 Receivable series duration: Receivable series duration actually way that how an awful lot
time it's going to take for the enterprise to get better their finances from the debtor. It is
greater recommended for the entity to hold debtor’s series duration as little as feasible
because the finances can't be blocked. The receivable series duration withinside the each
the years has been 107 and 106 days that is an awful lot better whilst they're evaluate to
enterprise that is simplest sixty-eight days. It suggests that Shimen restricted has no
manipulate over their debtor and charge are being not on time because of which their
liquidity has been suffered for the duration of the operational 12 months. It is critical to
offer reminders to them in order that series has been made on due route and such finances
may be invested in operating capital of the commercial enterprise.
 Earnings Per percentage: The incomes in keeping with percentage has been calculated
through dividing the internet earnings of the enterprise with weighted common variety of
shares. It actually shows that how mush returns the shareholders have become through
making the funding withinside the organization. The incomes in keeping with percentage
has been 50 pence withinside the enterprise, then again, the EPS of Shimen restricted has
been limited to. eighty and. ninety-three pence which could be very low and consequently
it must be improved in order that shareholder’s expectation desires to be meet out. Such
decrease incomes suggest the inefficiency of the company to generate earnings from the
belongings invested withinside the commercial enterprise and the commercial enterprise
will now no longer preserve for the longer duration if finances aren't utilised properly.
 Dividend Yield: This is the monetary ratio that offers with the coins dividends that has
been through the organization to its shareholder relative to marketplace fee in keeping
with percentage. The dividend of the enterprise has been preserving round 3.20 instances,
while the organization dividend yield involves 4. eighty in 2020 and 5. forty-five in 2021
that is pretty incredible and displays the company’s functionality to offer good enough
safety to shareholders toward their returns and such safety will create better price for the
organization in long term and could offer benefit to them in opposition to their
competitors.
 Price Earnings Ratio: Price profits ratio the cutting-edge marketplace fee of the enterprise
relative to profits in keeping with percentage of the entity. The fee profits ratio of the
enterprise has been 6.50 instances, but the organization has been preserving such ratio to

3.thirteen and 3.fifty seven instances respectively in 2020 and 2021 which suggests that
they're now no longer incomes an awful lot better evaluate to their marketplace fee and
because of this the valuation of the organization has been suffered withinside the
marketplace because of decrease marketplace capitalization that desires to be paintings
upon through them.
3.Suggestion on Improvement in Ratio to Shimen Ltd:
The proposal after thinking about the overall performance of the employer in 2020 and 2021 may
be that they want to paintings upon at the income they may be gaining of their enterprise. In they
do now no longer make use of the property in a powerful and green way that output will now no
longer be generated as much as that mark this is required withinside the enterprise. In it vital for
them to paintings upon their series duration that's manner better as anticipated because it without
delay have an effect on their liquidity due to the fact the price range are being blocked for such
duration and enterprise receives hampered without price range. The incomes in step with
percentage may be very negative of the enterprise which honestly states that they may be now no
longer contributing an awful lot income that can have an effect on the enterprise withinside the
lengthy run.
Part 2:
1.Accounting rate of return:
The accounting rate of return of an investment measures the average annual net income of
the project (incremental income) as a percentage of the investment. The numerator is the average
annual net income generated by the project over its useful life. The denominator can be either the
initial investment (including installation cost) or the average investment over the useful life of
the project. Average investment means the average amount of fund remained blocked during
the lifetime of the project under consideration (Budding, Faber, and Schoute, 2021).
The following table shows calculation of average rate of return of the fast food and the coffee
house:
Years Fast Food (£) Coffee House (£)
0 Nil Nil
1 20000 30000
2 30000 30000

3 40000 40000
4 40000 50000
5 50000 30000
Salvage Value 18000 22000
Average Inflow = (20000 + 30000 + 40000
+ 40000 + 50000 + 18000) / 5
= 39600
= (30000 + 30000 + 40000 +
50000 + 30000 + 22000) / 5
= 40400
Average Investment = (82000+ 18000) / 2 = (82000 + 22000) / 2
ARR (%) = 39600 / 50000 * 100 =
79.20 %
= 40400 / 52000 * 100 =77.69
%
2.Payback period:
Time required to recover the initial cash-outflow is called pay-back period. The payback
period of an investment is the length of time required for the cumulative total net cash flows
from the investment to equal the total initial cash outlays. At that point in time (payback
period), the investor has recovered all the money invested in the project (Caruana and Zammit,
2019).
The following table shows calculation of payback period of the fast food and coffee house: -
 Fast food:
Years Cash Flow (£) Cumulative Cash flows (£)
0 -82000 -82000
1 20000 -62000
2 30000 -32000
3 40000 +8000
4 40000 +48000
5 50000 +98000
Salvage Value 18000 +116000
Payback period in case of Fast food will be:

= 2 years + 32000 / 40000
= 2.80 years
 Coffee house:
Years Cash Flow (£) Cumulative Cash flows (£)
0 -82000 -82000
1 30000 -52000
2 30000 -22000
3 40000 +18000
4 50000 +68000
5 30000 +98000
Salvage Value 22000 +120000
Payback period in case of Coffee house will be:
= 2 years + 22000 / 40000
= 2.55 years
3.Critical evaluation of above technique for the organisation:
In the above desk the coins glide of speedy meals and espresso residence has been referred to
during five years and to examine the overall performance of each the retailers, the appraisal
approach has been implemented that's common charge of go back and payback length (Cuong
and Ha, 2018). The common charge of go back arrived to be 79.20 % in case of speedy meals
and in case of Coffee residence it's far 77.69 % which suggests that overall performance of
espresso residence is higher in phrases of go back with the aid of using .98 % however the choice
can't be made on the premise of ARR because the distinction in go back is negligible in each the
retailers. Therefore, payback length has been implemented on them to determine those which
techniques is recommended together with the retailers that need to be maintain or decided on
with the aid of using the organization in an effort to decorate their profitability. The payback
length in case of Fast meals arrives to be 2. eighty years which without a doubt approach that
funding this is made in speedy meals commercial enterprise of around £ 82000 has been
recovered with the aid of using the entity in 2. eighty years. The payback length in case of
espresso residence can be 2. fifty-five years which suggests the identical quantity of funding if
made espresso residence then such price range can be recovered speedy as evaluate to speedy

meals. Therefore, the very last end with a purpose to be made that payback length presents
preferred outcomes in phrases of retunes however common charge of go back is conventional
and this approach does now no longer bear in mind time cost of money. Therefore, such
approach will now no longer be thinking about for choice making, but in phrases of venture
feasibility the funding to be made in espresso residence that's higher in phrases of returns for the
organization (de Azevedo, Lino, and Machado-Martins, 2020). The weak point of common
charge of go back approach is that it does now no longer bear in mind time cost of money,
consequently the outcomes so arrived does now no longer offer correct outcomes to the
investors. On the opposite hand, the payback length approach is likewise does now no longer
bear in mind the time factor, consequently the outcomes so acquired from such approach does
now no longer offer correct outcomes. Since the payback length of espresso residence is decrease
than that venture needs to be regularly occurring with the aid of using the organization.
Part 3:
1. Explanation of the process of capital budgeting and critical evaluation of its process:
Capital Budgeting includes:
 Identification of funding tasks which might be strategic to business’ general objectives;
Estimating and comparing publish-tax incremental coins flows for every of the funding
proposals; and
 Selection of a funding concept that maximizes the go back to the investors (de Moura,
Santos, and Conceicao, 2019).
The volume to which the capital budgeting system wishes to be formalised and systematic tactics
to be set up relies upon on the dimensions of the organisation; wide variety of tasks to be taken
into consideration; direct monetary gain of every undertaking taken into consideration with the
aid of using itself; the composition of the organization's present property and control's choice to
alternate that composition; timing of prices related to the tasks which might be ultimately
accepted. The system that's concerned in capital budgeting has been noted under:
 Planning: The capital budgeting system starts off evolved with the identity of capacity
funding possibilities. The possibility then enters the making plans section while the
capacity impact at the organization's fortunes is classed and the cap potential of the
control of the organization to take advantage of the possibility is determined.

Opportunities having little benefit are rejected and promising possibilities are superior
withinside the shape of a suggestion to go into the assessment section.
 Evaluation: This section includes the willpower of concept and its investments, inflows
and outflows. Investment appraisal techniques, starting from the easy payback technique
and accounting charge of go back to the extra state-of-the-art discounted coins glide
techniques, are used to appraise the proposals. The approach decided on need to be the
only that allows the supervisor to make the quality choice withinside the mild of
triumphing circumstances (del Rocío Moreno-Enguix, Gras-Gil, and Henández-
Fernández, 2018).
 Selection: Considering the returns and dangers related to the character tasks in addition to
the value of capital to the corporation, the corporation will pick amongst tasks which
maximizes the shareholders’ wealth.
 Implementation: When the very last choice is made, the organization ought to accumulate
the essential funds, buy the property, and start the implementation of the undertaking
 Control: The development of the undertaking is monitored with the useful resource of
comments reviews. These reviews will consist of capital expenditure development
reviews, overall performance reviews evaluating real overall performance in opposition
to plans set and publish finishing touch audits.
 Review: When an undertaking terminates, or maybe before, the corporation need to
overview the whole undertaking to give an explanation for its fulfilment or failure. This
section may also have implication for organization's making plans and assessment tactics.
Further, the overview may also produce thoughts for brand spanking new proposals to be
undertaken withinside the future (Krause and Swiatczak, 2020).
2.Explantion and critical evaluation main source of finance for the entity working capital:
There are various sources available to meet short- term needs of finance. The different
sources are discussed below considering the working capital requirement of the company: -
 Trade Credit: It represents credit granted by suppliers of goods, etc., as an incident of
sale. The usual duration of such credit is 15 to 90 days. It generates automatically in the
course of business and is common to almost all business operations. It can be in the form
of an 'open account' or 'bills payable’. Trade credit is preferred as a source of finance
because it is without any explicit cost and till a business is a going concern it keeps on

rotating. Another very important characteristic of trade credit is that it enhances
automatically with the increase in the volume of business.
 Accrued Expenses and Deferred (Unearned) Income: Accrued expenses represent
liabilities which a company has to pay for the services which it has already received like
wages, taxes, interest and dividends. Such expenses arise out of the day-to-day activities
of the company and hence represent a spontaneous source of finance. Deferred income,
on the other hand, reflects the amount of funds received by a company in lieu of goods
and services to be provided in the future. Since these receipts increase a company’s
liquidity, they are also considered to be an important source of spontaneous finance
(Magli, Sabri, and Rahim, 2020).
 Advances from Customers: Manufacturers and contractors engaged in producing or
constructing costly goods involving considerable length of manufacturing or construction
time usually demand advance money from their customers at the time of accepting their
orders for executing their contracts or supplying the goods. This is a cost free source of
finance and really useful.
 Certificates of Deposit (CD): A certificate of deposit (CD) is basically a savings
certificate with a fixed maturity date of not less than 15 days up to a maximum of one
year.
 Bank Advances: Banks receive deposits from public for different periods at varying rates
of interest. These funds are invested and lent in such a manner that when required, they
may be called back. Lending results in gross revenues out of which costs, such as interest
on deposits, administrative costs, etc., are met and a reasonable profit is made. A bank's
lending policy is not merely profit motivated but has to also keep in mind the socio-
economic development of the country (Matkin, Kim, and Park, 2018).
 Short Term Loans: In a loan account, the entire advance is disbursed at one time either in
cash or by transfer to the current account of the borrower. It is a single advance and given
against securities like shares, government securities, life insurance policies and fixed
deposit receipts, etc. Except by way of interest and other charges, no further adjustments
are made in this account. Repayment under the loan account is made either by way of
repaying the full amount or by way of schedule of repayments agreed upon as in case of
term loans.

 Overdraft: Under this facility, customers are allowed to withdraw in excess of credit
balance standing in their Current Account. A fixed limit is, therefore, granted to the
borrower within which the borrower is allowed to overdraw his account. Though
overdrafts are repayable on demand, they generally continue for long periods by annual
renewals of the limits. This is a convenient arrangement for the borrower as he is in a
position to avail the limit sanctioned, according to his requirements. Interest is charged
on daily balances. Since these accounts are operated in the same way as cash credit and
current accounts, cheque books are provided.

CONCLUSION
Financial management plays the vital role in success and failure of the organisation as if
funds are misused within the organisation than organisation will not be able to meet out its goals
and objective they have set for the long run. In order to manage these finances, the expert must
be appointed within the organisation so that proper and timely decision has been taken towards
resource allocation on the existing and new product the organisation needs to undertake. This
report consists of calculation of various ratio to judge the profitability, liquidity and efficiency of
Shimen Ltd and the performance will have judged with the industry’s ratio that will work as the
standards. The capital budgeting and its whole process has been explained in this report along
with evaluation of the process being carried out. This report shows the effectiveness on the two
different outlets in the form of fast food and coffee house by evaluating them using investment
appraisal technique and recommendation has been made regarding the method and outlet which
must be preferable to company. At last this statement indicates the short term finances the
organisation need to obtain to meet out their short term requirement in investing their funds in
working capital of the business so that operational activities must be continued regularly.

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