Comparative Financial Analysis: THIS plc vs. THAT plc for Acquisition

This report conducts a detailed financial analysis comparing THIS plc and THAT plc, focusing on key financial ratios such as Return on Capital Employed, Return on Equity, Gross Profit Margin, Net Profit Margin, Inventory Turnover Period, Receivables Turnover Period, Current Ratio, Quick Ratio, Gearing, and Interest Coverage ratio. The analysis aims to assess the financial health and performance of both companies to inform strategic decisions, particularly regarding potential business acquisition. The report includes calculations of these ratios, a comparative analysis of the two companies' financial profiles, and an evaluation of the suitability of each company for a business merger. Additionally, the report discusses various financing options, outlining their advantages and disadvantages, and concludes with recommendations based on the overall findings.

Leading Strategic Decision-
Making

Table of Contents
INTRODUCTION...........................................................................................................................1
Main Body.......................................................................................................................................1
A ) Calculation of ratios: ............................................................................................................1
b) Comparison between financial profile of THIS plc and THAT plc on the basis of ratios.....8
c) Analysis of suitability for making business merge with other one.......................................10
d) Advantages and disadvantages of various financing options...............................................12
CONCLUSION AND RECOMMENDATION.............................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
Decision making process is an essential factor of business through which target get
ascertain in an effective manner (Goetsch and Davis, 2014). Leading strategic decision making is
a process through which management become able to frame their policies according to time by
leading it from front. Leaders and management have to analyse all facts and figures of business
which are related with that for attain and ascertain targets and goals on time. This report is based
on two entities which are THIS plc and THAT plc, who want to conduct a process of acquisition.
Thus, by using their financial information, Expanding business Plc will become able to analyse
that which company have good growth rate for merge the business. There will be various
financing options are identify which have several advantages and disadvantages which have to
get analyse in an appropriate manner. Along with all these things, a proper recommendations
also get provided by clarifying the overall findings.
Main Body
A ) Calculation of ratios:(i) Return on Capital Employed
It is a ratio which is apply for analysing the financial performance and efficiency of a company
with which its capital get employed (Hacklin and Wallnöfer, 2012). This get calculated with
apply a formula which is:
Earning before interest and tax/ capital employed
Long term borrowings + net assets
THIS plc THAT plc
Net assets 2735 9851
ADD: Long
term
liabilities 969 11761
Capital
employed 3704 21612
EBIT 513 4223
Return on 13.8498920 19.5400703
1

capital
employed 086 313
According to the ratio determination it get identify THAT plc have good return on capital which
they employed. Thus, chances of acquisition is high as compared to THIS plc.(ii) Return on Equity
Equity is a company assets or shares which issue by them with a motive to arrange some fund.
Thus, ROE is a measure which aid in analysing that how much dollar a company generate with
respect to each of their shareholders equity (Hrebiniak, 2013). Another term for stated return on
equity is return on net worth. Formula for calculating the ROE is:
ROE = Net Income/Shareholders' Equity
THIS plc THAT plc
Net income 362 2763
Shareholders
equity:
Share
Capital 55 75
Share
Premium
Account 125 133
Reserves 2555 9643
2735 9851
Return on
equity
13.2358318
099
28.0479139
174
Net income of THIS plc is low as compared to THAT plc and thus this impact is easily
determine on their shareholders equity as well. The return on equity of THIS plc is 13% which is
not high but if the data of THAT plc get underlying then a thing get determine that return on
equity is just double of THIS plc.
(iii) Gross Profit Margin
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It is a sort of model which usually used to identify the health of a company by revealing the
proportion which get left after revenue determination with cost of goods sold (Johnson and et.
al., 2013). Gross profit= Gross profit / sales *100
THIS plc THAT plc
Gross profit 2644 5463
Sales 2771 11629
Gross profit
margin
95.4168170
336
46.9773841
259
According to this calculation this get identify that THIS plc have low number of direct
expenses because their sale margin is high but according to THAT plc there is a huge difference
get determine within their financial position. That's why their percentage of gross profit margin
is low as compared to THIS plc.(iv) Net Profit Margin (using profit after taxation)
When all expenses of sales get deducted then a percentage of revenue get left which is consider
as net profit margin (Lunenburg, 2011). Net profit get calculated after deducting tax from it so
that better and effective results get gain. This get determine by applying a formula of:
Net income / Net sales
THIS plc THAT plc
Net profit 362 2763
Sales 2771 11629
Net profit
margin
13.0638758
571
23.7595666
007
The net profit margin get determine after deducting all expenses from it which state that
company already paid out all things adequately. Thus, THAT plc have good operating profit and
generate more profit as well.(v) Inventory Turnover Period
Every organisation have to sale their inventory and stock in a fixed period of time so that they
can maintain proper growth and profitability (Mullins, Walker and Boyd Jr, 2012). Thus, if a
company sale all of their stock state that they are in good position or providing more and more
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discount as well on the other hand if a company have remain stock unsold thus, they have poor
growth rate. Formula for calculating the inventory turnover is:
= Net Sales / Average turnover
THIS plc THAT plc
Sales 2771 11629
Inventory 3 7141
Inventory
turnover
923.666666
6667
1.62848340
57
Inventory
turnover
Period
0.39516420
06
224.134921
3174
Their is a huge difference get determine between these two organisations which state that
THIS plc sale out their stock in less period of time as compared to THAT plc but both of them
have distinct inventory rate. Thus, this is a major reason behind the differentiation between
average turnover period.
(vi) Receivables Turnover Period
Every organisation have to use their assets properly so that they become able to increase their
productivity (Nielsen and Nielsen, 2011). Receivables are all such things which a firm receive
from external business factor and support in working as well. Receivable turnover ratio define as
a process which signifies that how efficiently a firm is using their assets in a given course of
time. Thus, the formula for calculating the receivable turnover period is:
:Net credit sales / Average account receivables
THIS plc THAT plc
Net credit
sales 2771 11629
Average
receivables 226 7277
Account
receivable
12.2610619
469
1.59804864
64
Account 29.7690364 228.403560
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receivable
period 489 0654
Net credit sales of both the organisation are different from each other which state that
management have different perspective of planning. Although, their receivables also get vary
from each other and hence, this variation measure in their account receivable period as well. The
efficient using of asset by a company is THAT plc which signifies that they are using it in more
proper manner. Hence, Expanded business PLC have to take all such consideration in account.
(vii) Current Ratio
This ratio analysed with an aim to measure the company liquidity to pay all of their short term
and long term obligations (Phipps, 2012). It is essential for an organisation to maintain proper
flow of current assets over on their current liabilities. In case if CL is more than the CA then
company require more adequate strategies for overcoming from that. This ratio get determine by
applying a instruction which is:
Current ratio: Current assets/ Current liabilities
Current
Assets THIS plc THAT plc
Inventory 3 7141
Receivables 226 7277
Cash 35 3359
264 17777
Current
Liabilities
Borrowings
Repayable
within 1
year -98 -50
Trade
Payables -571 -6353
-669 -6403
Current 39.4618834 277.635483
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Ratio 081 3672
This ratio state that THAT plc is working and operating their business at vast level and thus their
current ratio is high as compared to THIS plc. Thus, according to this analysis it get identify that
THIS plc more need to get merge with such entity whom have good working condition and able
to deal with every situation properly. As THAT plc have low current liabilities according to
financial statement in which it is clearly shown that THIS plc have more number of CL than CA.
(viii) Quick Ratio
This ratio is helpful in determine how a company is able to meet with their short term obligations
with amount or fund they have (Robert Mitchell, Shepherd and Sharfman, 2011). Quick ratio
state about a company reliability to pay off all their minimum period obligations which aid them
in arranging more and more fund for their future aspects. Quick ratio get analyse by applying a
formula:
=(Current assets – Inventory) / Current Liabilities
All remaining stock get deducted from CA and then it become divisible with CL.
Current
Assets THIS plc THAT plc
Inventory 3 7141
Receivables 226 7277
Cash 35 3359
264 17777
Acid 261 10636
Current
Liabilities
Borrowings
Repayable
within 1
year -98 -50
Trade
Payable -571 -6353
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669 6403
Quick ratio
39.0134529
148
166.109636
1081
This ratio determination is very important for identifying that company is able to deal with any
uncertainty or not. Quick ratio is helpful in dealing with all short term obligations of business.
THAT plc have good growth through which they are more able to deal with all short term
financial obligations of business which are not adequate for business concern. Thus, Expanding
business Plc have to merge their business with THAT plc which support them in making their
business growth appropriate in nature.
(ix) Gearing
This ratio is helpful in analysing the financial leverages of a company in which it get determine
that compare some form of owner equity with to such fund which is borrowed by company.
Gearing ratio = company debt ÷ shareholder equity
THIS plc THAT plc
Long-Term
Liabilities
Long-Term
Borrowing -962 -8075
Provisions
for
Warranties -5 -3201
Deferred
Tax -2 -485
969 11761
Shareholde
rs’ Equity
Share
Capital 55 75
Share
Premium
125 133
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Account
Reserves 2555 9643
2735 9851
Gearing
ratio
35.4296160
878
119.388894
5285
Gearing ratio is helpful in identify the proportionate debt to equity. According to this
table it get analyse that THIS plc have low gearing ratio which clearly state that they have low
proportionate to pay all debt to equity on the other hand THAT plc have high gearing ratio.
(x) Interest Coverage ratio
Interest is all such amount which is payable by an organisation on amount which they borrow
from some one else. Interest coverage ratio is used to analyse to met with all of their interest
expenses on outstanding debt.
Interest coverage ratio = EBIT / Interest expenses
THIS plc THAT plc
Sales and
Distribution
Costs -1800 -428
Administrati
ve Expenses -331 -812
Operating
Profit 513 4223
Interest
Payable 55 726
Interest
Coverage
ratio
9.32727272
73
5.81680440
77
Interest coverage ratio is helpful in measuring ability of an organisation to apply all of
their interest and debt properly. THIS plc have low interest coverage ratio which state that they
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have more able to pay their amount and less chances to get bankrupt. As compared to this THAT
plc have more chances to get bankrupt due to low ICR.
 Book to Market Ratio
It is essential for every organisation to make their market value more as compared to book value.
Thus, Book to market ratio make this process easy to determine the book value of a firm to its
market value (Snyder and Diesing, 2015). Thus, it is essential to maintain proper growth and
stock in a company through which they are going to ascertain all targets in an adequate manner.
b) Comparison between financial profile of THIS plc and THAT plc on the basis of ratios
It is essential for every business to make a proper comparison between their working and
operations. Their financial performance are distinct from each other which made them different
from each other. Expanding business Plc wants to merge their business with THIS plc and THAT
plc and there is a proper differentiation get measure between both of their performance. This
comparison between financial profile will enable them in taking an appropriate decision. On the
basis of various ratio determination, a perfect comparison between both organisation
performance get identify which is as below:
Ratios THIS plc THAT plc
Return on Equity 13.2358318099 28.0479139174
Gross Profit Margin 95.4168170336 46.9773841259
Net Profit Margin (using
profit after taxation)
13.0638758571 23.7595666007
Inventory Turnover Period 0.3951642006 224.1349213174
Receivables Turnover Period 29.7690364489 228.4035600654
Current Ratio 39.4618834081 277.6354833672
Quick Ratio 39.0134529148 166.1096361081
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Gearing 35.4296160878 119.3888945285
Interest Coverage ratio 9.3272727273 5.8168044077
Return on Capital Employed 13.8498920086 19.5400703313
According to all ratios estimation, several major things get identify which state about
financial performance of both the companies during last year. The return on capital employed is
high of THAT plc which state that management have better and effective strategies through
which they are gaining more and more return. But not all positions are in favour of THAT plc,
several ratios state that THIS plc have good growth rate.
According to interest coverage ratio, THAT plc have more chances to become bankrupt
as they have low interest coverage ratio. Thus, overall decision of every merger by Expanding
Business Plc is based on bankruptcy of an organisation which is THIS plc have more. Along
with this, gearing ratio is another major tool through debt to equity of a company get analyse.
Business expansion become more capable with THIS plc which get analyse by measuring
inventory turnover period. According to this, THIS plc sale out their stock in less time period as
compared to THAT plc. Hence, Expanding Business Plc can merge their operations with such
entities.
THAT plc have good return on equity which present that more and more profit get gain in
return by an organisation to other one. Equity return is a major concern on which every business
firm have to take several steps. THAT plc provide good return to all of their shareholders which
support in enhance their market goodwill. Although, many shareholders just take a view on
return and then start making their investment activity.
On the basis of above aspects, it get analyse that several areas of THAT plc are more
adequate and have good rate on the other hand THIS plc have more appropriate development rate
for several areas as well. Hence, all judgements of Expanding business plc have to get drawn on
the basis of ratio analysis and a valid comparison between them. According to this, Expanding
business plc have to merge their business with THAT plc because they are operating business at
vast level which get determine through balance sheet and its differentiation. Although, they are
more capable as well in dealing with current and quick term obligations. Financial obligations
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meeting capacity have more to THAT plc as compared to THIC plc. Hence, management have to
go with a merger concept with THAT plc.
c) Analysis of suitability for making business merge with other one
Whenever two or more companies come together for a common concern then such
concept is consider as merger (Solomon, 2014). Merger have basically a simple meaning in
which two or more things come together ton make a single unit. Thus, merger is one of a
beneficial concept under which many organisation work together to generate more and more
revenue or else make their business growth more rapid. This terminology is appropriate for many
big small firms and their merge with small ones (Thiel and et. al., 2012). This is helpful in attain
and accomplish all targets and goals on time.
Although, both organisations merge together and formulate a new named company.
Many examples are identify which signifies merger concept more properly like Hero Honda.
Merger is suitable for Expanding Business Plc and they have to analyse the financial statement
of two most adequate acquisitions concern targets: Totally Hyperlative Information Systems plc
and Trying Harder At Transport plc.
THIS plc is dealing at small level on the other hand THAT plc deal in airports, rail
transport and other transportation facility. Hence, apart from electronic business products,
company want to expand business in another major concern for which they are identifying
several options which provide more and more return.
According to financial statement of both such companies, transportation business is more
adequate for expansion purpose as compared to software generation. From past few years, it get
determine that number of tourist rate is increasing day per day. Thus, a beneficial judgement is
one in which merger concept get implemented properly. Trying Harder At Transport plc is
appropriate for their merger. According to statement they have more profit generation ability and
chances of expansion are more. Their bankruptcy outcomes are more like but with support of
acquisition, this fact get decline as well.
Below is a financial statement of both organisations which clearly made a proper
comparison between them:
THIS plc THAT plc
￡ million ￡ million
Non-Current Assets
Intangible Assets 3,923 4,872
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Property, Plant and Equipment 186 5,366
4,109 10,238
Current Assets
Inventory 3 7,141
Receivables 226 7,277
Cash 35 3,359
264 17,777
Current Liabilities
Borrowings Repayable within 1 year (98) (50)
Trade Payables (571) (6,353)
(669) (6,403)
Long-Term Liabilities
Long-Term Borrowing (962) (8,075)
Provisions for Warranties (5) (3,201)
Deferred Tax (2) (485)
(969) (11,761)
Net Assets 2,735 9,851
Shareholders’ Equity
Share Capital 55 75
Share Premium Account 125 133
Reserves 2,555 9,643
2,735 9,851
THAT plc is dealing at same level to THIS plc but according to their operations which
are more in numbers. Although, software are selling only at one time which is signifies as one
time investment but transportation is a regular based activity which is taking place on daily basis.
Thus, THAT plc is more adequate to deal with rather than Totally Hyperlative Information
Systems plc. This decision is more helpful in making business and its survival for long term
context and chances of failure by another organisation also get decline which is adequate to
make a business successful in nature. For merging a business, all necessary formalities have to
get accomplish in proper time manner.
Management of Expanding Business Plc have to analyse financial statement properly and
take ratios determination on a serious note as well. Market value of THAT plc is more as
compared to THIS PLC. All such outcomes are in complete favour of Trying Harder At
Transport plc so all judgements will going to be in favour of such organisation as well. Not only
this, another major advantage by analysing ratio is get identify which company have good and
effective rate and which have not.
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d) Advantages and disadvantages of various financing options
Finance is a field which is usually deal with a concept of investment. It is a science of
money management through which an organisation become able to analyse all aspects where
they can made their investment properly (Tzeng and Huang, 2011). It is essential for an
organisation to analyse all options of investment and then take appropriate steps for that. Every
financing option require more adequate analysis which are related with its details. Thus, in case
if management found out any deviation with their financing activity then they have drop their
plan frequently and identify another option which provide them more return (Wu and Pagell,
2011).
Advantages and Disadvantages of various financing options are as follow:
Financing Options Benefits Limitations
Debt financing A major advantage of debt
financing is that many banks
easily provide loan on short
and long term basis which
signifies that everyone can
lend loan by paying some
security amount.
If repayment will not get done
then iota affect image and
goodwill of a company very
badly. This is one of a major
limitation and many people
most of the time become
insolvent and neglect to pay
amount on time.
Equity financing Equity financing is consider as
risk financing which is helpful
in arranging fund through
issuing shares and sale
debenture in market. One of a
oldest form and many
organisation usually adopt this
technique.
Sometimes company suffer
heavy loss and then do not pay
amount of interest on time.
This is consider as limitation
because shareholders trust get
void.
Investment banking Provide many opportunities to
start up and their return is
adequate. This is a major
Many time a start up get failed
and do not become able to pay
all obligations on time. This is
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advantage of investment
banking financing option.
consider as major limitation of
investment banking process
technique.
Relatives It is easy to arrange fund
through family, friends with
low interest rate. Thus, a major
advantages of this is that fund
get easily available in
minimum time period.
A major drawback of
arranging fund through relative
is fear of repayment. Many
relationship and bond get
affected due to lack of trust
and not meeting with
obligations on time.
These are the various financing options which have to take in account by every
organisation at the time when they are lending money. Expanding business plc and THAT plc
have to analyse each aspect properly and take decision on the basis of them.
This analysis is helpful for them in long term context and they become able to deal with
every situation as well. Equity is one of a major source which aid in arranging fund by general
public. Although, both companies are already listed in New York Stock Exchange which support
in arrange fund through most number of personalities. Nature of share market is not stable and
get fluctuate with time. Expanding business plc and Totally Hyperlative Information Systems plc
can adopt this option for organising a new firm in market by distributing the risk factor equally
between each other.
CONCLUSION AND RECOMMENDATION
It get concluded from the above report that during merger, it is essential to take several
appropriate steps which are beneficial in such consent. Merger require a keen focus on financial
statement of a company which is helpful in taking a beneficial decision for future aspects. For
this prospect, ratios have to get analyse in a proper manner. On the basis of calculation of various
number of ratios, management become able to make a proper differentiation between two or
more companies at a single time. Although merger with another business is not easy and apart
from ratios, authority have to take financial statement in account as well. By interpreting balance
sheet of an entity, many judgements become possible and a critical view on different aspects also
get done. Moreover, various number of financing options are also analyse with their advantages
14

and limitations. This process is helpful in deriving an appropriate decision which is beneficial for
long term context.
It get recommend on the basis of ratio analysis that company have t go with THAT plc
rather than THIS plc. Although, quick and current ratios of THAT plc are more appropriate but
their gearing ratio state that company become bankrupt in near future. For overcoming from this,
management have to merge their business with another one so that chances of differences get
reduce. Along with this, balance sheet is helpful in analysing various aspects more properly.
Balance sheet open all sort of operation activity properly. Along with this, out of various
financing options company have to choose equity financing under which fund get arrange
through various number of people. Thus, Expanding business plc and Totally Hyperlative
Information Systems plc have to combine their working and start a transportation business
together so that more likely outcome can be gain.
15