SOE11444: Financial Report on Scylace plc Investment Decisions

This financial report analyzes Scylace plc's investment strategies, focusing on evaluating two potential superstore locations and the prospective acquisition of Helibeb plc. The report employs various financial methods, including annual profit calculations, average investment analysis, accounting rate ...Read More

FINANCIAL REPORT

Contents
EXECUTIVE SUMMARY.........................................................................................................................3
INTRODUCTION......................................................................................................................................3
MAIN BODY..............................................................................................................................................4
A methodology for evaluating the proposed new superstore locations and prospective
acquisition, in the light of available finance.......................................................................................4
An evaluation of the proposed new superstore locations and prospective acquisition...............6
CONCLUSION........................................................................................................................................12
RECOMMENDATIONS..........................................................................................................................13
REFERENCES........................................................................................................................................14

EXECUTIVE SUMMARY
The project report summarize about evaluation of different types of financial
options and aspects available to mentioned company. In the first part of report methods
which are going to be used for making evaluation of location alternatives, business
finance and acquisition are mentioned. These methods are annual profitability
calculation, accounting rate of return, ratio analysis and many more. The further part of
report summarize about proper evaluation of above mentioned alternatives on the
behalf of discussed methods. It abstracts that from two available options of location A
and B, location B is suitable. As well as they should acquire Helibeb plc because
different types ratios such as net profit margin, operating margin, book gearing ratio etc.
are showing that Scylace plc can acquire. Though, performance is average of this
company but expected to grow in upcoming time frame. In addition, the report
summarizes that companies need to make proper analysis before taking any major
decisions such as selecting any locations or acquiring any company. This is so because
these are some key aspects and any wrong decision may lead to huge financial and
non financial lose of company. Same as in this report proper analysis of available
alternatives have been done in an effective manner.
INTRODUCTION
The term financial report can be defined as a form of written document that
contains detailed information regards to each financial transactions and total profitability
from operations. These reports are too essential for business entities in order to take
corrective actions (Authority, 2018). The project report is based on a company that is
Scylace plc. This company is involved in the grocery retail chain. Company is planning
to build a new store as well as want to make acquisition of another company which is
Helibeb plc. The report covers detailed information regards analysis of available two
options for building a new superstore. In order to make proper evaluation of these two
proposals various kinds of techniques have been implemented. Basically these
techniques and methods are too crucial for business entities in order to take corrective

steps for taking further financial decisions. Any error in this aspect may lead to huge
loss of companies. In addition, report also covers information related to acquisition of a
company and for that analysis of that company’s profitability, their debts, and assets is
done. So overall report includes vital range of techniques, methods for making suitable
and valuable decisions in regards with financial aspects.
MAIN BODY
A methodology for evaluating the proposed new superstore locations and prospective
acquisition, in the light of available finance.
There are various kinds of methods for making evaluation of different aspects
regards to finance (Muda, Harahap, Maksum and Abubakar, 2018). It depends on
companies that which method they apply. In the context of above mentioned company,
this can be find out that they want to open new store as well as they also decide to do
acquisition. For this purpose below mentioned methods can be applied by them which
are as follows:
For proposed new superstore locations- There are two locations which are A and B. The
efficiency of these locations can be evaluated by below mentioned methods:
 By calculating annual profit- The annual benefit is the company's net profits due
to taxes, interest costs, asset sales gains (loss), investment gains (losses),
property disposal gains, depreciation, amortization, income tax, extraordinary
products, and award expenses, as calculated by the accounting firm in
compliance with commonly agreed accounting rules that representing the
expenses imposed by the event's allocation. This is computed by below
mentioned formula:
Annual Sales Revenue – Annual Cost of Sales – Annual Staff Costs –
Depreciation Other Annual Costs.
 By calculating average investment- Average investment is the capital cost
required to start a project, plus the final scrap value of any equipment, divided by
two (Nogueira and Jorge, 2016). This is a type of method which can be used in

order to measure efficiency of various kinds of projects. In the above company’s
two options evaluation this is applied by using below mentioned formula:
Cost of New Superstore + Residual Value) / 2
 Accounting rate of return- ARR is the financial formula for capital budgeting. This
is often referred to as the annual return rate, or ARR. The calculation does not
take the term value of capital into account (Onchong’a, Muturi and Atambo,
2016). The value provided by ARR from the capital investment's net profit is
estimated. The ARR returns a percentage. In the above company’s two options
evaluation this is applied by using below mentioned formula:
Annual Profit / Average Investment
For prospective acquisition- In order to evaluate about efficiency of Helibeb plc, ratio
analysis is done which are as follows:
Ratio analysis- Ratio analysis is a systematic approach of analyzing the financial results
of an entity, and offers an overview into efficiency, business efficacy, and productivity.
Analysis of percentages is an integral part in the analysis in securities (Agustiningsih,
Murni and Putri, 2017). In the aspect of above company, they have calculated below
mentioned ratios to evaluate efficiency of Helibeb plc which are as follows:
 Return on shareholders’ equity ratio
 Capital employed turnover ratio
 Net profit margin
 Operating margin
 Book gearing ratio
For available finance- In order to find out efficiency of available finance options below
mentioned methods have been used by above company:
 Yield to redemption on bonds- This is the intrinsic return rate (IRR) of an
shareholder in a debt because, before the maturity of the bond, the lender retains
the debt at the same pace for all contributions made over time and reinvested
(Bosi and Joy, 2017). It is calculated by below mentioned formula:

 Cost of equity capital- In finance, equity costs are the benefit a corporation pays
its creditors, i.e. shareholders, by borrowing through their resources to reduce
the risk they face (Song, Wang and Zhu, 2018). Corporations must acquire
resources from others in order to expand and operate. It is calculated by below
mentioned formula:
(Dividend / Share Price) + Dividend Growth
An evaluation of the proposed new superstore locations and prospective acquisition
On the basis of above mentioned methods, evaluation of proposed new
superstore locations and prospective acquisition is done in such manner:
Evaluation of Proposed new superstore locations-
 Annual profit- On the basis of calculated values of annual profit of both locations
A and B, this can be find out that location A has annual profit of 1 while B has
profit of 0.66. It shows that location A is better as compared to location B due to
higher value of annual profit.
Location A Location B
Annual profit 1 0.66

Location A Location B
0
0.2
0.4
0.6
0.8
1
1.2
1
0.66
Annual profit
Annual profit
 Average investment- The value of average investment of location A is of 25 while
B has average investment of 14. It shows that location B will be less expensive
for above mentioned Plc but higher expensive investment will have higher risk.
Thus above company should consider location B.
Location A Location B
Average investment 25 14

Location A Location B
0
5
10
15
20
25
30
25
14
Average investment
Average investment
 Accounting rate of return- The value of accounting rate of return of location A is
of 4. On the other hand, location B has accounting rate of return of 4.7. Hence,
above company should consider location B because it will produce higher
amount of return in future.
Location A Location B
Accounting rate of return 4 4.7

Location A Location B
3.6
3.8
4
4.2
4.4
4.6
4.8
4
4.7
Accounting rate of return
Accounting rate of return
Evaluation of prospective acquisition: In order to take decision of making acquisition
of Helibeb plc, Scylace plc computed different types of ratios and some of them are
mentioned below in such manner that are as follows:
 Return on shareholders’ equity- The Equity Return (ER) is a profitability
calculation measuring how several profits a corporation generates of income on
each investment quarter (Nwanyanwu, 2017). On the basis of calculated value of
return on shareholders’ equity this can be find out that Helibeb plc has 14.8 %
return in financial year 2017. While in 2018, they have of 15.1 %. It indicates that
their efficiency of gaining return is increasing in year 2018 as compared to year
2017.
2017 2018
Return on shareholders’
equity
14.8 % 15.1 %

2017 2018
14.65%
14.70%
14.75%
14.80%
14.85%
14.90%
14.95%
15.00%
15.05%
15.10%
15.15%
14.80%
15.10%
Return on shareholders’ equity
Return on shareholders’
equity
 Capital turnover ratio- Capital turnover contrasts the company's net revenue with
the overall wealth of its creditors. The goal is to quantify the share of profits a
business will produce from a certain sum of equity. The amount of capital
spending needed in a certain sector to produce revenue is also a general
indicator (Klinsukhon and Ussahawanitchakit, 2016). On the basis of calculated
value of capital turnover ratio of above mentioned plc this can be find out that
capital turnover ratio is of 3.6 in year 2017 while in year 2018 it is of 3.5. This is
indicating that above company has effective ration in year 2017 as compared to
year 2018. Though, there is no huge difference in both years’ ratios.
2017 2018
Capital turnover ratio 3.6 3.5

2017 2018
3.44
3.46
3.48
3.5
3.52
3.54
3.56
3.58
3.6
3.62 3.6
3.5
Capital turnover ratio
Capital turnover ratio
 Net profit margin- The margin for net profit refers to the amount of revenue
produced from net gain or benefit. Net profit margin for a corporation or business
segment is the operating income to sales ratio (Muda, Siregar and Sadalia,
2017). Usually, a net profit margin is represented as a percentage but sometimes
in decimal form. The difference for net profit shows how much of a dollar a
company's revenue is received. The value of net profit margin of above company
in year 2017 was of 2.3% while in year 2018, it was of 2.5%. This showing that
company has better net profitability in year 2018 as compared to year 2017.
Herein, this is important to note that difference is not so high in both years’
performance.
2017 2018
Net profit margin 2.3 2.5

2017 2018
2.15
2.2
2.25
2.3
2.35
2.4
2.45
2.5
2.55
2.3
2.5
Net profit margin
Net profit margin
 Operating margin- The operating margin is a profitability indicator. It indicates
how much of rising profit in income remains after attention is given to cost of all
revenues and operating expenses (Olowokure, Tanko and Nyor, 2016). The
value of operating margin is 3.6% of above company for year 2017. For next year
2018, this ratio raised and became of 3.8%. It is showing that company’s
efficiency was better in year 2018 as compared to year 2017.
2017 2018
Operating margin 3.6 3.8

2017 2018
3.5
3.55
3.6
3.65
3.7
3.75
3.8
3.85
3.6
3.8
Operating margin
Operating margin
 Book gearing ratio- The ratio of Book gearing is a calculation of the financial levy
of a firm, that is, the capital structure's amount of interest-bearing liabilities. The
benefit ratio is mainly calculated by the shareholders' equity portion of the overall
debt (Rukmana, 2018). Often, a gross liability separated by cumulative capital is
determined. The book gearing ratio of this company is different in all three years.
Such as in year 2016, it was of 44.3% which decreased and became of 41.4% in
year 2017. As well as in next year, it again reduced till 38%. This is showing that
above company’s performance was better in year 2016 as compared to remained
two years including year 2017 and 2018.
2016 2017 2018
Book gearing ratio 44.3 41.4 38

2016 2017 2018
34
36
38
40
42
44
46
44.3
41.4
38
Book gearing ratio
Book gearing ratio
CONCLUSION
On the basis of above project report it has been concluded that companies need
to take decisions regards to financial aspects by making proper analysis aid with
different types of techniques. The report concludes about different kinds of techniques
such as calculation of annual profit, accounting rate of return and many more with an
objective of making analysis of both types of locations including A and B. In addition, in
the further part of report, efficiency of a company is evaluated which is being acquired
by Scylace plc. For this purpose a wide range of ratios have been calculated and
presented in an effective manner. The key ratios which are calculated are net profit
margin, book gearing ratio, capital employed ratio and return on shareholders’ equity.
On the behalf mentioned calculation of different types of ratios this can be concluded
that Scylace plc must acquire the analyzed company because its performance is
increasing. As well as in the aspect of two options for locations, this has been
concluded that above company should start to build their new building at location B. this
is so because location B is more efficient and has higher profitability as compared to
option A.

RECOMMENDATIONS
The recommendation is being on the basis of proper analysis of various aspects.
On the basis of above done analysis of two locations available to Scylace plc and
acquisition of Helibeb plc, below mentioned recommendations can be given in such
manner:
 Scylace plc should consider location B, this is so because its efficiency is much
better as compared to location A. As well as for making proper analysis of
locations different kinds of techniques have been applied and each of method
indicates that location A is less effective. Thus above company should consider
location B. If they will do so then will be able to generate higher range of
customers as well as huge market area.
 In order to take decision about making acquisition of Helibeb plc, this can be
suggest to manage and board of director of Scylace plc that they should consider
this company for acquiring. This is so because its performance is better which is
measured by help of vital range of ratios. Though some ratios are showing
average and negative result but most of the ratios are indicating that above
company’s performance is increasing in year 2018 as compared to year 2017.
Thus above company should make acquisition of Helibeb plc. As this will be
beneficial for them and they will be able to generate higher amount of profitability
in upcoming time period.

REFERENCES
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