Financial Analysis Report: XYZ Company's Performance (2013-2016)

This report presents a comprehensive financial analysis of XYZ Company, a German firm experiencing rapid growth. It begins with an overview of the company's sources and uses of funds from 2013 to 2015, highlighting shifts in financing strategies. The report then delves into working capital calculations, assessing the company's short-term financial health and efficiency. Pro forma balance sheets and profit and loss statements for 2016 are constructed to project future performance. The core of the report focuses on investment appraisal techniques, specifically NPV and IRR, to evaluate a new project's viability. The analysis includes detailed calculations of the cost of capital, incorporating risk-free rates, equity risk premiums, and beta values. The conclusion summarizes the company's strong financial performance, the positive outcomes of the investment appraisal, and provides recommendations based on the financial findings.

FINANCE MANAGEMENT
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Table of Contents
INTRODUCTION ...............................................................................................................................5
TASK 1 ................................................................................................................................................5
1. Uses and Sources of Funds for 2013-2015 period.......................................................................5
2. Calculation of Working Capital...................................................................................................5
TASK 2 ................................................................................................................................................7
1. Application of Investment Appraisal Techniques........................................................................7
2. Recommendation for acceptance of Project................................................................................8
Conclusion............................................................................................................................................9
REFERENCES...................................................................................................................................10
Index of Tables
Table 1: Calculation of Working Capital..............................................................................................6
Table 2: Pro forma Balance Sheet for 2016..........................................................................................6
Table 3: Pro Forma Profit and Loss Statement.....................................................................................7
Table 4: Calculation of NPV and IRR (Amount in€ millions).............................................................7
Table 5: Calculation of Discounting factor...........................................................................................8
Table 6: Details of risk free rate, premium and beta............................................................................9
Table 7: Calculations for weights and cost of debt and equity.............................................................9
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INTRODUCTION
Finance is at heart of every business. Financial management is core activity of business to
maintain its financial health and improved performance every year. Capital structure of business is
calculated in this report using various ratios and forming Pro forma balance sheet and Profit and
loss account for a German company XYZ. Moreover this reports specifies the investment appraisal
techniques and detailed insight into calculation of overall cost of capital.
TASK 1
1. Uses and Sources of Funds for 2013-2015 period
There are various sources of finance available for companies and their utilisation differs
with nature of business, repartition and many more factors such as duration for which funds are
required, cots of funds etc.(Biddle, 2015).
2013 2014 2015 2016
Source of Funds Long term
debt+Equity share
capital+ bank loan
Long term
debt+Equity share
capital+ bank loan
Long term
debt+Equity share
capital+ bank loan
Long term
debt+Equity share
capital+ bank loan
Uses of Funds Funds are utilised
to purchase
inventory and
fixed assets to
derive future
economic benefits.
There is
significant
investment in
fixed assets in
2014 as compared
to 2013 which is
funded from
raising equity and
long term debt
aggressively.
Increase in fixed
assets and current
assets in 2015 is
funded from
raising long term
debt and partially
from equity share
capital.
In year 2016 new
projects are to be
raised from bank
loans and avoiding
the long term debt
with higher
interest rates.
2. Calculation of Working Capital
Working capital is a measure to check the company's short term Financial health and its
efficiency to repay the current obligations(Baños-Caballero, García-Teruel and Martínez-Solano,
2014). Working capital is calculated by deducting current liabilities from the current assets.
Working capital is expected to decrease in 2016 due to decrease in cash. Account payables and
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Inventory are increased for 20% in respect to sales.
Table 1: Calculation of Working Capital
2013 2014 2015 2016
Particulars
Amount
in€millions
Amount in€
millions
Amount in€
millions
Amount in€
millions
Current Assets (A) 5668 10083 13038 15581.6
Current Liabilities (B) 3826 7290 9378 13298.48
Working Capital (A-B) 1842 2793 3660 2283.12
Interpretation
It can be observed form working capital calculations that company has efficiently managed
the working capital since 2013. Working capital is continuously growing depicting the efficiency of
current assets over current liabilities.
Table 2: Pro forma Balance Sheet for 2016
2013 2014 2015 2016
Particulars
Amount
in€millions
Amount in€
millions
Amount in€
millions
Amount in€
millions
Assets
Cash 205 375 245 230
Notes and Acc. Receivables 2920 5883 7013 8415.6
Inventory 2543 3825 5780 6936
Total current assets 5668 10083 13038 15581.6
Net Fixed assets 903 2208 2433 2578
Other Assets 184 907 892.00 967.24
Total Assets 6755 13198 16363 19126.84
Liabilities
Bank loans 2323 4355 6075 9334.88
Accounts and trade payables 1503 2935 3303 3963.6
Total current Liabilities 3826 7290 9378 13298.48
Long term Debt 1236 3785 4122 4122
Total Liabilities 5062 11075 13500 17420.48
Common stock 53 55 58 60
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Paid-in-capital 740 763 815 845
Retained earnings 900 1305 1990 801
Total Liabilities and net worth 6755 13198 16363 19126.84
Assumptions:
1. Other assets and general and administration expenses are expected to grow in 2016 in
respect to sales at the average rate of past three years which comes to 4.96% of sales in year
2016.
2. Sales, Delivery and warehousing charges are in direct connection to sales and increase ins
ales will cause increase of 20 % in the same.
3. Account Receivables, Gross Profit and EBIT are taken in same ratio to sales as in year 2015.
4. Bank loans are calculated as balancing figure of the balance sheet.
Interpretations
From the above balance sheet it can be observed that financial wealth of the company is
rising since 2013. Further financial halt and performance of the company is good based on the
balance sheet figures. Further growth in working capital depicts that liquidity is maintained and
current assets are adequate to meet the current obligations.
Table 3: Pro Forma Profit and Loss Statement
2013 2014 2015 2016
Particulars
Amount in€
millions
Amount in€
millions
Amount in€
millions
Amount in€
millions
Net Sales 8055 12765 16253 19503.60
COGS 5690 8785 10540 12648.00
Gross Profit 2365 3980 5713 6855.60
Sales, delivery, warehousing 1015 1793 2373 2847.60
General and administration expenses 547 945 1125 1372.77
Total expenses 1562 2738 3498 4220.37
EBIT (Operating market) 803 1242 2215 2658.00
Interest Expense 495 605 950 1000.30
Profit before tax 308 637 1265 1657.70
Taxes 113 225 481 630.32
Net Income 195 412 784 1027.38
Less : Dividend 226.02
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Retained earnings 801.36
Interpretations
XYZ has performed significantly well in year 2016 as compared to previous years due to
rise ins ales at the Rte of 20% and further decrease in interest cost has contributed towards it. In
year 2016 company is distributing dividends at the rate of 22% which will increase its market value
in terms of rise ins hare prices and increased demand.
TASK 2
1. Application of Investment Appraisal Techniques
Investment Appraisal techniques are the tools of financial planning which assist in decision
making regarding major projects of expansion or purchase of machinery (Baum and Crosby, 2014).
In the case of XYZ company a new project is under consideration which is evaluated under the
financial microscope of NPV and IRR.
Table 4: Calculation of NPV and IRR (Amount in€ millions)
Particulars Year 0 Year1 Year2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Initial investment 210 0 0 0 0 0 0 0 0 0 0
Savings in Raw Materials 0 135 135 135 135 135 135 135 135 135 135
Additional expenses 0 95 95 95 95 95 95 95 95 95 95
Working Capital 37 0 0 0 0 0 0 0 0 0 0
Working capital recovery 0 0 0 0 0 0 0 0 0 0 33.3
Loss of sales 0 10 10 10 10 10 10 10 10 10 10
Tax benefit on depreciation 0 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 7.35 IRR
Net cash flows 247.00 37.35 37.35 37.35 37.35 37.35 37.35 37.35 37.35 37.35 70.65 9.58%
Discounting factor @4.36% 1.00 0.96 0.92 0.88 0.84 0.81 0.77 0.74 0.71 0.68 0.65 NPV
Present value of Cash-flows 247.00 35.79 34.29 32.86 31.49 30.17 28.91 27.70 26.55 25.44 46.11 72.32
Assumption :
1. Savings in raw material purchase of €135million every is avoidance of outflow therefore
treated as cash inflow while calculating NPV and IRR.
2. Since additional expense of €95million every year is a expense relating to project as existing
capacity and work force will be required for other projects of the company and capacity
enhancement will cost to this project exclusively.
3. Further replacement of fixed assets of company to invest in this company is treated as initial
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investment and tax benefit on depreciation is regarded as cash inflows.
4. Cannibalisation cost of loss ins ales is related to this project and therefore deducted to
calculate cash flows for the years.
Interpretation
 Net Present Value : NPV is the difference between initial cash investment and the
discounted cash inflows. In the current context of XYZ company it can be evaluated that
NPV is positive which implies that net value is added to the company from accepting the
project. Further savings in cash outflows are treated as equivalent to cash inflows.
 Internal Rate Of Return : Internal Rate of return is the discounting rate at which NPV of
the project is 0. However since IRR is greater than cost of capital of 4.36% therefore project
should be accepted by company.
2. Recommendation for acceptance of Project
The project should be accepted by company XYZ because it is generating positive value to
the company and bringing in profitability into company. Although initial investment is high of €
210million and working capital of €37million but, it is easily recoverable through savings in
purchase of raw material which involves significant amount of €135million every year.
Table 5: Calculation of Discounting factor
Calculation of cost of Equity
Particulars Formula Rate
CAPM Model -Expected
Return (cost of equity) Risk free rate+(Risk Premium)Beta 2.25%
Overall Cost of capital
(Cost of debt*Weight of debt)+(Cost of
equity*weight of equity) 4.36%
Assumption :
1. Since project is expected to start on the first day of year 2017 and we are calculating the
return on the last day of 2015 hence one year yield is considered.
2. Since XYZ is German Company with paid up capital of € 815 which exceeds the minimum
capital requirement of €750 Million therefore beta of Dax Index (German Big Cap) is
considered for one year.
Table 6: Details of risk free rate, premium and beta
German Government yield (Risk
free rate)
Equity risk
premium
Beta (Dax Index
(German Big Cap))
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1 year 0.98% 1.65% 0.77
Table 7: Calculations for weights and cost of debt and equity
Net Cost of debt (1- tax rate) Weight of Debt Cost of equity Weight of Equity
0.065 0.67 0.00022505 0.33
CONCLUSION
From the above report it can be concluded that performance of XYZ has increased
significantly in year 2016 due to its decisions of financial findings and rising sales up to 20%.
Further, NPV and IRR calculation indicated that project is acceptable as it will add value to the firm
and will bring profitability.
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