Comprehensive Financial Analysis Report: Home Range Ltd Performance

This report presents a financial analysis of Home Range Ltd, evaluating its performance based on the income statement, balance sheet, and cash flow statement. The analysis covers key financial components such as revenue, cost of goods sold, gross profit, operating expenses, and net profit, h...Read More

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Business and Management
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Question 1
a) Income statement
The General purpose of the income statement is to provide the performance of the financial
incomes of a business over a particular period. The various these components of an income
statement have specific benefits. Revenue is significant because the organisation cannot grow
faster than its revenues and thus the projected growth of Home Range Ltd can only be gauged
based on the increase or decrease in its revenues. Cost of goods sold are the direct costs
incurred in production, distribution and sale of products or services offered by the company.
These values are significant in determining the sale price. Gross profit provides the resources
to take care of all other expenses of the business entity. A higher and stable gross margin of
the business is an indication of a more significant potential for positive outcomes. Operating
expenses are essential in determining the efficiency of the management since they
considerably have control of this category of expenditure. Operating income shows the
earnings of the company from its normal operations before any other non-operating incomes
are deducted. Net Profit shows the profitability of the business.
b) Balance sheet
This is a financial statement that shows the current financial position of the entity. It helps in
controlling cash resources of the business to ensure that expenses are paid as at and when
they occur. Equity in the balance sheet shows the initial investment of the company. Non-
current assets also indicate whether the entity will continue to be in operation for more than
one financial year. Additionally, the balance sheet helps in the spreading of the costs of the
non-current assets over several fiscal years instead of the period of acquisition only. It also
shows its short-term and long-term obligations. Thus, Home Range Ltd can use its statement

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of financial position to predict whether it will meet its expenses when they fall due and its
operational existence in the fiscal year and beyond.
c) Cash flow statement
A cash flow statement explains the variation in liquid resources of the entity by displaying
how cash been acquired under many headings such as operating activities, investment
activities and financing activities.
Question 2
i. Income statement
Component Effect on the company Comments
There is a decrease in
Profit before tax from
Dec 2016 (£k 31,003 ) to
Dec 2017 (£k 28, 514) by
£k 2,489 which is a 8%
decrease.
Not bad A decrease in profitability is
alarming. However, because
the business had on 31 Dec
2016 received a return on
equity of 35% and on 1 Jan
2017 taken a loan of £k 1.2
million to expand the
business, then this slight
drop in profitability within
the year is an expectation.
There was a 20% increase
in sales or £k 18,396
Good An increase in sales is
always good news. However,
for the case of Home Range
Ltd, this increase is not
reflected in the profits
because there is a decrease in
profits. But still, the increase
in sales worked to lower the
decrease in sales due to the

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loan acquired the same year.
Gross profit has decreased
slight by £k 766 or by
2%.
Bad A decrease in gross profit
irrespective of the increase
in sales should be a concern
to Clare. This scenario can
be caused by either high cost
of sales or reduced selling
prices.
Total expenses have
increased from £k 19, 215
to £k 20,998 or by 9%.
Bad Total of expenses has
increased by half the
increase in sales while the
gross profit has decreased.
ii. Balance sheet
Component Effect on the company Comments
The amount customers owe
the business as at 31 Dec
2017 is a whooping £k 4,051
which is an increase by £k
2,439 or 151% increase
Worse The business is doing
extremely worse in such a
case. This implies that a lot
of cash is withheld outside
the company regardless of
the attractive increase in
sales. This will further result
in a scarcity of money in the
business.
Home Range Ltd owes its
suppliers £k 11, 124, an
increase of £k 1,726 or 18%
increase
Bad or likely good This shows that the business
has tried to pay off its
suppliers and is withholding
some cash resources for use.
But the reasons for the
increase of the payables need

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to be ascertained and
avoided.
The amount the business
owes the bank totals to £k
1,600 (bank loan) with no
bank overdraft. With the
exclusion of the bank loan,
the business has net assets of
£110, 193. Thus the amount
owed to the ban is far less
compared to the value of the
business
Good A low debt to the bank
financing is an indication of
the financial health or
stability of the Home Range
Ltd.
iii. Cash flow statement
a) Operating cash-flow ratio = cash flows from operating activities/ current liabilities
= 18,530/17,176 = 1.07
Since the operating cash-flow is not less than 1.0, this implies that Home Range Ltd is
generating sufficient cash to meet its short term liabilities as at and when they occur
b) Price/cash flow ratio = share price/ operating cash flow per share
Share Price = earnings/number of shares
= 107,593/1000
=£k 107.59
Operating cash flow per share = Net flow from operating activities/number of shares
=£k18, 530/1000
=£k 18.53

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Price/cash flow ratio ==£k 107.59/£k 18.53
=5.8
c) Cash flow margin ratio = cash flow from operating cash flows/ net sales
= £k 18,530/£k 106,872 x 100= 17%
A lower percentage of 17% shows the low ability of the firm to convert sales to cash.
d) Current ratio = current assets/current liabilities
=£k 113,049/£k 17,176
= 7 times
The Home Range Ltd can meet its short-term debt seven times and thus the firm has high
liquidity.
e) Quick ratio (Acid-test) = current assets-inventory/current liabilities
=£k 113,049-£k8, 792/£k 17,176
=£k 104,257/£k 17,176
=6.0
Since the acid test ratio is far much higher than 1.0, this shows that the company doesn’t have
to sell its inventory to meet present debts. This further shows that the firm’s liquidity is stable
presently.
Question 3

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Recommendations
i. An increase of profit before tax in the financial year 2018.
Clare should endeavour to increase the profit before tax seeing that the loan will have been
put into the intended use in the previous year. This can be achieved by further increasing
sales by considering relatively cheaper marketing and advertising methods.
ii. Reduce the amount of receivables.
Clare should endeavour to reduce the massive amounts of money that customers owe the
business. This can be achieved by engaging a debt collector on short terms either a bank or an
employee, whichever is economical. The company can also introduce policies on credit sales
such as the penalty for delayed payments to encourage the creditors to pay promptly.
iii. Reduce the percentage of payables
The 18% increase in payables is a good show that the suppliers have a good relationship with
the company; however, this should be avoided as it can show the false financial health of the
organisation.
iv. Improve cash flows from business operations.
An operating cash flow ratio of 1.0 is not that stable, and thus, the organisation should
increase the cash flows that accrue from its operations about its current obligation. This can
be achieved by reducing the massive amounts owed by creditors either by lowering the
payment period or engaging a debt collector to pressure the creditors to pay in time.