Financial Management and Control: Pro Bio PLC Performance Analysis

This report provides a comprehensive financial analysis of Pro Bio PLC, evaluating its performance through various financial ratios, including profitability, liquidity, gearing, assets utilization, and investor potential ratios. It calculates and analyzes the working capital cycle, comparing the company's efficiency in converting current assets into cash over two years. The report also discusses the limitations of ratio analysis in both cross-sectional and time-series comparisons. Furthermore, it explores different investment appraisal techniques and various traditional budgeting methods. The analysis is based on the provided financial statements and aims to assess the company's financial health and identify areas for improvement. The report is structured into three parts, covering different aspects of financial management and control, and includes tables and graphs to support the analysis.

FINANCIAL
MANAGEMENT AND
CONTROL

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Part (A)........................................................................................................................................3
1. Evaluation of performance of Pro Bio plc in terms of different types of ratios......................3
2. Calculation of working capital cycle.....................................................................................10
3. Limitation of ratio analysis for both cross-sectional and time-series comparisons..............12
Part (B) .....................................................................................................................................13
1. Use of different types of investment appraisal techniques....................................................13
Part (C)......................................................................................................................................17
2. Use of various kinds of traditional budgeting methods........................................................17
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................18

INTRODUCTION
In the current business scenario, it is essential to make an effective utilisation of
resources so that level of profitability can be increase. The term financial management can be
defined as a way of assessing need of financial resources in companies and providing funds from
best resources. In this aspect controlling of monetary funds is also essential so that it can be
allocated to different activities in a better way (Doinea and Lapadat, 2012). Main objective of
report is to assessing the performance of given company. The project report is categorised into
different parts in which part A, covers information about various ratios, and working capital
cycle. As well as part B, includes description of investment appraisal techniques and part C,
contains information about role of traditional budgeting methods.
MAIN BODY
Part (A)
1. Evaluation of performance of Pro Bio plc in terms of different types of ratios.
 Profitability ratio- This is a type of ratio which is calculated by business entities in order
to assess efficiency of generating revenues (Chan, Chau and Chan, 2012). Herein, below
some ratios are mentioned that are as follows:
(I) Gross profit ratio = Gross profit / Net sales * 100
All data in £000 except gross
profit ratio
2018 2019
Gross profit 9850 9485
Net sales 17890 19345
Calculation 9850/17890*100 9485/19345*100
Gross profit ratio 55.06% 49.03%

GP ratio (in percentage)
46
48
50
52
54
56 55.06
49.03
2018
2019
Analysis- On the basis of above presented graph, this can be find out that above company has
different amount of gross profit ratios in both year 2018 and 2019. In year, 2018 their gross
profit ratio was of 55.06% which reduced in next year till 49.03%. It is indicating that company's
efficiency of gaining gross revenue has been reduced in year 2019. The reason of decreasing in
this ratio is increasing in value of cost of sales in year 2019 as compare to year 2018.
(ii) Operating profit ratio = Operating profit / net sales * 100
All data in £000 except
operating profit ratio
2018 2019
Operating profit 6610 5710
Net sales 17890 19345
Calculation 6610/17890*100 5710/19345*100
Operating profit ratio 36.95% 29.52%
Operating profit ratio (in percentage)
0
10
20
30
40 36.95
29.52
2018
2019
Analysis- On the basis of above presented graph, this can be find out that above company has
different amount of operating profit ratios in both year 2018 and 2019. In year, 2018 their
operating profit ratio was of 36.95% which reduced in next year till 29.52%. It is indicating that
company's efficiency of gaining operating profit has been reduced in year 2019. The reason of

decreasing in this ratio is increasing in value of operating expenses in year 2019 as compare to
year 2018.
(iii) Net profit ratio = Net profit / net sales * 100
All data in £000 except net
profit ratio
2018 2019
Net profit 1945 580
Net sales 17890 19345
Calculation 1945/17890*100 580/19345*100
Net profit ratio 10.87% 3.00%
Net profit ratio (in percentage)
0
2
4
6
8
10
12 10.87
3
2018
2019
Analysis- On the basis of above presented graph, it can be find out that there is huge gape in net
profit margin in both of years. Like in year 2018, the net profit ratio was of 10.87% which
reduced and next year till 3.00%. It is so because of lower amount of net profit in year 2019 that
was of £580000 while in year 2018, its value was of £1945000. So in comparative manner,
company's performance is poor in year 2019.
 Liquidity ratio- This is a type of ratio which is calculated in order to evaluate liquidity
position of companies in terms of paying short term debts (Nicolăescu, 2013). It consists
two types of ratios such as:
(I) Current ratio = Current assets / current liabilities
All data in £000 except
current ratio
2018 2019

Current assets 3790 4130
Current liabilities 2555 3310
Calculation 3790/2555 4130/3310
Current ratio 1.48 times 1.25 times
Current ratio (in times)
1.1
1.15
1.2
1.25
1.3
1.35
1.4
1.45
1.5 1.48
1.25 2018
2019
Analysis- On the basis of above presented graph, it can be find out that company's current ratio is
not in ideal condition. This is so because the ideal current ratio is 2:1 and their ratio is below it.
Like in year 2018, the current ratio was of 1.48 times which reduced in next year and became of
1.25 times. This is so because company's current assets are increasing with lower percentage but
current liabilities are increasing with huge margin in year 2019.
(ii) Quick ratio = Quick assets / current liabilities
All data in £000 except quick
ratio
2018 2019
Quick assets 2790 2650
Current liabilities 2555 3310
Calculation 2790/2555 2650/3310
Quick ratio 1.09 times 0.80 times

Quick ratio (in times)
0
0.2
0.4
0.6
0.8
1
1.2 1.09
0.8
2018
2019
Analysis- Similar as the above current ratio, quick ratio is also lower ideal ratio that is of 1.5:1
times. In year 2018, this was of 1.09 times which reduced in next year and became of 0.80 times.
It is so because decreasing in value of quick assets in year 2019 as compare to year 2018.
 Gearing ratio = Total debt / total equity
All data in £000 except quick
ratio
2018 2019
Total debt 8955 12610
Total equity 9580 10160
Calculation 8955/9580 12610/10160
Gearing ratio 0.93 1.24
Gearing ratio
0
0.2
0.4
0.6
0.8
1
1.2
1.4
0.93
1.24
2018
2019
Analysis- On the basis of above presented graph, this can be find that company has different
amount of gearing ratio which is of 0.93 in year 2018 and 1.24 in 2019. It is so because of
variation in value of total debts and equities in both of years.

 Assets utilisation ratio- This ratio is calculated in order to assess efficiency of utilising
assets by a company (Kober, Subraamanniam and Watson, 2012). It consists below
mentioned ratios such as:
(I) Total assets turn over ratio = Net sales / average total assets
All data in £000 except total
assets turn over ratio
2018 2019
Net sales 17890 19345
Total assets 18535 22770
Calculation 17890/18535 19345/22770
Total assets turn over ratio 0.96 0.85
Total assets turn over ratio
0.75
0.8
0.85
0.9
0.95
1 0.96
0.85 2018
2019
Analysis- On the basis of above presented graph, it can be find out that efficiency of utilising
assets of this company has been decreased in year 2019 in compare to year 2018. Such as in year
2018, it was of 0.96 which reduced in next year and became of 0.85.
(ii) Fixed assets turn over ratio = Net sales / fixed assets
All data in £000 except fixed
assets turn over ratio
2018 2019
Net sales 17890 19345
Fixed assets 14745 18640
Calculation 17890/14745 19345/18640
Fixed assets turn over ratio 1.21 1.04

Fixed assets turn over ratio
0.95
1
1.05
1.1
1.15
1.2
1.25 1.21
1.04 2018
2019
Analysis- On the basis of above presented graph, it can be find out that efficiency of utilising
fixed assets of this company has been decreased in year 2019 in compare to year 2018. Such as
in year 2018, it was of 1.21 which reduced in next year and became of 1.04.
 Investor potential ratios- This is a type of ratio which is used by investors in order to
assess the efficiency of companies and to take investment decisions (Bodnar, Consolandi
and Jaiswal‐Dale, 2013). There are different types of ratios such as:
(I) Return on assets – Net income / total assets
All data in £000 except return
on assets ratio
2018 2019
Net income 1945 580
Total assets 18535 22770
Calculation 1945/18535 580/22770
Return on assets 0.1 0.02
Total assets turn over ratio
0
0.02
0.04
0.06
0.08
0.1
0.12 0.1
0.02
2018
2019

Analysis- On the basis of above presented graph, this can be find out that efficiency of this
company in order to generate return has been reduced in year 2019. Though, in both of years
company failed to gain higher return. Such as in year 2018, it was of 0.1 which decreased in next
year till 0.02.
(ii) Return on equity = Net income / shareholders' equity
All data in £000 except return
on equity ratio
2018 2019
Net income 1945 580
Shareholders' equity 9580 10160
Calculation 1945/9580 580/10160
Return on equity 0.2 0.05
Analysis- On the basis of above presented graph, this can be find out that efficiency of this
company in order to generate return on equity has been reduced in year 2019. Though, in both of
years company failed to gain higher return. Such as in year 2018, it was of 0.2 which decreased
in next year till 0.05.
2. Calculation of working capital cycle.
Working capital cycle - The working capital period (WCC) is the time it takes for the net
current assets and current liabilities to be converted into cash (Porras-Gómez, 2014). In the
context of above company, calculation of working capital cycle is done below in such manner:
Working capital cycle -
For year 2018:
Return on equity
0
0.05
0.1
0.15
0.2
0.25
0.2
0.05
2018
2019

= Inventor days + Receivable days – Payable days
= (44+43-68) days
= 19 days
For year 2019:
= (40+50-51) days
= 39 days
Data in days 2018 2019
Working capital cycle 19 39
Working capital cycle (in days)
0
10
20
30
40
50
19
39
2018
2019
Analysis- The above presented graph shows result about working capital cycle. The company's
efficiency to convert cash is different in both of years. Like in year 2018, the company was
taking 19 days in order to convert their current assets into cash. While in year 2019, this time
period raised and became of 39 days. It is indicating that company's efficiency to converting
current assets into cash has been reduced in year 2019 as compare to year 2018.
Working Note:
For year 2018
Inventory turn over ratio = Cost of good sold / Average inventory
= 9040/1092.5 {Average inventory: Opening stock+closing stock/2}
= 8.27
Receivable turn over ratio= Net sales/ account receivable
= 17890/2115

= 8.45
Payable turn over ratio = Total purchase/ accounts payables
= 8855/ 1655 {total purchase: cost of goods sold+closing stock-opening stock}
= 5.35
Inventory days = 365 days / Inventory turn over ratio
= 365 / 8.27
= 44.13 or 44 days
Receivable days = 365 days / receivable turn over ratio
= 365/8.45
= 43.19 or 43 days
Payable days = 365 days/ payable turn over ratio
= 365/5.35
= 68.22 or 68 days
For year 2019
Inventory turn over ratio = Cost of good sold / Average inventory
= 11340/1240 {Average inventory: Opening stock+closing stock/2}
= 9.14
Receivable turn over ratio= Net sales/ account receivable
= 19345/2650
= 7.3
Payable turn over ratio = Total purchase/ accounts payables
= 11820/ 1655 {total purchase: cost of goods sold+closing stock-opening stock}
= 7.14
Inventory days = 365 days / Inventory turn over ratio
= 365 / 9.14

= 39.93 or 40 days
Receivable days = 365 days / receivable turn over ratio
= 365/7.3
= 50 days
Payable days = 365 days/ payable turn over ratio
= 365/7.14
= 51.12 or 51 days
3. Limitation of ratio analysis for both cross-sectional and time-series comparisons.
Analysis of the ratio is an useful method to compare the public presentation of a
corporation with other businesses. These correlations could be misdirected. Some of the
disadvantages of cross-sectional correlation ratio review are listed below:
 Accounting policies- Accounting policies allows businesses to take accounting measures
and use flexibility when setting precedent (Achleitner, Goergen and Hinterramskogler,
2013). Such an independence leads to gaps in company history. That distorts correlations
of cross-sectional firms in bend.
 Historic cost - If there are businesses with various ages. A tax returns will also include
non-current assets acquired at various times in the previous year that are usually reported
at historical value.
 Different hazard profile- Companies have different profiles of financial and business
threats. Numerous fiscal and competitive risks can be faced by businesses in the same
sector. For comparison, a business with a lower debt ratio can imply a better fiscal
position. But, banks may not keep loans issued to the business due to low credit
worthiness or high tax risk profiling of the business.
 Qualitative factor- Analysis of the ratio does not see qualitative variables including
consistency of course, quality of assets and many more (López, Rich and Smith, 2013).
 Inflation- When in any of the periods under examination the rate of inflation has changed,
this may mean that perhaps the figures are not consistent over time. For example, if the

inflation rate for one year was 100 percent, sales would seem to have increased over the
previous year, when sales did not actually increase at all.
 Operational changes- A business could adjust its fundamental operating structures to such
a degree that a ratio measured many years ago and contrasted to today's same ratio will
result in a false conclusion.
Part (B)
1. Use of different types of investment appraisal techniques.
There are different types of techniques in order to asses the efficiency of different kinds
of investment projects. It depends on companies that how well they are applying these
techniques. Herein, below use of these investment appraisal techniques is done in such manner:
1. Payback period- It is defined as a type of technique that is associated with process of analysing
time period that may occur in process of recovering investment cost (Arrondo-García,
Fernández-Méndez and Menéndez-Requejo, 2016). This is very useful for those companies who
are going to make large capitalised investment because by help of it they may become aware
about estimated time to recover the investment amount. Below, usefulness of this technique is
mentioned in such manner:
 Simplicity- This is one of the key benefit of payback period method as it is easy to use
and calculate. It does not require any typical data gathering and calculation.
 Risk focus- In addition, this technique is beneficial for focusing on risk factors so that
companies can do comparison between two projects on the basis of risks.
Example:
Payback period: Investment/cash flows
Investment = 280000
Cash flow = 80000
Hence payback period = 280000/80000
= 3.5 years.
2. Net present value- It is a type of technique which is related with process of calculating
profitability of different types of investment projects (Lappalainen and Niskanen, 2012). This is
being computed by making difference between PV of cash in & outflows of a particular time

period. In most of the business entities this technique is used in order to assess current value of
their projects and on the basis of it they take decisions whether they should make investment or
not. It has below mentioned importance which are as follows:
 This technique is useful for companies in order to take better decisions and by help of it
they can save funds.
 In addition, under it time value of money factors is considered which makes results more
reliable and useful.
Example:
Hence the value of net present value will be as:
NPV = 297828-275000
= £22828
3. Accounting rate of return - According to this process, the estimated rate of return (ARR) of the
investment is calculated by dividing the estimated annual net operating income by the original
investment and then applied to the required rate of return of the managers to accept or decline a
plan (Richard, Kirby and Chadwick, 2013). If the estimated rate of return of the asset is
approximately equal to the expected rate of return of the company, the plan will be adopted.
Otherwise it will be ignored. The rate of return is determined using the equation as follows:

Accounting rate of return = Incremental accounting income / Initial investment
This technique has some key benefits for companies which are as follows-
 This approach alone takes into consideration the income accounting principle to measure
the return rate. In fact, the accounting income can be determined accurately from the
financial statements.
 This approach accepts the concept of net earnings, i.e. after tax and depreciation. This is a
critical factor in assessing a plan for a project.
Example:
Initial investment= 275000
So,
ARR = 33541.67 / 275000*100
= 12.19%
4. Internal rate of return- The Internal Rate of Return (IRR) is the rate of interest that helps make
a plan zero's net present value (NPV). In other words, on a project or investment, it is the
anticipated compound annual return rate that will be gained. Companies invest in various
projects to create value and improve the wealth of their investors, which is only feasible if the
projects they invest in earn a return higher than that of the required rate of return expected by
capital suppliers. It has some importance which are as follows:
 First and foremost, the internal rate of return method takes into account the value of
money when determining a plan (Clinton, Pinello and Skaife, 2014). As well as by
estimating the rate of interest at which PV of future cash flows is equivalent to the
necessary investment, users can calculate IRR.

 The most attractive feature about this approach is that when the IRR is measured, it is
very easy to interpret.
Example:
Internal rate of return =
Lower discounted rate + NPV at lower discount rate / (NPV at lower discount rate- NPV at
higher discount rate) * Higher discount rate- lower discount rate
Part (C)
2. Use of various kinds of traditional budgeting methods.
Traditional budgeting technique- This can be defined as a type of technique of preparing
the budgets in which past years' financial activities are considered as base. Under it, new
activities are not justified, budgets are prepared by making some corrections in last years budgets
(Kavulya, 2017). In this budgeting, only those items needed to be justified whose value is lower
or higher from the last years' budgets. This method of budgeting is variant from zero based
budget but it is much more similar as incremental budgeting method. Most of the companies are
using this technique of budgeting because it is less cost and time consuming. Herein, below some
key advantages of this budgeting technique are mentioned which are as follows:
 This budgeting technique is useful in better decision-making. It is so because by help of
budgeted activities, this becomes easier to find out the issues. As well as users can make
modifications in the budgeted when actual value of expenditures exceeds estimated
amount of expenses.
 In addition, this budgeting approach is that it is useful for obtain financing. It becomes
possible because managers and financial department gather key information regards to
needed amount of funds. On the basis of it, companies acquire financial resources.

Alternative method of budgeting:
Apart from the traditional budgeting, there are some other budgeting techniques which
are as follows-
Zero based budgeting - Zero-based budgeting involves justifying spending above a zero base and
calculating costs for various production and service levels, i.e. justifying all expenditure, not just
incremental expenditure (Ben Slama Zouari and Boulila Taktak, 2014). The main advantage of
zero-based budgeting is that all planned expenditures can be accurately measured and that
possible and contingent activities can be investigated more closely. It has some advantages
which are as follows:
 It is beneficial for companies in order to make an effective allocation of resources.
 As well as by help of this budgeting technique, managers become able to find out the cost
effective ways in order to enhance the activities.
 In addition, by help of this budget communication and coordination also increase.
So, these are some key benefits of above mentioned budgeting technique for business entities.
CONCLUSION
On the basis of above project report, it has been concluded that management of financial
resources is too crucial in order to generate higher amount of revenues. Under the report,
financial position of ProBio company is assessed. As accordance of ratio analysis, it can be
concluded that their performance is not so effective in year 2019. As well as their efficiency to
convert current assets into cash is also better in year 2019. Apart from the above calculations,
some theoretical concepts are also described such as limitation of ratios. Along with critical
evaluation of investment appraisal techniques like payback period method, NPV etc. In the end
part of report, role of traditional budgeting and zero based budgeting is concluded in a detailed
manner.
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