Financial Management Report: Investment Analysis of Nyota Minerals

This report provides a comprehensive financial analysis for Investhical, focusing on an investment in Nyota Minerals Ltd. The report begins with an assessment of the company's financial position, utilizing financial ratios to evaluate profitability, liquidity, efficiency, and solvency. It then delves into the need for working capital and long-term funding, exploring various sources such as angel investors, bank loans, retained earnings, equity financing, and the sale of fixed assets, along with their respective advantages and disadvantages. The report offers recommendations on the most suitable funding options, considering both cost and risk factors. Furthermore, it emphasizes the importance of cost accounting and explores costing tools to evaluate the financial health of Nyota Minerals Ltd, culminating in a master budget and designed targets. The report aims to guide Investhical in making informed investment decisions and optimizing financial management strategies.

Financial Management

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Assessing financial position and providing recommendation............................................1
TASK 2............................................................................................................................................2
1. Need for working capital and long-term requirements of funds........................................2
2. Sources of funding and advantages and disadvantages......................................................3
3. Justified recommendation related to cost and risk.............................................................6
TASK 3............................................................................................................................................7
1. Significance of cost accounting..........................................................................................7
2. Costing tools and systems to evaluate financial health of Nyota Minerals Ltd.................7
3. Recommendation................................................................................................................8
4. Assess budget and budgetary process.................................................................................9
5. Design targets and formulate master budget....................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial management plays a crucial role in the business to accomplish desired results.
The present report deals with Board of Investhical which is planning to invest in Nyota Minerals
Ltd engaged in mining and gold exploration sector. Sources of finance are discussed along with
advantages and disadvantages of the same. Moreover, importance of costing is described along
with recommendation to use adequate source of finance. Costing systems are provided to
improve financial health of company and master budget is prepared as well.
TASK 1
1. Assessing financial position and providing recommendation
Dalata Hotel Group Plc
Particulars Formula 2016 2015
Profitability ratios
Gross profit ratio
Gross profit / Revenue *
100 62.20% 61.50%
Net profit ratio Net profit / Revenue * 100 12.02% 9.73%
Return on capital
employed EBIT / Capital employed 0.07% 0.05%
Return on Equity (ROE)
Net income / Shareholders'
Equity 6.03% 5.34%
Liquidity ratios
Current ratio
Current assets / Current
Liabilities 1.44 : 1 2.84 : 1
Quick ratio
Liquid assets / Current
Liabilities 0.83: 1 2.72 : 1
Efficiency ratios
Debtors Turnover ratio
Net credit sales / Average
accounts receivable 42.04 47.96
Stock Turnover ratio Cost of Goods Sold / 69.4 89.5
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Average inventory
Creditors turnover ratio
Suppliers purchases /
Average accounts payable 42.33 38.58
Solvency ratios
Debt to Equity ratio Debt / Equity 0.43 0.47
Debt to assets ratio Debt / Assets 0.37 0.37
Financial health and recommendation-
Financial ratios have been computed from the financial statements of Dalata Hotel Group
Plc for the year 2015 and 2016 respectively. Organisation is listed on LSE (London Stock
Exchange) and is engaged in hospitality sector. It can be interpreted that financial performance
of company is good but needs to be enhanced by implementing well-structured strategies so that
performance may be increased up to high extent. This can be seen that gross profit ratio in 2015
was 61.50 % which increased to 62.20 % in the year 2016. In the same way, net profit ratio is
also maximised in subsequent year. This implies that it is able to control its expenditures in a
better way. Return on equity and return on capital employed is also maximised which is good
sign of company (Renz and Herman, 2016).
On the other hand, current and liquid ratios have been decreased at the end of 2016 year.
It is recommended that current ratio can be increased by using sweep accounts. This type of
accounts help to transfer funds into higher interest carrying rate when business does not utilise it.
This will help Dalata Hotel Group Plc to have enough of liquidity and it may be able to easily
pay-off liabilities with much ease. Moreover, liabilities should be paid as early as possible.
Apart from this, efficiency ratio such as stock turnover ratio is also decreased. It is
recommended that inventory must be ordered only when it is needed. Moreover, proper
inventory management report should be provided to managers so that they may order the same to
reduce wastage and as such, stock may be easily utilised and ratio may be increased. On the
other hand, solvency ratio such as debt to equity ratio is less than 0.4 % which is good as
recommended by market analysts. All above discussed ratios should be increased so that
company may be able to improve its financial position in effective manner.
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TASK 2
1. Need for working capital and long-term requirements of funds
Finance is quite essential need for business so that it may be able to perform well with
appropriate funds invested in it. It is the basic requirement of Board of Investhical so that it may
invest funds in good organisations so that adequate returns may be garnered in the best possible
way (Bergh and et.al, 2016). There is need for finance for carrying out short-term and long-term
funds in effective way. Working capital is required in highly liquid form so that organisation can
easily carry out daily operational tasks in quite effectual manner. This is necessary so that
business may be able to perform well in the highly competitive market.
Board of Investhical needs funds so that it may be able to invest in the stock of other
organisations to yield better returns. The main need for funds is that advanced in technology is
required so that overall production may be injected and unit costs may be reduced. Long-term
funds such as bank loans, issuing shares, retained earnings are required so that it may perform
well. In relation to this, short-term funds such as overdraft agreement, advances from customers
are essentially required in the business to utilise them for carrying out working capital in the best
possible manner (Bryson, 2018).
2. Sources of funding and advantages and disadvantages
There are different sources of finance which can be utilised by Investhical organisation
and Board can ensure proper use of funds. It may be able to choose right source of finance the
best suitable for it. Various sources of funding and there advantages and disadvantages are as
follows-
Angel investors
Angel funding is quite useful for small businesses which need funds for start-ups. They
are private individuals which provides funds and in return for it, take certain right in profit
margin from the business. This is good source of finance of Investhical organisation to initiate
funds in the best possible way to invest.
Advantages
1. It is useful for small business which is looking for seed or initial capital for starting
business. Usually small amount is invested which is sufficient for starting the business.
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2. It is suitable for Investhical organisation as it need to pay debt to angel investors. It
does not involve paying out monthly instalments along with interest (Trigeorgis and Reuer,
2017).
Disadvantages
1. It is disadvantageous for business as it has to provide reasonable part of profit margin
which is difficult to provide which is the biggest limitation of this method.
2. Angel investors initiate some sort of control on the organisation which often leads to
disputes between them.
Bank loans
Loan from bank is another good source of funding for Investhical organisation to invest
additional fund of £1000000. Taking loan from bank adds to monthly instalments of fund along
with interest fund accrued on the same. It is required that debt paying capacity of organisation
should be strong enough for getting loan and making timely payment.
Advantages
1. The main advantage of taking loans from bank is that organisation may grow easily
with necessary amount of funds in effective way (Kosinova and et.al, 2016).
2. It is suitable as certain fixed rate loans are useful for business as it may repay loan
amount with fixed rate of interest and as such, fluctuating rates are not present.
Disadvantages
1. Main disadvantage of bank loan is that some real estate guarantee or collateral security
is required and as such, difficulty is obtained for taking loan.
2. Interest payment limits organisation to qualify for loans as it has to pay loan amount
along with interest which increased and interest rate is quite high as well.
Retained earnings
Retained earnings is an internal source of raising finance which is suitable when
company earns quite good quantum of revenue. This implies that business can retain some part
of profit and utilise the same in future requirements of funds in the best possible way.
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Advantages
1. It is advantageous to business as it does not involve any cost of financing. This is
because it is raised internally and carries usually no cost (Trisha, 2018 ).
2. It is suitable as it does not involve abiding by any legal formalities while raising fund.
Generally, resolution is passed for raising retained earnings in AGM (Annual General Meeting)
of company.
Disadvantages
1. It is not suitable for Investhical organisation as shareholders may get disheartened of
lower dividends to them. This affects market value of shares.
2. Conservative policy regarding dividends may lead to over-capitalisation which is not
good for company. If more savings are accumulated, then it implies that firm is not effectively
utilising funds of shareholders.
Equity financing
Issuance of equity shares is another useful source of obtaining finance in effective way. It
is quiet easy way of raising finance and equity shareholders are real owners of the organisation.
Control is initiated by them on the company so that it may perform well by optimum utilisation
of funds. Moreover, voting rights is imparted to equity shareholders as well (Henri, Boiral and
Roy, 2016).
Advantages
1. It is useful for company as it carries no liability to pay fixed rate of dividend. When
more or less profit is earned, then rate is decided on such basis only.
2. No charge is created over assets of organisation when equity shares are issued to public
for subscription. Moreover, it is permanent source of finance of company.
Disadvantages
1. It is disadvantageous as raising finance only from equity does not provide advantage of
using trading in equity. Moreover, perfect blend of debt and equity is appropriate so that full
utilisation of funds can be made.
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2. Another disadvantage of equity shares is that it is not useful for investors which
usually invests in safer securities where income yield is fixed in nature.
Sale of fixed assets
Sale of fixed assets is another good source of finance for business as it results in quick
collection of funds in the best possible way (Martínez-Ferrero, Banerjee and García-Sánchez,
2016). Business can effectively use funds by selling fixed assets over the time which are not
useful any more. Assets once sold can provide effective results in the form of fulfilment of
adequate funds at its disposal.
Advantages
1. It is one of the easiest source of generating finance in the business and quick funds can
be produced with much ease. Investhical organisation can easily invest in purchasing stock once
assets are sold.
2. It is good enough method for generating source of finance as it helps business to sell
off assets in effective way at its disposal usually through way of auction (Martin, Farndale,
Paauwe and Stiles, 2016).
Disadvantages
1. It is not suitable method as if there are multiple items to be sold, then price is collective
of all the assets. It provides less amount of assets and as such, individual prices should be set.
2. It is slow option for raising funds and as such, business can opt for another method of
obtaining funds in effective way. It is unsuitable when assets have low value.
3. Justified recommendation related to cost and risk
There are various sources of finance which are useful for the company to raise funds in
effective way. The above discussed various methods can be used depending upon the nature of
the organisation. In this case, it is recommended to Board of Investhical to raise source of
finance through issuing equity shares. This is justified as equity financing is the better option to
company in terms of cost and related risk in effective manner. Equity financing is better as
shares are issued to public and as such, desired funds are raised with much ease.
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Cost of equity financing is much lower than taking bank loans and debt financing. This is
because investors shares the cost and risk associated with the company up to large extent (Wang,
Dou and Jia, 2016). Moreover, Investhical organisation can easily raise funds through equity
financing as no obligation is present to provide fixed dividends to shareholders. Financial
leverage ratio is much controlled and as such, it takes advantage of not only equity but also of
debt in effective way. Thus, cost and risk associated is reduced in this financing method. In
relation to this, through equity financing can be helpful for carry forward some amount to
retained earnings in the best possible way.
Retained earnings can be used by company in effective way so that greater or increased
amount of working capital may be available with much ease. Moreover, shareholder's wealth
maximisation objective can be effectively generated in the company and as a result, sufficient
amount is available to company for carrying out daily tasks. Thus, it is justified and
recommended to Board of Investhical to utilise equity financing.
TASK 3
1. Significance of cost accounting
Nyota Minerals Ltd is engaged in gold exploration. Company has various projects under
control and maintenance and as such, it is much important for it to analyse cost and earn revenue
(Engert, Rauter and Baumgartner, 2016). It can be analysed in the annual reports of 2013 and
2014 that there has been varied difference in the costs of the concern and as a result, restatement
of financial statements is done for assessing difference. The restatement shows that various costs
such as administration, impairment of assets, loss on sale of investments and share based
compensation expenditures have been more in restatement as compared to earlier financial
statement of 2013 year. The main reason behind such fluctuation is that Nyota Minerals Ltd have
invested in Tulu Kapi Project and Northern Blocks investments which were occurred in
December month and annual report was prepared up to June only. This has increased various
expenditures.
The expenses were maximised as administration, impairment of assets were increased as
these were not included in the report. This resulted into error of not including costs in the year.
This has resulted in much varied difference between deviation in two financial statements. In
relation to this, cost accounting is important as management is benefited by it to ascertain
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expenditures in effective way (Gatzert and Schmit, 2016). This help to formulate budgetary
policies with much ease. Investors are benefited as they may assess financial condition of
company and make important investment related decision whether to provide funds or not.
2. Costing tools and systems to evaluate financial health of Nyota Minerals Ltd
The costing tools and systems are important for company as it help to control
expenditures in effective way so that adequate profit may be earned by the organisation. Nyota
Minerals Ltd is required to implement costing systems such as process costing and job costing in
the organisation. It is important as it helps to assess real financial position in the best possible
way. Job costing system is quite effective tool which implements material, labour and overheads
to assign for individual job. It works best for company engaged in several projects. Mining and
gold exploration projects undertaken by the company such as Tulu Kapi Project and other ones
as well.
Process costing is another useful costing tool which material, labour and overheads are
segregated in entire process of production (Harlez and Malagueno, 2016). This help company to
analyse costs in effective manner. The real financial position of Nyota Minerals Ltd can be
evaluated quite easily. In relation to this, Northern Block licenses are fully owned by it and
moreover, investment is initiated in KME and Tulu Kapi. Cash proceeds is utilised to again
commence exploration process in Northern Blocks. However, it was difficult for the company to
initiate more investment rights in Tulu Kapi project because of no support from equity markets.
3. Recommendation
The costing system of Nyota Minerals Ltd can be improved so that losses may be reduced
up to high extent. It is recommended that standard costing model should be used so that costs can
be easily evaluated in effective way. It will be helpful for company as it may be able to assess
variances in effectual manner. Standard and actual results can be identified and as such,
organisation may be able to take corrective action for improving situation. Moreover, overheads
are the largest expenses for organisation related to supplies and administration. Activity Based
Costing will be helpful for company so that unnecessary activities can be analysed and removed
to control costs (Abushova, Burova and Suloeva, 2016).
It can be recommended to Investhical organisation that it should not invest in Nyota
Minerals Ltd as it is going on several financial issues which can be dangerous for the company
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and lower returns may be provided. Nyota Minerals Ltd has cutting down costs and as a result,
London office has been leased. Moreover, key directors of the company have already resigned in
order to cut down costs in effective way. This implies that company is facing threat whether it
might be wound up and as such, going concern concept of accounting clarifies about the real
financial health of company which states that it is unable to meet its funding requirement which
has resulted in discontinuation of several projects.
4. Assess budget and budgetary process
Budget plays an important role in the organisation so that it may be able to estimate
expenditures and income to be earned in the coming period. Nyota Minerals Ltd also prepares
budgets so that it may be able to estimated cost and profit in effective way. This is important for
organisation so that it may perform in accordance with budgetary targets to achieve desired
results. The budgetary process of Nyota Minerals Ltd can be evaluated in the following manner-
Providing estimates-
The managers of various departments provide an estimate to top management regarding
their needs for carrying out operational tasks in effective way. It provides clear estimation of
level of production, sales to be attained by the business. All past trends are analysed and budget
report is provided to budget committee for the approval purpose (Sroufe and Joseph, 2017).
Coordinate-
Now budget committee will analyse requirements of departments so that proper
utilisation of funds may be made by allocating to units in effective manner. Budget committee
analyses and provide funds to units for accomplishing goals.
Communicate budget-
Budget is communicated to departmental managers so that they may provide their
approval and funds can be imparted. In this stage, any modifications are incorporated by units
and Nyota Minerals Ltd implements the same in effectual way.
Implementation-
Budget is implemented for the year after all changes have been incorporated and
departmental managers also give away their approval. Senior management implements budget
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and all necessary resources such as materials, labour and overheads are provided to them to
accomplish set targets quite easily (Chernev, 2018).
Monitoring-
This stage is most significant as after implementation of budget, it is required that Nyota
Minerals Ltd constantly monitors about the performance of employees so that planned output
may be compared with actual results obtained. It is necessary so that improvement can be done
by adopting corrective actions by the company.
5. Design targets and formulate master budget
Targets are required to initiate good sales so that performance may be enhanced. It is
required that Northern Block project should be targeted to accomplish exploration. Moreover,
other projects such as Tulu Kapi project should also be focused by the management.
Cash flow Budget for the year
2014
Receipts
Sales 90000
Payments
Supplier payment 500000
Issue of shares 20000
Sale of investments 10000
Administration costs 100000
Total payments 630000
Opening bank balance 600000
Add Total Receipts 90000
Less Total Payments 630000
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