Financial Analysis Report: Understanding Pemberley Business Statements

This report provides a detailed financial analysis of Pemberley Business, examining key aspects of its financial statements. It begins with an executive summary outlining the report's objectives and scope, followed by an in-depth analysis of the statement of financial position, including movements in ROCE, current ratio, and receivable days, and their implications for bank decisions. The report also explores different elements of the financial statements, such as bonus issues versus right issues, and analyzes solvency ratios like gearing and interest coverage. It calculates these ratios, compares them with actual ratios, and assesses their impact on the bank's decision-making process. The analysis considers the reasons behind the observed movements and provides a comprehensive understanding of Pemberley's financial health, offering valuable insights for lenders and investors.

Understanding
Financial Statements
of Pemberley Business

QUESTION 5
To: Charlotte Lucas, Head of Loans Department
From: William Darcy, Financial analyst
Date: May 1 2019
Title: Understanding financial statements Pemberley business
Executive summary: To complete a detailed analysis of financial statements of Pemberley
Business. Various topics are discussed under this report which includes features of Pemberley's
financial statements, interpretation of the statement of profit and loss and financial position. At
the end interpretation of cash flow of the company is does. With the help of all these aspects
positive and negative impact of them on bank's decision regarding funding to organisation can
be analysed.
Main Report:
QUESTION 3
A. Movement in Pemberley’s Statement of financial position
(i)From the exhibit 3 in which ratios are calculate various movements are identified. All of
them are as follows:
 ROCE of Pemberley has increased in year 2018 as compare to 2017. For year 2017 it
was 14.53% which has been increased in year 2018 up to 18.90%.
 Current ratio of Pemberley is decreased up to 2.50 in year 2018 as compare to 3.67
which is for 2017.
 Receivable days of Pemberley is increased in year 2018 up to 64.95 from 45.67 which is
for year 2017.
(ii) Positive or negative impact of movement on bank’s decisions:
 Increment in ROCE can leave positive impact upon bank’s decision because in year
2018 organisation’s return is increased as compare to previous year. It shows that the
company is generating good returns on its capital employment.
 Decrement in current ratio can leave negative impact upon bank’s decision because now
its ability of paying out all current liability is decreased as compare to previous year.
 Increment in receivable ratio can leave negative impact upon bank’s decision because
now organisation’s account receivable period is increased which means long term credit
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will be provided to debtors.
(iii) Reason behind movements
 Capital employed is increased due to enhancement in operating profits, equities and
debts of organisation.
 Current ratio is decreased because current liabilities are increased with more percentage
as compare to current liabilities.
 Receivable days of debtors are increased due to increment in receivables and revenues
of the company.
B. Explanation of different elements:
(i) In transfer to share and dividend accounts has the bonus issue been reflected in
Pemberley’s financial statement in year 2018.
(ii) Shareholders of Pemberley are receiving bonus shares instead of a dividend.
(iii) Difference between bonus and right issues:
 Existing shareholders have right to subscribe new shares that are issued by company in
the market. When organisation attain supernormal profits then it prefers to convert them
into bonus shares that are issued to shareholders free of cost.
C. Setting out in Exhibit 5:
(i)Solvency ratios such as gearing and interest coverage help to analyse financial solvency
of company because if organisation is having gearing ratio less than 25% then it depicts
that there is a low risk for investors and lenders. Interest coverage ratio shows ability of
organisation to pay interest on its debts. If it is more than 2 then it is considered that
company is in good situation and have good financial solvency.
(ii) Calculation of ratios:
 Interest coverage ratio: Operating profit / finance cost
=210/ 50
= 4.2
 Liquidity ratio (Current ratio): Current assets/ current liabilities
=1216/ 606
=2.01
(iii) Comparison of revised ratios and actual ratios:
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In Exhibit 3 liquidity ratio of the company is 2.50 and the revised ratio is 2.01 which
shows that organisation’s ability to repay its current liabilities is decreased. Revised interest
cover ratio of the company is also decreased up to 4.2 from 10.20 which is actual ratio of year
2018. It shows that capability of paying interest on debts is reduced.
Revised information can leave negative impact upon bank’s decision because it
reflects that organisation has become weaker.
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