Financial Statement Analysis: Uber Tools Ltd and Madagascar Ltd

Desklib provides past papers and solved assignments for students. This report analyzes the financial performance of two companies.

Business Finance
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Table of Contents
Part 1...............................................................................................................................................3
Executive summary:......................................................................................................................3
1)......................................................................................................................................................3
a)......................................................................................................................................................3
b)......................................................................................................................................................5
c)......................................................................................................................................................6
2)......................................................................................................................................................6
3)......................................................................................................................................................7
Part 2...............................................................................................................................................9
Executive summary.......................................................................................................................9
1)......................................................................................................................................................9
a):.....................................................................................................................................................9
b):..................................................................................................................................................11
c):...................................................................................................................................................12
2)....................................................................................................................................................13
References.....................................................................................................................................15
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Part 1
Executive summary: The following report is projected to provide an understanding about the
financial conditions of the Uber Tool Ltd. to improve the future financial performance of the
enterprise.in the following report in task 1 a major distinction between the profits and cash flows
are provided, definition of working capital, receivables & payables is provide to gather an
understanding about the concepts .in task 2 the analyses about how financial results in UTL is
managed by management and in task 3 the steps which needs to improve the financial position of
the enterprise is analysed and recommended.
1)
a)
Profit:
In Uber Tools Ltd. (“UTL”) profits are derived after deducting the actual expenses incurred from
actual revenue generated from the operations of the enterprise. The main facilitative objective of
the UTL is wealth maximization which results from stable profit maximization practices in the
enterprise.UTL in current year has operating profit before interest and tax was £36 million .
Cash flows:
Cash flows are the actual result that derives from operating activities, investing activities and
financing activities of a particular time period. In UTL to ascertain the exact cash position
management of the enterprise formulates cash flow statements in a particular time period. Cash
flows are the exact cash that is generated from the business activities in a particular financial
period.
Profit in an enterprise is derived after deducting actual expenses incurred in a particular period of
time from actual revenue generated pertaining to that particular time period and whereas cash
flows in an enterprise are the actual cash generated from enterprise business activities. In an
enterprise profits are observed from the income statements of the enterprise and cash flow are
observed from the cash flow statements of the enterprise. Profits and cash flows are two different
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financial parameters that must be ascertained and sufficiently earned for foregoing success of an
enterprise. Most probably success of an enterprise is dependable on its profitability and financial
health of an enterprise. In many enterprises there is a huge growth in sales of a particular period
and due to these sales enough cash is also generated in the enterprise but this situation does not
assure the profitability from that particular project. When an enterprise grows rapidly there can
be chances of conflicts among both these two parameters especially regarding existing corporate
issues in the enterprise.in the above discussed enterprise UTL it can be said that any enterprise if
is sufficient in generating adequate cash flows may not achieve sufficient adequate profits from
these cash flows generated and this serves as a measure which depicts about that sufficient cash
flows is not a suitable criteria to judge the profitability position of an enterprise. As it can also
observed from the analysis of most successful business enterprise that a sufficient profitable
enterprises also suffers from insufficient cash flows and this situation leads to bankruptcy. It can
also be said that in UTL generation of sufficient revenue does not increase the immediate cash
position of the enterprise and if the enterprises incurring expenses that does not decrease the
immediate cash position of the enterprise.
Following below three differences projected to project the actual difference between the profits
and cash flows by taking UTL into consideration:
 Revenue generated: in UTL the last year turnover was £400 million. In this figure of revenue
various types of transactions are also included whose invoice is generated by the enterprise and
actual cash are received in the current year therefore profits are derived on the basis of actual
revenue generated not on the basis of cash received.
 Expenses incurred :in UTL profits are derived after deducting various types of expenses which
is actually not paid and therefore the actual cash outflows are not increased .these profits
includes the amount of outstanding expenses but actual cash flows does not reflect these
payments .
 Profit recognized: in UTL profits are derived and recognized according to the accounting and
this reflects a basic difference between cash flows and profits as in this enterprise many
transactions are recorded at the time of point of sales and actual whether actual cash is received
or not and profits are also recognized according to this context.
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b)
Working capital: Working capital is an actual capital required by the enterprise for maintaining
the operational efficiency of the enterprise. Working capital is derived after deducting the actual
current liabilities from the actual current assets of UTL. Following image provides a detail about
how working capital in UTL is derived:
Receivables: Receivables reflect about the actual amount of cash that is due from their customers
reading the foods delivered to them. In UTL receivables are the actual amount that the company
is liable to receive from the customers in respect to their payment regarding goods received by
them.
Payables: Payables actually reflects about the actual amount of cash that is to be paid with
respect to amount due to the supplier regarding materials supplied to the enterprises. In UTL
payables is the actual cash amount that the enterprise is obliged to pay to the supplier’s regarding
the raw material acquired from suppliers?
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c)
Working capital in an enterprise is the actual difference between the current assets and current
liabilities of enterprise. This amount derived is also known as the net working capital which can
be used in UTL for repayment of its short term obligations.
Changes in the working capital are projected in the cash flow statement in an enterprise. In the
working capital if the current liabilities and current assets are increased in same proportion in the
current year as compared to the previous year then there will be no change in the entire working
capital which needs to be reflected under the operating activities in the cash flow statement. If
these changes in current liabilities are more than the current assets then there will be decreases in
the overall cash flow and if the changes in current liabilities is less than the changes in the
current assets then there will increase in overall cash flow of the enterprises.
2)
Management of financial performance affects the results of the enterprise in financial terms. By
the proper ascertainment of cash flows and profits in UTL financial results are improved as
profits are derived after deducting the actual expenses incurred from actual revenue generated
from the operations of the enterprise. The main facilitative objective of the UTL is wealth
maximization which results from stable profit maximization practices in the enterprise. Although
every enterprise needs huge profits for the survival, stability and growth of the enterprise but all
these survival, stability and growth is not possible without stable cash flows and these practices
improves the financial performance of the enterprise. In UTL Cash flows is the actual result that
derives from operating activities, investing activities and financing activities of a particular time
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period. Cash flows are the exact cash that is generated from the business activities in a particular
financial period. In UTL actual cash flows ascertained from the cash flow statements are used to
meet existing short term obligations of the enterprise and these practices also improves the
financial performance because of reducing existing liabilities. In UTL to ascertain the exact cash
position management of the enterprise formulates cash flow statements in a particular time
period and both these financial terms affects the financial performance of the enterprise. Changes
in working capital as reflected in cash flow statements also affects the financial results of the
enterprise as these changes either effect positively or negatively the existing cash position of the
enterprise. Receivables and payables also affects the financial performance of the enterprise as
improvement in financial performance is possible when there is an increase in the number of
receivables and decrease in the number of payables.
3)
By efficient working capital management following are the steps that are needed to
improve the cash flow position of the enterprise:
 Improve accounts receivable: Receivables reflect about the actual amount of cash that is due
from their customers reading the foods delivered to them. In UTL receivables are the actual
amount that the company is liable to receive from the customers in respect to their payment
regarding goods received by then if the receivables of UTL are recovered on a timely basis then
the cash position of the enterprise will subsequently improve.
 Improve accounts payable: Payables actually reflects about the actual amount of cash that is to
be paid with respect to amount due to the supplier regarding materials supplied to the enterprises.
In UTL if proper negotiation and proper management of the pavement process is made regarding
the payables then the cash position of the enterprise will subsequently improve.
 Reduce expenses: Expenses in an enterprise need to be reduced to initiate continuous
improvement in profitability position of the enterprise. Less expense will results into less cash
outflow in a particular time period. Therefore if there is less expense incurred in UTL then the
cash position of the enterprise will subsequently improve.
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 Proper negotiation with suppliers: If management of enterprise are successful in proper
negotiation regarding the material supplied to them then the cash position will improve.
Therefore management of UTL needs to be successful in negotiating with the suppliers regarding
the prices of materials supplied in order to improve the cash position of the enterprise.
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Part 2
Executive summary
This report is based on the financial information of Madagascar Ltd and going to be prepared to
evaluate the financial performance of the company so that relevant conclusion about the financial
position of the company can be outlined. During the assessment of the report, financial figures of
company’s financial statements will evaluated through the techniques of ratio analysis. After the
analysis, report will present concluded and relevant recommendations that can be adopted by the
Madagascar Ltd to ensure overall wellness of entity.
1)
a):
 Sales Growth:
It is an indicator of increment in total sales and utilised to compare the figures of current sales
against the previous year sales figures to evaluate the wellness of sales efforts. Results of this
ratio present the negative or positive alteration in current year sales against the sales of the
previous year (Nuhu, 2014).
= (Year 2 sales – year 1 sales) / Year 1 sales
 Gross Profit Margin:
It can be explained as the financial matrix that is utilised to evaluate the margin of the entity by
comparing the amount left after deducting the amount of COGS from sales against total revenue.
It is utilised to investigate how efficiently a company is managing its primary costs to maintain
the level of profitability (Nuhu, 2014).
= (Gross income / total sales) * 100
 Operating Profit Margin:
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It is calculated by comparing the figures of EBIT and total sales to evaluate the wellness of
operating efforts of the company. It compares the profitability of the company by using the
figures of income that remains in the hand of the company after paying all production and
optional expenses but before paying financing costs and taxes.
= (Operating income / total sales) * 100
 Gearing:
Gearing ratio is utilised to compare the figures of equity and debts to compare and evaluate the
leverage conditions of a business entity (Haque, 2015).
= Total debts / (total debt + Shareholder fund)
 Interest Cover:
This ratio indicates how easily a business entity can set-off its obligation of financial cost
through net incomes that are earned from the operations
= Operating income / financing costs
 Liquidity Ratio:
These ratios are utilised to evaluate the repayment capability of the organisation against for
short-term obligation. Liquidity ratios are evaluated by comparing current assets of an
organisation against the balance of current obligations (Adewuyi, 2016)s.
= Current assets / Current Obligations
 Return on Equity:
ROE is an indicator of profitability which explains the condition of incomes against the capital
introduced by the shareholders. As shareholders are real owners of the business, ROE is very
useful to evaluate how an organisation is generating income for its valuable shareholders.
= Net income / shareholder fund
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 Return on Capital Employed:
This ratio is utilised to evaluate the efficiency and profitability of the business by comparing the
figures of EBIT and capital employed. It measures the wellness of company activities by
comparing the profits against the total capital introduced to generate income.
= Operating income / Capital Employed
b):
Calculation of referred ratios to evaluate the financial performance of Madagascar Industries
Ltd:
Particulars
Madagascar Industries Ltd
2019 2020 2021
Sales Growth N.A. 10% 15.91%
Gross Profit Margin 63.89% 63.64% 59.26%
Operating Profit Margin 30% 25.51% 10.68%
Gearing 37.96% 42.07% 51.14%
Interest Cover 12 8.42 3.06
Liquidity Ratio 2.24 2.38 0.92
Return on Equity 26% 20.75% 7.56%
Return on Capital
Employed 22.04% 16.86% 6.96%
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c):
Above calculations are indicating that values of calculated ratios are changing every year which
is proving the fluctuation in financial conditions. Possible reasons for the alteration in the above
ratios are discussed below:
 Sales Growth
Sales growth of 2019 is not determinable due to lack of information. Comparison of 2020 and
2021 is indicating the sales growth of 10% and 15.91% respectively. The company is reporting
continuous growth because it has a good customer base in the UK and working with customer-
oriented strategy for last 10 years.
Gross profit margin:
The gross profit margin of Madagascar was 63% in 2019 and 2020 and reduced to 59% in 2021.
During the year 2021, the highest level of sales has been attained by the company but gross profit
has been reduced due to increment in COGS. The increment in COGS may arise due to
increment in material cost, wages rates and overheads charges.
 Operating Profit margin:
Operating margin of the company is showing a continuous decreasing trend (from 30% to
10.368%) since the last three years and the same is arising due to increment in operating costs
and depreciation values. The increment in operating costs may arise due to the impact of
inflation and market changes. Similarly, the company is continuously increasing the balance of
fixed assets so the balance of yearly depreciation is showing an increasing trend.
 Gearing Ratio:
From the results of gearing ratio, it is outlined that leverage risk is increasing continuously and
the same is happening because the company is continuously borrowing money from the market.
 Interest coverage ratio:
Interest coverage of Madagascar Ltd is indicated that availability of incomes against the financial
costs is decreasing regularly. As the company continuously accepting the financial debts,
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