Business Finance: Case Study of UTL and Madagascar Ltd

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

Business Finance
1

Table of Contents
Part 1:...............................................................................................................................................3
Executive summary:........................................................................................................................3
1):.....................................................................................................................................................3
2):.....................................................................................................................................................5
3):.....................................................................................................................................................6
Part 2:...............................................................................................................................................8
Executive summary:........................................................................................................................8
1:......................................................................................................................................................8
2:....................................................................................................................................................14
References:....................................................................................................................................15
2

Part 1:
Executive summary:
This report is going to be created for the analysis of UTL which is working in the production
industry of industrial tools. Report will focus on the financial aspects of company and aid to
understand the concepts of financial reporting and working capital management. In the initial
stage of report, concepts of profits, cash flow, inventory and more will be explained along with
the problems that are related to the working capital management in UTL Company. At the end of
report, useful advice will be provided to the managers that can be adapted to the elimination of
problems identified earlier.
1):
(a):
Profit:
In respect of a business organisation, Profit can be explained as the amount which remains in the
hands of company after paying all expenses that has been made to gain such incomes. In other
works, it is the amount of surplus which remains with the commercial entity after deducting all
paid and non-paid costs from the total of earned incomes (Leonard, 2019).
Cash flow:
It can be explained as the reaming balance of cash resources which remains with a commercial
entity like UTL Ltd after ducting all the cash payments from the sum of all cash-inflows. Thus,
only cash transactions are considered during the determination of net cash flow.
Profit: Cash flow:
 Income or expenses that are occurred but
not received should be included in profits.
 Negative balance of profitability indicates
 Transactions that are not affecting the
balance of cash resources will not be
included in cash flows.
3

problematic conditions (Tradegecko,
2019).
 Negative balance of net cash flow not an all
time indicator of problematic financial
condition (Tradegecko, 2019).
(b):
Working capital
Term WC refers the balance of resources that are available within organisational activities to
successfully handle the day to day business events. It can be evaluated through deducting the
sum of current obligations from the sum of available current assets. It is a popular concept of
financial management which helps in correct management of liquidity and operational efficiency.
Inventory:
This term refers the total of all raw materials, finished goods and WIP products that are held by a
business to sell during the common course of business. It is classified as the current assets and
should be disclosed under the head of current assets (Leonard, 2019).
Receivables:
In commercial terms, "receivable" is for those amounts which are outstanding through the
normal course of business with the customers of a company. A business organization that is
selling goods or services on credit will have an outstanding amount, which will represent the
amount with the customer.
Payables
It is a liability account which stands for the amounts that are payable to the suppliers of
commercial entity. It should be noted that payable is indictor of only those amounts which are
needed to be paid to the creditor of business (Tradegecko, 2019).
c):
4

Working capital and cash flows are interrelated to change in balance of working capital items
makes significant impact on the cash flow. Net change in working capital is needed to be
reported during the evaluation of cash flows. Following are some examples of impact on cash
flow due to change in working capital figures:
 If current liabilities are increasing more than current assets, it will make negative impact on
the cash flows whereas alteration in current assets is more than current liabilities, it will lead
to increase cash flows (Kennan, 2019).
 Cash flow will decrease if payments are more than cash receipts while cash flow will
increase if cash incomes are higher than cash payments.
2):
Managerial activities of UTL Ltd are not in well manner because there are several concepts
which are demanding immediate improvements. Following are some problematic issues which
are identified in UTL:
Cash flow and profits:
Profits and cash flows, both are vital part of business so both are required to be maintained in
appropriate manner to maximise the organisation’s stability. In respect of UTL, analysis of
profits conditions are stating that reformation of strategy is necessary o assure the enhancement
in incomes because availability of net incomes for shareholders is decreasing continuously
(Kennan, 2019). This type of declining trends will reduce the faith of shareholders for company
activities which will affect the availability of funds in future. Cash flow is another vital issue for
the UTL because Debts are increasing continuously and outflow of cash resources is not
accountable with cash incomes.
Working capital issues:
Practices of working capital management are not well in UTL and there are several issues
associated with the managerial process. In respect of inventory, large number of inventory goods
is stored at the closed site (Brico-France) of UTL which will be utilised after the solution of
associated dispute. Here, opinion of managers is not appropriate because unutilised inventory
5

will be obsolete before the resolution of such dispute. Additionally, stored inventory is creating
an additional cost for the business in the form of storage and security cost.
As cash business policy is followed by the UTL Ltd, there are no issue related to the receivables
but whole business of company is dependent on two major clients so company should try to
enhance the number of clients (Kennan, 2019). Improvement in cash management is also
required because £ 38m are invested in a designing company without efficient planning and the
same is reflecting in enhanced balance of financial debts.
Supplier management practices of company are also not well and a supplier filed a legal case
against the company. To ensure that raw items are available at credit and low prices, effective
communication and business terms should be maintained with suppliers.
3):
To remove all the problematic issues, UTL can implement following recommendations:
 Enable inventory management:
Inventory is one of the most significant parts of working capital so all the inventory items should
be managed appropriately so that cost of storage, charring and order can be mitigated. For
example, inventory that is stored at the discontinued site should be sold immediately to unlock
the amounts and reduce the risk of inventory obsolete (PWC, 2019).
 New share issue:
In the current situation, new shares should be issued by UTL Ltd to reduce leverage risk. This
amount can be used to reduce the cost of financing through the repayment of loans, because there
is no fixed payment obligation in equity capital.
 Investment planning:
Large amounts are invested by the UTL in external companies which is presenting the
inefficiency of investment activities. Properly planning should be made to reduce the
unnecessary investments so that unblocked amounts can be utilised for other purposes (PWC,
2019).
6

Part 2:
Executive summary:
The explanation that is included in this description is related to the financial data of Madagascar
Ltdand financial performance of a company is going to be evaluated through the application of
ratio analysis techniques. The company is engaged in the production of jewelry products and an
active market is available for the company in the UK. Analysis of financial aspects of company
activities through ratio analysis technique will help to outline strong and weak areas of
performance so that wellness of business activities can be enhanced up to the desired level.
1:
a):
 Sales growth:
This ratio represents the growth in sales figures that is gained by a business during the year
against sales figures for last year. Calculations of sales growth ratio are made through the
comparison of sales figures of two continuous years to find the positive or negative trends of
sales outcomes (Adewuyi, 2016).
`
 Gross Profit Margin:
Term Gross profit presents the number of revenues that remain in the hands of business after
deducting all the primary expenses of business activities. The figure of gross profit can be
calculated through deducting the primary costs or cost of goods sold from total revenues (Goyal,
2016). Results of GPM inform the level of efficiency that has been maintained by the company
in handing of primary costs.
7

 Operating Profit Margin:
OPM illustrates the operational efficiency of company operations and calculated through the
comparison of operational profitability (EBIT) and net revenues. It is considerable that the
operating profit is evaluated by deducting expenses related to operations (Andrijasevic and Pasic,
2014).
 Gearing:
It is a risk leverage ratio which evaluates the financial risk that is associated with lending funds
to an organization. Through the comparison of Debt and equity figures, the risk of lending can be
evaluated and mitigated to the lowest year which will help to create the optimal structure of
working capital (Adewuyi, 2016).
 Interest Cover:
IC ratio is a maker of wellness of organizational incomes against the financial costs that is paid
or has to be paid by the business for borrowed funds. It helps to determinate how efficiently a
business in earning incomes to handle interest costs (Nuhu, 2014).
 Liquidity ratio:
Liquidity is a major concern for every business and can be calculated through the comparison of
short-term assets against current liabilities of the business. Evaluating the liquidity helps in
determining the power of internal cash available for repayment at the time of near-coming
obligations (Goyal, 2016).
8

 Return on Equity:
It represents the profitability situation which has been maintained by the business against the
amount of capital in recent years which was introduced in operation to obtain such income
(Myšková and Hájek, 2017). Through this ratio, managers can mark-out that how efficiently an
association is gaining profit returns for shareholders.
 Return on Capital Employed:
In this ratio, a comparison of net incomes and capital employed is made to find the condition of
profit returns against the figures of total capital that have been utilized to gain such returns. It is
an absolute measurement of profitability to determinate the efficient use of working capital so
that inefficiencies can be eliminated (Adewuyi, 2016).
9

b):
Ratio analysis:
Particulars
Amount
20X9 20X0 20X1
Liquidity Ratio 2.24 2.38 0.92
Sales Growth N.A. 10% 15.91%
Gearing 37.96% 42.07% 51.14%
Return on Equity 26% 20.75% 7.56%
Operating Profit Margin 30% 25.51% 10.68%
Interest Cover 12 8.42 3.06
Gross Profit Margin 63.89% 63.64% 59.26%
Return on Capital
Employed 22.04% 16.86% 6.96%
10

c):
As business conditions are changing rapidly, financials outcomes of Madagascar Ltd are
showing highly variable trends. Following are some major reasons for the changes in the
financial results that are identified through the above ratios:
 Sales Growth
Change in sales of 2019 cannot be identified because sales figures for the previous year are not
provided. From the comparison of the next two years, the growth of 10% and 15.90% have been
identified in sales figures which are concluding that most appropriate and customer oriented
strategy of sale is adopted by the company. Conditions are marking that strong and satisfied
consumer base is the main reason for the continuous growth in business.
 Gross profit margin:
A constant trend has been identified in the gross profitability of Madagascar Ltd during the year
2019 and 2020 because the percentage of GPM was stable to 63%. In 2021, Gross margin
declined to 59% which is enough to say that prime costs are showing an increasing trend. Main
causes for the increment in prime cost can be classified as the increment in prices of material,
wages and overheads.
 Operating profit margin (OPM):
Operating profitability of Madagascar is declining continuously and reduced to 10.37% in 2021
which was approx. 30% in 2019. Main causes for the reduction in operating returns can be
explained as the enhancement in depreciation and operational expenditure. The increment in
deprecation is arising due to the balance of fixed assets are increasing regularly whereas
operational costs are rising due to inflation and economic changes.
 Gearing ratio:
From the analysis of leverage risk, it is identified that risk for lenders is enhancing every year in
Madagascar Ltd because business activities are going to be financed through debt borrowings.
The increment in leverage risk leads for the enhancement in interest cost of the optimum
structure should be maintained by the company.
11

 (ICR) Interest coverage ratio:
With the results, it can be said that Madagascar Ltd. is earning enough money to pay the interest
cost but the percentage of return against interest expenditure is decreasing. Here, two main
reasons have been identified for the reduction in ICR; financial debts are increasing regularly and
profit returns decreasing regularly due to the increase in other cooperative costs.
 Liquidity Ratio:
A business organization should maintain the ratio of 2:1 among current assets and liabilities to
assure the availability of cash resources all the time. The current ratio of Madagascar Ltd
declined to 0.92t which is a marking that enough current assets are not available for the payment
of short-duration obligations.
 Return on Equity:
ROE which presents the organizational profitability against the shareholder's fund is showing a
significant decline since the last 3 years because the cost of production, financing, and operations
is increasing.
 Return on Capital Employed
Return on the balance of capital employed declined to 6.96% which was more than 20% before 2
years. Reasons for a reduction in ROCE include the increment in debts, share capital and
operational costs.
12