Comprehensive Financial Report: Ratio Analysis & Capital Strategy

This financial report provides an in-depth analysis of a company's financial health and viability through ratio analysis and capital management strategies. It begins by evaluating measures of return, such as Return on Investment (ROI) and Net Present Value (NPV), for assessing new production divisions...Read More

FINANCIAL
MANAGEMENT
1

Table of Contents
QUESTION 1...................................................................................................................................3
1.1 ................................................................................................................................................4
1.2 ................................................................................................................................................4
1.3.................................................................................................................................................6
Question 2....................................................................................................................................6
Question 3....................................................................................................................................7
3.3.................................................................................................................................................8
REFERENCES..............................................................................................................................11
2

QUESTION 1
1.1
The measures of return which the directors should employee to consider the viability of
opening a new production division are,
Return on Investment :
ROI is a performance measurement tool that is used for the evaluation of the efficiency or
profitability of an investment. This is helpful for the comparison of the efficiency of a number of
different investments. ROI helps in directly measuring the amount of return on a particular
investment that is relative to the investment costs (Gao and Yu, 2020). For the calculation of ROI
the benefit of an investment is divided by the costs of investment that is able to express it is as a
percentage or ratio. This measure of examining the return does not take into account the holding
period or passage of time and hence it can miss the opportunity costs of investing elsewhere.
With the help of this comparison can be made for the different investments and it can be ranked
for the different projects or assets by the directors.
Net present value :
NPV is the difference between the present value of cash inflow and the present value of
cash outflows over the period. It is a capital budgeting method which can also be used by the
directors as a measure of return as it analyses the profitability of the projected investment for
new product considerations (What’s My Return on Investment and How Do I Calculate It?,
2022). NPV is the result of calculations which are used for finding the value of the future
payments. With the help of positive results in the NPV the directors are able to calculate the
current total value of future stream of payments (Wen, 2019). This is also the considered to be
the factor which is useful for the estimation of the future cash inflow for the new production
division.
3

1.2
This company can fund its planned US development with the help of the retained
earnings, debt capital and equity capital. Out of these debts and equity funding are to be the fund
that needs to be planned by the company for its US development. Debt funding have the
following advantages and disadvantages,
Advantages Disadvantages
Retain control- The lending institution does not
have a say in the decisions made by the
business. This also improves the relationship
with the lender once the loan has been paid
back.
Qualification requirements- For being able to
gather the fund required the business requires
credit of rating to receive financing.
Tax advantage- The amount that is paid by the
organization in return of this investment is tax-
free and hence is an advantage for the
organization.
Discipline- For this organization needs to have
a financial discipline that will help it to make
the repayments in time. Not having discipline
can impact the image of the organization.
Easier planning- This is the most effective
form of funding for planning the future budgets
as in this method of funding the organization
knows in advance about the principles and
interest that has to be paid back each month.
Collateral- Through agreeing towards
providing a collateral services to the lender
some business can impact the assets and its
potential risk. This is considered to be the
guarantee of the loan that is potentially putting
the business at own risk (Bouri and Gupta,
2021).
Advantages and disadvantages of equity funding are,
Advantages Disadvantages
Less burden- This method puts the
organization in less burden as it does not have
to make any monthly payment for land and its
gives to the freedom to channel more money
Share profit- The shareholders also demand a
share of profit from the business.
4

into the growing business.
Credit issues gone- It does not require the
business any creditworthiness.
Loss of control- Issues share means division of
ownership in the form of shares.
Lean and gain from partners- The partners
which are joined in the organization are able to
teach the business new ways of their operations
(Aguguom, 2020).
Potential conflicts- Due to increased number of
owners the potential conflicts increases in the
organization.
1.3
The directors might have chosen not to pay cash dividends because of cash constraints
and investment opportunities. It can also be due to the poor profitability and earnings that the
directors my face in the company. In this case study the directors refrained form paying
dividends because of cost of raising external funds as company can use retained earnings.
Generation of retained earning should boost the company's value. However, it in turn boosts the
value amount invested into it. Retained earnings are not asset, but they can be used to purchase
assets such as inventory, equipment and other form of investment Hence, decreasing the
requirement of long term investment.
Question 2
2.1
Internal financial risk involve risk of liquidity, cash balance, asset turnover and such other risk.
All these internal risk are directly associated with the finances hold by the organization. Amco
Ltd is going forward to built a contractual relationship between the stakeholders. Internal risk
belong to the internal environment and culture of the company that can support and favour to the
business to offer the various internal risk involve with the business operations. External risk on
the other ha involve market risk. The business environment is completely fluctuating market
place where every possible factor or element in the market are influenced. External risk are not
directly associated with the organization itself rather this is solely implemented over every single
company operating in the respective business environment sector. This involves changes in the
consume demand, preferences and choices (Rudebusch, 2021). Inflation and decline growth rate
5

of GDP of country is another major factor that influence to the external risk factor associated
with the business. The agreement sign will offer numerous amount of internal and external
challenges and issues to the Amco Ltd. All these internal as well external issues or challenges
will lead to a numerous challenges and issues that would completely and directly affect or
influence to the company's operations in the respective target market. All thee risks would
directly influence and affect to the company's corporate financial failure possibility. Financial
failures arises out of lack of availability of the appropriate financial resources. All these risk
factors directly influence to the capacity of the company to generate the financial stability in
business.
2.2
Rising revenue and expanding the profit margins are the two main corporate financial goals for
the Amco Ltd. Both the goals will favour to the organization to support the business objectives in
the best way possible. These goals can convert into an effective business strategy that will
support the organization to support the overall business needs and requirements in the best way
possible (Belás and et.al., 2018). Company can design suitable strategy to develop the products
and services that can favour to the organization to maximise its profits. Financial management
strategies can also design and develop by the organization in such a process to support the
overall growth and development of the business in the best way possible.
3.2
Proper monitoring an evaluation technique can be adopted to support the corporate financial
goals set by the management. IN order to monitor the performance quarterly revenues and sales
can be analysis. This is the best suitable approach can be taken by the organization where the
revenues are monitored and controlled with the use of proper discount strategies that can support
to the organization to achieve growth and development in the business.
Question 3
3.1
Working capital for the year 2019 is 84500 (96500 – 12000). It can state that working capital is
favourably maintained by the Balty Ltd. There are certain ways that can support to the
organization to improve the working capital cycle this may involve shorten the operating cycle of
the organization. Avoiding the financing fixed asset of the company is another suitable method
to improve the working capital management of the organization. Performing credit checks are
6

also involved in managing the working capital of the business (Pakdel and Ashrafi, 2019).
Utilization of trade credit check can also be used as a primary tool top control and monitor the
working capital in the business. Unnecessary expenses can also deduct by the organization so
that better management of the working capital can be done by the organisation. Bed debt should
also be focused to reduce by the company (Sparviero, 2019). This is another suitable method or
technique that can favour to the organization to improve the working capital management of the
business. Additional ba finance can also be approached by the organization in order to maintain
the positive or favourable working capital in the business.
3.2
Trade credit is one of the most effective source company can use to generate the short term
funding in the business. This allows by the suppliers where the supply is done on credit basis.
This allows the organization to repay the cash in certain stipulated time period (Sawarni,
Narayanasamy and Ayyalusamy, 2020). This facility allows the organization to generate the
short term financing in the business. Usually the company require paying in three to four months
in this short term funding source.
Advantage:
 This does not require any security.
 Very easy and fast mode of financing.
Disadvantage:
 This funding source many times charge interest that further increases the cost.
Commercial bank loan can also taken by the company in order to generate its short term capital
requirements in business. This is the most effective mode of generating funds and finances in the
business.
Advantage:
 The easy mode of financing in business.
 Safe mode of arranging short term funds.
Disadvantages:
 It requires security to deposit.
7

Commercial paper is another short term financing source in the business. This mode of funding
allow a favour to the organization to generate funds through commercial papers like promissory
notes.
Advantages
 Easy mode of arranging funds in business.
Disadvantages:
 Risky technique.
◦ 3.3
 PROFITABILITY RATIOS
 Net profit ratio:
Particulars Formula 2019
Net profit 16000
Sales revenue 72000
NP ratio
Net profit / sales *
100 22%
 The NP ratio shows the percentage of profit that the business has earned after
deducting all the expenses from its total revenue that is generated (Naseem et.al.,2019).
22% of NP indicates positive financial health f the organization.
 Gross profit ratio

Particulars Formula 2019
Gross Profit 42500
Sales revenue 72000
GP ratio
Gross profit /
sales * 100 59%
 Gross profit of 59% shows the high about of revenue that this business generate
by just deducting the cost of goods sold.
 SUSTAINABILITY RATIOS

 Current ratio:

8

Particulars Formula 2019
Current assets 96500
Current liabilities 12000
Current ratio
Current assets /
current liabilities 8.0416666667
 This is the ratio which shows the efficiency of the organization has in this
organization the current ratio is more than idea explaining how sustainable the business
has been.
 Quick ratio

Particulars Formula 2019
Current assets 96500
Inventory 50000
Current liabilities 12000
Quick ratio
Current assets -
(stock )/Current
liabilities 3.875
 Having a quick ratio of 3.875 shows that this organization will be able to pay off
the short term obligations.
 PERFORMANCE RATIOS
 Inventory turnover ratio :

Particulars Formula 2019
COGS 20500
inventory 50000
Inventory Turnover Ratio COGS/Inventory 0.41

9

 This inventory turn over ratio shows how efficiently does the organization able to
completely finish its inventory. This shows that the sales of the organization is very high
and hence shows effectiveness of performance.
 From the following report the financial health and viability of the company can be
shown with positive results hence its safe for the shareholders to invest in this project.
10

REFERENCES
Books and Journals
Aguguom, T.A., 2020. Cash Flow Optimality and Investment Returns: Investors Expectations in
Listed Manufacturing Firms in Nigeria. Asian Journal of Economics, Business and
Accounting. 16(4). pp.39-50.
Belás, J. and et.al., 2018. Important factors of financial risk in the SME segment. Journal of
International Studies.
Bouri, E. and Gupta, R., 2021. Predicting Bitcoin returns: Comparing the roles of newspaper-and
internet search-based measures of uncertainty. Finance Research Letters. 38. p.101398.
Gao, R. and Yu, X., 2020. How to measure capital investment efficiency: A literature synthesis.
Accounting & Finance. 60(1). pp.299-334.
Naseem, M.A., et.al.,2019. Moderating role of financial ratios in corporate social responsibility
disclosure and firm value. PloS one. 14(4). p.e0215430.
Pakdel, M. and Ashrafi, M., 2019. Relationship between Working Capital Management and the
Performance of Firm in Different Business Cycles. Dutch Journal of Finance and
Management. 3(1). p.em0057.
Rudebusch, G. D., 2021. Climate change is a source of financial risk. FRBSF Economic
Letter. 2021(03). pp.01-06.
Sawarni, K. S., Narayanasamy, S. and Ayyalusamy, K., 2020. Working capital management,
firm performance and nature of business: an empirical evidence from
India. International Journal of Productivity and Performance Management.
Sparviero, S., 2019. The case for a socially oriented business model canvas: The social enterprise
model canvas. Journal of Social Entrepreneurship. 10(2). pp.232-251.
Wen, Q., 2019. Asset growth and stock market returns: A time-series analysis. Review of
Finance. 23(3). pp.599-628.
Online
What’s My Return on Investment and How Do I Calculate It?, 2022[Online]. Available through:
<https://www.toptal.com/finance/financial-analysts/return-on-investment>
11