BFK 450 - Financial Performance and Position of ElectroServe PLC

This report presents a comprehensive financial analysis of ElectroServe PLC for the year 2033, focusing on the company's financial performance and position. The analysis utilizes various financial ratios to evaluate profitability (return on capital employed, operating profit margin, gross margin ratio), efficiency (revenue on capital employed, inventory holding period), liquidity (current ratio, liquid ratio), and stability (gearing ratio, interest coverage ratio). The report highlights improvements in certain areas, such as gross margin and liquidity, while also pointing out areas needing attention, such as the negative return on capital employed and high debt dependency. The analysis also provides recommendations for improvement, including enhancing sales and profitability, managing receivables and payables effectively, and reducing reliance on debt. The report concludes by emphasizing the potential for further financial improvement and expansion for ElectroServe PLC.

Financial analysis
ElectroServe PLC
Student Name

Table of Contents
Background..................................................................................................................................................2
Discussion and Analysis...............................................................................................................................2
Financial Performance Analysis...............................................................................................................2
Financial Position Analysis.......................................................................................................................3
Recommendation and Conclusion...............................................................................................................3
References...................................................................................................................................................4

Background
As report has been prepared on the financial analysis of the company ElectroServe plc for the year 2033
where the company suffered the loss of $520000. The company has been analyzed based on different
types of ratios and comparison has been drawn with respect to the industry. Finally, recommendation
has been given towards the end to improve the financial performance and the financial position of the
company (Alexander, 2016).
Discussion and Analysis
For analyzing a company, ratio analysis is one of the best techniques as it helps in identifying the trends
w.r.t. to the past period and the industry and thereby setting the targets for the years to come by. The
analysis has been bifurcated in 2 parts namely financial performance review and financial position
review.
Financial Performance Analysis
This mainly deals with the ratios associated with the profit and loss account of the company. The same
has further been divided in profitability and efficiency ratios.
1. Profitability Ratios: This ratio focuses on the profitability and the sales growth of the company.
a. Return on capital employed: It measured the return to the shareholders of the company. It
shows if the capital invested by the shareholders is earning profits for the company. For
ElectroServe plc, we can see that the ratio has been negative in both the year 2032 and
2033 indicating the erosion of capital, the same has however improved from last year.
Industry trend is 13.3%, which shows that the company needs to improve a lot (Dichev,
2017).
b. Operating profit margin: This ratio shows the profit earned by company from normal
operating business of the company post all operating expenses. The same has improved
from -15% to -4.6% but it is still negative indicating higher operating expenses (Choy, 2018).
c. Gross margin ratio: There gross margin indicates the profit earned by company post
deduction of direct expenses related to sale. The GM improved from 23.5% to 28.6% which
is a positive sign for the company. The main reason for the same was increased in selling
prices and quantitative growth (Heminway, 2017).
d. Operating expenses to sales ratio: This shows the ratio of operating expenses incurred for
selling given goods. The same has improved as it came down from 38.5% to 33.2% but it is
still below the industry trend of 30.3%. This calls for reduction of expenses and cost cutting
measures in the company.
2. Efficiency Ratios: The efficiency ratios shows if the business is improving in managing its
resources like debtors, creditors, inventory, fixed assets, etc.
a. Revenue on capital employed ratio: This shows the ability of the company to use its capital
to generate the sales. Mathematically, it is calculated as (Revenue / Total assets less current
liabilities). In the given case, the same has improved marginally from 1.78 to 1.79 times but
it is still below the industry average of 2.25 times (Belton, 2017).

b. Inventory holding period: This shows the number of days it takes to liquidate the inventory.
The same reduced from 83 to 47 days which is indicative of the fact that there is good
internal control over inventory liquidation.
c. Payable days: The payable days in a company shows the timeline within which the payables
are being liquidated. It has remained constant at 52 days but the company should improve
furthermore as the industry average is near to 85 days (Werner, 2017).
d. Receivable days: This shows the frequency within which the money is collected from
receivables. The shorter it is, the better it is for the company. The same has remained
constant at 60 days as against the industry average of 64 days, which shows that the
company should further try to bring it down to have a positive impact on net working
capital.
Financial Position Analysis
This mainly deals with the financial position or the balance sheet status of the company. It is further
divided into 2 parts namely liquidity ratios and stability ratios.
1. Liquidity ratios: This shows the ability of the company to meet the short term obligations on
time.
a. Current Ratio: the It shows the ability of the company to pay off the current liabilities with
the current assets. The same has improved from 1.64 times to 2.09 times and it is due to
increase in receivables and decrease in overdrafts. It is well above the industry average of
1.5 times (Linden & Freeman, 2017).
b. Liquid Ratio/Acid Ratio/Quick ratio: This ratio shows the proportion of liquid assets with the
company to pay of short term liabilities. It has increased from 0.8 times to 1.34 times which
shows that the company has been able to improve overall liquidity level.
2. Stability Ratios: These ratios are the indicator of capital structure of the company as to if it is
dependent on debt or it is backed by equity.
a. Gearing ratio: This ratio shows the amount of capital that is funded by the interest bearing
liabilities out of the total capital of the company. Mathematically, it is debt divided by the
total capital. The same has increased from 39.4% in 2032 to 54.6% in 2033 which is
indicative of the fact that the company has raised more debt. Though it is well below the
industry average of 61.4% but still the company is carrying a risk of high dependency on
debts (Gerlach, et al., 2018).
b. Interest coverage ratio: The same has improved marginally from -6.8 times to -1.5 times
which indicates that the interest paying ability has improved but the company is still
incapable of paying it having negative ratio. Therefore the company needs to improve upon
the profitability as the company is way below the conventional target of 4 times (Jefferson,
2017).
All in all, the working capital of the company has improved as compared to the last year. It has improved
from 195 days to 147 days and is within the industry average but there is much more potential beyond
this and it will have a direct bearing on the positive financial status of the company (Goldmann, 2016).

Recommendation and Conclusion
From the above discussion and analysis, it is clear that the company has improved as compared to the
last year and it is expected to improve further in the coming years but it is way beyond the industry
average. Some of the recommendations for the company includes improvement in terms of sales and
profitability which is directly attributable to return on capital for the shareholders. The company is
having a good control on the inventory but it needs to improve further in terms of receivable days and
the payables days as it will help the company to have positive net working capital and good cash flow.
The company is performing well in terms of liquidity ratios but it needs to reduce its dependency on the
debt capital as it involves the risk of defaulting on interest payment as well. The company can also look
for expansion in terms of areas and coverage and increasing the quantitative sales. This coupled with the
decrease in operation and direct costs can help the company to improve the net profit.
References
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411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
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Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, 3(1), p. 145.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Gerlach, J., Mora, N. & Uysal, P., 2018. Bank funding costs in a rising interest rate environment. Journal
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Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
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