Financial Performance Analysis of Helen's Hire Cars - ACC104 Report

This report provides a comprehensive financial analysis of Helen's Hire Cars for the year 2016, focusing on the application of ratio analysis to assess the company's financial condition. The analysis begins with an executive summary that highlights key findings, including the identification of business problems related to profitability, liquidity, and solvency. The report delves into the calculation and interpretation of various financial ratios, such as profitability ratios (net margin, return on assets, and return on equity), liquidity ratios (current ratio and quick ratio), efficiency ratios, and solvency ratios (debt-to-equity ratio). The analysis reveals that Helen's Hire Cars faces challenges in generating adequate income, managing working capital efficiently, and maintaining a healthy capital structure. Specifically, the report notes a low net margin, inefficient asset utilization, idle working capital, and an over-reliance on equity funding. The conclusion summarizes these findings and emphasizes the need for strategic adjustments to improve financial performance and decision-making capabilities. The report references relevant academic sources to support its analysis.

Running head: ACCOUNTING FOR DECISIONS 2
Accounting for Decisions 2
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1ACCOUNTING FOR DECISIONS 2
Executive Summary:
After the preparation of the adjusted trial balance and the respective financial statements
including the income statement and the balance sheet statement, it is necessary to assess the
financial condition of Helen’s Hire Cars for the year 2016. In order to analyse the financial
condition of the concerned organisation, the use of ratio analysis is deemed to be vital, as it helps
in revealing the business problems of the organisation. It has been found that the idle working
capital and settling creditor terms earlier than the debtor terms has resulted in increased cash
outflows for the organisation. Finally, excessive reliance on equity funding would minimise the
decision-making ability of the management of Helen’s Hire Cars in future.

2ACCOUNTING FOR DECISIONS 2
Table of Contents
Answer to Question 3:.....................................................................................................................3
Introduction:................................................................................................................................3
Analysis:......................................................................................................................................3
Conclusion:..................................................................................................................................6
References:......................................................................................................................................7

3ACCOUNTING FOR DECISIONS 2
Answer to Question 3:
Introduction:
After the preparation of the adjusted trial balance and the respective financial statements
including the income statement and the balance sheet statement, it is necessary to assess the
financial condition of Helen’s Hire Cars for the year 2016. In order to analyse the financial
condition of the concerned organisation, the use of ratio analysis is deemed to be vital, as it helps
in revealing the business problems of the organisation. This section would identify such
problems identified from the financial statements of the organisation after the conduction of
appropriate ratio analysis.
Analysis:
For identifying the business problems of Helen’s Hire Cars, the following groups of
ratios are used:
Profitability ratios:
From the above table, it is evident that the net margin of the organisation is significantly
lower as 3.91%. This is because it has to incur adequate amount of expenses for conducting its
business operations, which could not be offset largely by revenue generation (Islam, 2014). In

4ACCOUNTING FOR DECISIONS 2
terms of return on assets, it could be seen that the ratio is obtained as 5.86%. However, as the
business deals in hire cars, the ideal ratio needs to be above 8% (Li, 2015). In this case, the ratio
is below the ideal standard, which implies that the organisation has not utilised its assets
effectively to generate adequate return. Finally, in terms of return on equity, the ratio is
computed as 7.87%. This ratio is found to be significantly lower, as the standard margin is
minimum 20%. Hence, it is clearly inherent from the profitability viewpoint that Helen’s Hire
Cars is struggling to generate adequate income from its business activities.
Liquidity ratios:
From the above table, it is observed that the current ratio is computed as 1.37, which is
well below the ideal margin of 2. On the other hand, quick ratio is computed as 1.32, which has
exceeded the ideal standard of 1 (Vogel, 2014). This implies that the organisation has allowed
extended credit terms to its customers owing to which a large amount of cash could not be
utilised for investment in current business operations. Thus, the adequate working capital of the
organisation has been kept idle throughout the year.
Efficiency ratios:

5ACCOUNTING FOR DECISIONS 2
From the above table, it is clear that although the organisation has managed to settle off
its inventory at a faster rate of 1.23 days in 2016 owing to possible rise in market demand. In this
case, it is noteworthy to mention that since the organisation has no cost of sales, revenue figure is
used for computing all the efficiency ratios. On the other hand, it could be seen that the
organisation has been collecting its receivables at a later point, while it has to settle its
obligations to the creditors at an earlier period. This implies that the organisation has
experienced increase in its overall cash outflows due to the unwillingness of the creditors in
extending their payment terms.
Solvency ratio:
The above table clearly indicates that the debt to equity ratio of the organisation is
computed as 0.34. This implies that the organisation funds majority of its assets through equity
(Wahlen, Baginski & Bradshaw, 2014). In this aspect, it is to be noted that excessive dependence
on equity funding would minimise the decision-making ability of the management of Helen’s
Hire Cars.

6ACCOUNTING FOR DECISIONS 2
Conclusion:
Based on the above discussion, it could be stated that Helen’s Hire Cars has not managed
to earn sufficient profit from its business operations owing to increased operating expenses. In
addition, the idle working capital and settling creditor terms earlier than the debtor terms has
resulted in increased cash outflows for the organisation. Finally, excessive reliance on equity
funding would minimise the decision-making ability of the management of Helen’s Hire Cars in
future.

7ACCOUNTING FOR DECISIONS 2
References:
Islam, M. A. (2014). An analysis of the financial performance of national bank limited using
financial ratio. Journal of Behavioural Economics, Finance, Entrepreneurship,
Accounting and Transport, 2(5), 121-129.
Li, X. (2015). Accounting conservatism and the cost of capital: An international
analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement
analysis and valuation. Nelson Education.