Financial Decision Making: A Report on Hi-Tech PLC Analysis

This report presents a comprehensive financial analysis of Hi-Tech PLC, a UK-based company in the computer hardware and accessories industry. The analysis is divided into two parts: the first part focuses on the company's business performance, examining its income statement and balance sheet through various financial ratios such as profitability, efficiency, liquidity, and gearing ratios. Cash flow and product line analyses are also included. The second part delves into investment appraisal techniques used to evaluate Hi-Tech PLC's expansion project, including management forecasts and methods like payback period, accounting rate of return, and net present value. The report also discusses sources of finance and non-financial factors influencing the company's decisions. The analysis reveals insights into Hi-Tech PLC's financial health, operational efficiency, and investment strategies.

RUNNING HEAD: FINANCIAL DECISION MAKING
financial analysis
Hi-Tech PLC

Financial decision making 1
Executive summary
This report contains a brief financial analysis of Hi-Tech PLC, a company that operates in United
Kingdom and deals with the manufacturing of computer hardware and accessories. It was
founded in 1980 and is now a multi-national company in UK. The first part of the report deals
with the analysis of company’s income statement and balance sheet with help of some specific
ratios. In addition to this, cash flow analysis and production analysis is also done which reflects
the financial position of Hi-Tech in the market.
The second part of the report contains investment appraisal techniques used for evaluating the
expansion project of Hi-Tech PLC. A management forecast is been done and various appraisal
methods are been used. The methods include payback, accounting rate of return and net present
value method. Along with this, various sources of finance and non financial factors are also
discussed in the later part of the report. Overall, the report presents the business analysis and
investment analysis of Hi-Tech PLC and its expansion strategy.

Financial decision making 2
Contents
Part 1 Business Performance Analysis........................................................................................................4
Statement of profit and loss analysis...........................................................................................................4
Analysis of sales......................................................................................................................................4
Profitability ratios....................................................................................................................................4
Gross profit ratio..................................................................................................................................4
Net profit ratio.....................................................................................................................................5
Return on equity..................................................................................................................................6
Statement of financial position analysis......................................................................................................7
Efficiency ratios......................................................................................................................................7
Inventory turnover ratio.......................................................................................................................7
Inventory days.....................................................................................................................................7
Receivable turnover ratio.....................................................................................................................8
Receivable days...................................................................................................................................8
Creditor turnover ratio.........................................................................................................................9
Payables days....................................................................................................................................10
Asset turnover ratio...........................................................................................................................10
Liquidity ratios......................................................................................................................................11
Current ratio......................................................................................................................................11
Quick ratio.........................................................................................................................................12
Gearing ratios........................................................................................................................................12
Debt-to-equity ratio...........................................................................................................................12
Interest coverage ratio........................................................................................................................13
Statement of cash flow analysis.............................................................................................................14
Product Line Analysis...........................................................................................................................15
Part-2 Investment Appraisal......................................................................................................................16
Management forecast.............................................................................................................................16

Financial decision making 3
Appraisal Techniques............................................................................................................................17
Payback period..................................................................................................................................17
Accounting rate of return...................................................................................................................17
Net Present Value..............................................................................................................................18
Sources of Finance................................................................................................................................18
Non-Financial factors............................................................................................................................19
References.................................................................................................................................................20

Financial decision making 4
Part 1 Business Performance Analysis
Statement of profit and loss analysis
Analysis of sales
Looking at the revenue of Hi-Tech PLC, it is observed that total sales of the company increase
by 25.02% in 2017. Prior to this year, the amount was reported at £2022 million and it changed
to £2528 million in 2017. Reason behind such upsurge is the expansion plan of the company, in
which it has supplied new range of products in the market at the start of 2017. The core products
of the company are computers, laptop, tablet and other It devices. The sale of laptops makes the
highest contribution in the total revenue of Hi-Tech PLC. The sale of tablets has also increases
the company’s revenue as well as stimulates growth in business IT markets. It is expected that it
will become Hi-Tech’s main product by 2019.
From increased sales, it is reflected that company is performing better in its industry and is
focused on achieving its objectives as well as making profits.
Profitability ratios
Gross profit ratio
It is basically a financial metric used for assessing the financial health of a company. The amount
of gross profit is shown as a percentage of total sales, which is known as gross profit margin
(Vogel, 2014).
Gross Profit Margin 2017 2016
Gross Profit (A) 541 517
Sales (B) 2528 2022

Financial decision making 5
GPR (A/B) 21% 26%
In 2017, the ratio was 21% which was less than the GPR of 26%, reported in 2016. The reasons
behind the decline are:
 Change in sales is more than the change in gross profit amount due to the highest
contribution of laptop sales.
 Along with this, the ratio reduces due to increase in company’s cost of goods sold. It
rises by 32.03% in 2017 as compare to 2016.
 Gross profit increases only by 4.64% whereas 25.02% change is been noticed in total
revenue.
Net profit ratio
It is also one of the financial metric used for measuring the profitability of the company. It is
expressed in terms of percentage and indicates the amount which is earned as a part of total
revenue (Jenter and Lewellen, 2015).
Profit Margin 2017 2016
Net Profit (A) 130 82
Sales (B) 2528 2022
NPR (A/B) 5% 4%
Unlike Hi-tech’s GPR, its net profit margin has improved in year 2017 and shown an upsurge of
1% in the amount of net profit.
 The ratio rises due to the increase in the profits as well as in sales.

Financial decision making 6
 Percentage change in net profit is 58.54% which is way more than the percentage change
in total sales.
 High laptop sales worth £1052 million in 2017 helps the company to cover the cost and
increase its net profits.
Return on equity
This ratio indicates the capability of a company to generate profits from its shareholders
investments. It is basically the amount of net income shown in terms of percentage of
shareholders equity (Parrino, Kidwell and Bates, 2011).
Return on Equity 2017 2016
Net Profit (A) 130 82
Shareholders’ equity (B) 1069 939
ROE (A/B) 12% 9%
Hi-Tech’s ROE increases by 3% in year 2017. In 2016, the ratio was 9% which rose to 12% in
2017. Reason for this upsurge are:
 The profit rises by 58.54% whereas equity increases only by 14% last year. Such huge
difference boosted up Hi-Tech’s ROE, making it more profitable.
 Lower income tax expense and the finance cost incurred by Hi-Tech raises its ROE.
 Also, the company has both long term and short term borrowings, which increases its
financial leverage as well as ROE.

Financial decision making 7
Statement of financial position analysis
Efficiency ratios
Inventory turnover ratio
It reflects the number of times; company’s inventory is replaced and sold during a specific
period. In other words, it defines how fast an organization converts its inventory into cash.
(Tracy, 2012).
Inventory Turnover Ratio 2017 2016
COGS (A) 1987 1505
Inventory (B) 290 120
ITR (A/B) 6.85 12.54
The ITR of the company reduces to 6.85 times from 12.54 times. Reason being:
 During the financial year 2016-2017, Hi-Tech’s inventory jumped by 142% and reached
at £290 million in year 2017. The same figure was reported at £120 million in year 2016.
Due to such upsurge, the ITR of the company falls.
 Another reason is the less increase in COGS as compare to the increase in inventory.
 Also the company has planned for expanding its operations in Asian Markets. This force
the company to increase the inventory levels for offering reliable services to its
customers.
Inventory days
Days Inventory Outstanding (DIO) 2017 2016
Days (A) 365 365
ITR (B) 6.85 12.54
DIO (A/B) 53 29

Financial decision making 8
The period taken by the company to sell its stock is measured in terms of days, which is known
as inventory days. The upsurge in the inventory levels also pushed up the inventory days of Hi-
Tech PLC from 29 days to 53 days in 2017. This represents 45% increases in the number of
days.
Receivable turnover ratio
Debtor turnover shows that how quickly a company collects its receivables or convert them into
cash during a specific period of time (Bragg, 2012).
Debtor Turnover Ratio 2017 2016
Revenue (A) 2528 2022
Accounts Receivables (B) 378 253
DTR (A/B) 6.69 7.99
 As it is observed that the revenue of Hi-Tech has increased by 25.02% in 2017, its DTR
reduces to 6.69 in the year from 7.99 in 2016. This is because of the increased debtors in
2017.
 The accounts receivables in 2016 and 2017 were £253 million and £378 million
respectively. The percentage increase is of 49% as a result of which, zero cash balance is
reported in the balance sheet of Hi-Tech PLC.
 As Hi-Tech PLC provides IT devices to the customers, so it may be possible that many of
them buy the products on credit and pay the amount in instalments. As a result of which,
the balance of accounts receivables increases.
Receivable days
Receivable days 2017 2016
Days (A) 365 365
DTR (B) 6.69 7.99

Financial decision making 9
Receivable days (A/B) 55 46
Due to reduced DTR, receivable days have also increased from 46 days to 54 days. This means
in 2017, company has taken 4 more days to collect its receivables in 2017. Efficiency of Hi-Tech
PLC is reduced in collecting its debtors (Nikolai, Bazley and Jones, 2009).
Creditor turnover ratio
This ratio gives investor an idea about the credit worthiness of the company. In other words, it
shows how many times a company is paying its accounts payables. CTR measures the capability
of a company to pay its creditors quickly (Bragg, 2012).
Creditor Turnover Ratio (2017) $M $M
COGS (A) 1987 1505
Accounts Payables (B) 245 138
CTR (A/B) 8.11 10.91
It is said that if the ratio falls from one period to another, it means the company is taking longer
to pay its creditors. The same is the case with Hi-Tech PLC. Its CTR falls from 10.91 to 8.11 in
2017. Reason being;
 The company has no cash in hand also its accounts payables increases in that year.
 The cost of goods sold rise, payables increases and zero cash balance has reduces the
CTR of the company.
 Expansion plan is also the reason behind this, as in order to increase its inventory level
company has purchased assets on credit and due to lack of cash; it is facing difficulties in
paying its creditors

Financial decision making 10
Payables days
Payable days 2017 2016
Days (A) 365 365
DTR (B) 8.11 10.91
Payable days
(A/B) 45 33
Just like debtor days, payable days also increases from 33 to 45 days. It means Hi-Tech takes
longer to set off its short term financial obligations, which makes the company less worthy and
less efficient. (Lee, Lee and Lee, 2009).
Asset turnover ratio
It compares the firm’s net sales with its total assets and determines the ability of the firm to make
revenue by utilizing its assets (Gibson, 2011).
Total Assets Turnover 2017 2016
Sales (A) 2528 2022
Total Assets (B) 1632 1177
ATR (A/B) 1.55 1.72
Despite of increased revenue, the ATR of Hi-Tech reduces from 1.72 to 1.55 times.
 The financial reason behind this fall is that the total assets of the company rise by 39% in
2017 whereas the revenue has increased only by 25.02%. This implies that company has
not utilized its assets effectively and efficiently in order to generate more sales from
them.
 Also major part of the total assets is covered by the non-current assets, which cannot be
converted into cash quickly.

Financial decision making 11
 Hi-Tech has an increased development cost which constitutes its non-current assets,
making ROA to fall.
From all the efficiency ratios, one thing is clear that though Hi-Tech has strong profitability
position but it is not efficient in managing its operations and assets.
Liquidity ratios
Current ratio
The potentiality of a company to pay its current liabilities from its current assets is ascertained by
calculating the current ratio for that period (Saleem and Rehman, 2011).
Current ratio
201
7 2016
Current Assets (A) 668 507
Current Liabilities (B) 338 138
CR (A/B) 1.98 3.67
In fiscal year 2016-2017, the CR of Hi-Tech PLC declined by 1.7, reaches to 1.98 which is even
lesser than the ideal benchmark of 2:1. However, the same can vary according to different
industries. Lesser CR represents that the company is having difficulties in meeting its current
financial obligations. Reasons for this fall are:
 Cash problems faced by Hi-Tech. The company had zero cash balance in year 2017
 Most of the amount was tied up in inventory and accounts payables which has also
reduces the current ratio.
 Increase in current liabilities is way more than the current assets.

Financial decision making 12
Quick ratio
It also measures the liquidity position of a company by disclosing its capability of paying short
term liabilities with its quick assets. The ideal quick ratio is 1:1 (Godwin and Alderman, 2012).
Quick ratio 2017 2016
Quick Assets (A) (668-290) (507-120)
Current Liabilities (B) 338 138
QR (A/B) 1.12 2.80
Just like current ratio, Hi-Tech PLC’s quick ratio also worsens in 2016-17. It reduces from 2.80
to 1.12 in the last year. However, it was more than the standard ratio.
 The reason for this decline was that, company has invested more in non-current assets as
compare to its current assets.
 The cash is been utilized in purchasing the property and paying the development cost
incurred for the expansion plan.
 The cash is been tied up in the accounts receivables.
Both the ratio shows that Hi-Tech does not have a sound liquidity position and the company has
faced cash flow problems during the fiscal year 2016-17.
Gearing ratios
Debt-to-equity ratio
It is a financial gearing ratio which shows the portion of debt taken by the company against its
equity capital. A high D/E ratio indicates that most of the company’s assets are financed through
debt and includes high financial risk (Higgins, 2012).

Financial decision making 13
Debt to Equity Ratio 2017 2016
Debt (A) 225 100
Equity (B) 1069 939
D/E (A/B) 21% 11%
A £25 million increase was there in Hi-Tech’s long term borrowings. Compared to which, the
equity capital of the company raised to £1069 million in 2017 from £939 million. Reason for
high D/E ratio:
 The debt portion of Hi-Tech rises by 125% whereas the equity shown an upsurge of only
14%. This difference boosted up the D/E ratio of the company by 10%.
 In 2016, the ratio was 11% and in 2017, it reaches to 21%. Despite of having more
equity, Hi-Tech relied on debt or borrowings for managing its operations.
 In order to fund the expansion plan, company has taken short and long term loans due to
the shortage of cash.
Interest coverage ratio
This ratio shows the number of times a company make its interest payments from its operating
profits. Generally, a high ratio is more favourable because a low ratio indicates that the firm has
more debt expenses and is not pay to pay its interest expenses (Kimmel, Weygandt and Kieso,
2010).
Interest Coverage Ratio 2017 2016
EBIT (A) 225 151
Interest Expense (B) 25 6
ICR (A/B) 9.00 25.17

Financial decision making 14
Talking about Hi-Tech PLC, the ICR of the firm shows a huge decline in year 2016-2017. It was
25.17 in 2016 and it falls to 9 in 2017. Reason being,
 The finance cost of the company suddenly rises to £25 million from £6 million in 2017
due to the more interest bearing borrowings.
 Rise in operating profit of Hi-Tech is very less than the increase in its interest expense in
terms of percentage.
 Also because of more debt portion and reduced operating margin, its ICR has increased
last year.
Statement of cash flow analysis
Looking at the cash flows from operating activities of Hi-Tech PLC, it is observed that the net
cash used in the activities is £28 million. Though the operating profit has increased but the
adjustments for changes in working capital has reduces it to £67 million. The amount was not
enough for paying the interest and income tax expenses and as a result of which a negative figure
is derived from the operating activities. Cash flows from investing activities shows that company
has invested more in purchasing property, plant and equipment worth £294 million and £30
million cash is used for purchasing intangible assets. No sales proceeds were there which gives
the overall result of net cash used amounted to £324 million in investing activities.
Unlike the above two activities financial activities shows a proceeds from long term borrowings
worth £125 million in the year 2016-17. However, such proceeds were not enough to set against
the cash used in operating and investing activities. As a result of which, cash flow statement
depicts a net decrease of £227 million in the amount of cash. This overall analysis of the
statement represents that the cash position of Hi-Tech PLC got worse in 2017 as compare to

Financial decision making 15
2016. The company lacks the availability of cash in the business which reduces its efficiency and
affects its liquidity position to a great extent.
2017 2016
Inventory days 53 29
Receivable days 55 46
Payable days 45 33
Operating cash cycle =
(Inventory days + receivable
days) – Payable days
63 days 41 days
Operating cash cycle of the company in 2016 is 41 days which increases to 63 days in 2017. This
increase depicts that company is not acquiring the cash quickly, taking more time in paying its
creditors and collecting its debtors and lastly taking more time in converting its inventory into
cash. Reason behind such increase is high inventory and receivable days. Generally, a shorter
conversion cycle is favourable but in case of Hi-tech PLC, the cycle has increased and
deteriorates the cash position of the firm. Large amount of cash is been tied up in the non-current
assets, inventories and debtors of the company. Overall, it can be said that Hi-Tech is no longer
cash rich and has experienced a shortage of cash in fiscal year 2016-17.
Product Line Analysis
It is generally carried out to know about the balance product mix which is to be developed and
marketed to replace those products which are in decline. In 2017, Hi-Tech PLC succeeded in
implementing its phase one expansion strategy, result of which can be shown in the increased
revenue of the company. The overall revenue increases to £2528 million in 2017, showing the
biggest contribution the sale proceeds of Laptops. The increased sales allow Hi-Tech to achieve
high profit margins in the same year.

Financial decision making 16
Its overall N.P. margin rises by 1% and ROE boosted up by 3%. Also the reduction of 20% in
selling prices of desktops, laptops and tablets reduces the level of competition in the market. The
strategy followed by Hi-Tech PLC has increased its market share and enhanced its customer
base. Along with the expansion planned required an additional investment in its UK situated
manufacturing the unit. The units are located in the area which is supported by Hi-Tech’s
existing suppliers.
However, the company has no cash balance as of 2017, but previously it was known to be a cash
rich business and regularly pay dividends. Also as per the payment terms of the company, the
standard customer days are 30 days but in 2017, this was increased due to the delay in payment
from one of the Hi-Tech’s main customer. However, it can be said that the new product line of
Hi-Tech will improve its performance and enhance its financial position.
Part-2 Investment Appraisal
Management forecast
The further finance required for the expansion is £500 million. Against which, it is expected that
the revenue in 2019 and 2020 will be £300 million and £560 million respectively. The amount
will continue to rise in the subsequent years. Along with this, the forecast stated that the variable
cost will be more in the starting two years which resulted in a contribution of £60 million and
£112 million respectively. Apparently, management forecast does not take into account the fixed
cost, which is also a part of contribution. In the fifth year, the contribution will be more than the
triple of the amount reported in first year.

Financial decision making 17
Appraisal Techniques
Payback period
It is the method which measures the time taken by a project to recoup its initial investment. In
case of Hi-Tech PLC, the non-financial managers may not understand the calculation of
contribution but surely knows that the expansion project in Asian markets will take 4 years to
return the £500 million. With help of this method, managers can identify those projects which
will give faster returns. Therefore, for a company like Hi-Tech PLC whose cash position is
worse, it is very much necessary to recover the cash as soon as possible. High amount of cash is
expected in year 3 and 4 and by the end of fourth year whole amount of cash outflow will be
recovered. The main drawback of this technique is that it does not consider the time value of
money like NPV (Baker and English, 2011).
Accounting rate of return
In this method, the accounting profit arising from the proposal is represented in terms of
percentage of the investment made. The targeted ARR of Hi-Tech PLC was 10% and the
calculated one was 18%. It makes it easier for the company to take decision as its calculated
ARR was greater than the targeted one. It also takes into account the whole five years if projects.
Along with this, the margin of safety between the targeted and calculated is also high. It shows a
difference of 8% which is enough for the project having 5 years of life. This implies that the
result will not deviate and the rate will remain higher than the standard rate (Bierman and Smidt,
2012).
Just like payback, ARR also does not consider the time value of money which is main drawback
of this method.

Financial decision making 18
Net Present Value
This technique is used to determine the present value of cash inflow and outflow, which is then
used for measuring the viability and profitability of a project. It is the most appropriate method
as it takes into account the time value of money and shows the future profits made by the
company (Weygandt, Kimmel and Kieso, 2009). In case of Hi-Tech PLC, the NPV of the project
is £110 million discounted at the rate of 5%. The value of NPV is positive which implies that the
project is profitable and can be accepted.
Sources of Finance
In order to fund the investment of £500 million in its Asian project, Hi-Tech needs to find out the
sources for raising finance. Looking at the internal sources, it is already observed that company
is lacking the availability of cash in the business. In fact, it has zero cash balance in year 2017.
Also, it has good return on its assets, which means there is no asset to dispose. Hence, in such
situation issue of share is the more practical approach which is to be applied. Improvement in
profitability ratios in 2017 can help the company to increase its share prices. However, Hi-Tech
has not paid any dividends in 2017, so it may be possible that it has to pay the same in the
coming years due to the expansion project.
Looking at the external sources, the only way is to take the long term loans because shot term
will not be appropriate according to the project life. However, the company already has high debt
ratio and low interest cover. This indicates that company is not in a condition to generate more
from loans. Borrowings may increase the financial risk for Hi-tech, therefore the company
should focus on making money from share issue (Barthwal, 2007).

Financial decision making 19
Non-Financial factors
Hi-Tech previously operates in Western Europe and North America, having its headquarters in
United Kingdom since 1980. Now the company is first time expanding its operations in Asian
markets. A proper market research can help the company to properly understand the difference
between the market segments such as demand for the IT products and many more.
The second which is to be kept in mind is the prevailing competition in IT industry and
competitors’ behaviour in the Asian markets. The collective strategy of the competitors may
outperform Hi-tech PLC. In addition to this, the company also needs to plan about its targeted
customer in the area of expansion. Their habits of using IT devices, their taste and preferences all
are required to be analysed.

Financial decision making 20
References
Baker, H. K. and English, P. (2011). Capital budgeting valuation: Financial analysis for today's
investment projects (Vol. 13). New Jersey: John Wiley & Sons.
Barthwal, R.R., (2007). Industrial Economics: an introductory text book. 2nd ed, New Delhi:
New Age International.
Bierman Jr, H. and Smidt, S. (2012). The capital budgeting decision: economic analysis of
investment projects. 9th ed. New York: Routledge.
Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New
Jersey: John Wiley & Sons.
Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersey: John Wiley & Sons.
Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.
Godwin, N., and Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Jenter, D., and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of
Finance, 70(6), 2813-2852.
Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for business
decision making. New Jersey: John Wiley & Sons.
Lee, A. C., Lee, J. C., and Lee, C. F. (2009). Financial analysis, planning and forecasting:
Theory and application. Singapore: World Scientific Publishing Co Inc.

Financial decision making 21
Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009). Intermediate Accounting. USA: Cengage
Learning.
Parrino, R., Kidwell, D. S., and Bates, T. (2011). Fundamentals of corporate finance. John
Wiley & Sons.
Saleem, Q., and Rehman, R. U. (2011). Impacts of liquidity ratios on
profitability. Interdisciplinary Journal of Research in Business, 1(7), 95-98.
Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyze
any business on the planet. RatioAnalysis. Net.
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., (2009). Managerial accounting: tools for
business decision making. 5th ed. USA: John Wiley & Sons.