Financial Performance and Investment Appraisal of Thomas's Ltd

This report provides a comprehensive financial analysis of Thomas's Construction Products Limited, evaluating its profitability and liquidity through ratio analysis from 2013 to 2017. It examines the feasibility of setting up an internal training department, considering both financial and non-financial factors. The report also explores investment decisions concerning the establishment of a manufacturing and distribution center in various countries (UK, France, Vietnam, or Brazil), utilizing Net Present Value (NPV) and Profitability Index (PI) techniques to recommend the most beneficial location. Ultimately, the analysis suggests that investing in Brazil would yield the highest returns based on these financial metrics, while also advising careful consideration of both financial and non-financial aspects when evaluating the training department proposal. Desklib offers a range of similar solved assignments to aid students in their studies.

BUSINESS FINANCE

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1...............................................................................................................................3
Question 2...............................................................................................................................6
Question 3...............................................................................................................................7
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Business finance is a crucial function of the businesses. It refers to the activities related to
acquisition and managing funds to run the business smoothly. Finance is the most critical factor
for any business (Wang And et.al, 2021).In this report, a comprehensive analysis of financial
performance of Thomas's Construction Products Limited has been performed along-with
focusing on the profitability and liquidity of the business. Further a detailed and comprehensive
study has been done to analyse whether it should consider the proposal to set up their own
training department to run courses to train their internal employees as well as external persons.
The concept of margin of safety has been explained in the below report in context to the
Thomas's Construction Products Limited. Further this report includes several recommendations
to the director of the company upon investment decisions on the basis of various calculations and
reasons and implications are explained thoroughly to support those recommendations.
MAIN BODY
Question 1
Performance Management shall be considered as an essential aspect of the management
accounting. Performance management system plays a key role in deploy strategy, but it has a
prerequisite and that is measure the existing performance (Ejiogu And et.al, 2018). Profitability
and expansion are the best signal of performance measures. Financial statements mainly consist
balance sheet and income statement which can be considered for financial decision making. To
obtain significant and relevant financial information, it is compulsory to analyse the data
provided by the financial statements.
Thomas's Construction Products Limited is a global business based in the UK but trading
across many areas of the world. The company have continued to work with customers in South
America, SE Asia and across Europe. To analyse the financial position of the company in the
reference of profitability and liquidity a comprehensive ratio analysis is performed on the basis
of given financial information. Ratio analysis is a process of comparing the number against
previous years.
To assess the financial performance in context of the profitability of the Thomas's
Construction Products Limited, Profitability ratios can be considered. Profitability ratios measure
the operational efficiency of the firm (Shi And et.al, 2018).These ratios depict the final outcomes

of the business operations. Management aims to increase these ratios to maximize the firm's
value.
To assess the financial performance in context of the liquidity of the company, Liquidity
ratios can be considered(Arner And et.al, 2020). Short term solvency means the ability of the
organisation to pay its debts. Inabilities to pay-off short-term debts affects its creditability as well
as its sustanability.
Following ratios are calculated to analyse the financial performance of the company,
which are as under :-
Ratios 2013 2014 2015 2016 2017
1. Operating
Ratio
= Operating
profit/Sales
0.06 0.05 0.09 0.07 0.04
2. Return on
Total Asset
= Operating
profit/average
total asset,
where average
total asset is
=(long term
assets+current
assets)/2
0.14
where average
total asset is
=(34305+7254
)/2
=20779.5
0.14
where average
total asset is
=(41444+7546
)/2
=24495
0.33
where average
total asset is
=(54561+8214
)/2
=31387.5
0.3
where average
total asset is
=(67061+9450
)/2
=38255.5
0.16
where average
total asset is
=(78300+9215
)/2
=43757.5
3. Return on
capital
employed
=Earning
before interest
and
taxes/capital
0.13 0.14 0.373 0.37 0.22

employed*100
4. Current
ratio
=Current
assets/current
liabilities
1.06 1.04 0.85 0.79 0.68
By considering the above calculated ratios, company's financial performance can be
interpreted as follows:-
1. Operating Profit: It can be said that company's operating profit is not stable in the period
from 2013 to 2017. In year 2014, it shows minimal decrease as compared to year 2013
but in 2015 it significantly increased to 90 percent. It can be said that company's
operating profit is affected by several factors may be labour rate, carrying cost of stocks
etc. From year 2015 there is a decreasing trend in the operating profit may be caused by
higher freight amount, high purchase prices etc.
2. Return on total assets: This ratio shows that company is generating a good return on its
total assets which is increasing year by year. But from the year 2016 there is a decreasing
trend in the above ratio. That means that company's overall ability to generate higher
returns is affected caused by several factors such as increased prices in the raw material
and labour rates and company's inability to control overheads.
3. Return on capital employed: Till the year 2016, there is a increasing trend in the
company's return on capital investment but in year 2017 it reduced to 22 percent that
shows that company is earning good returns on the total invested amount and company's
overall value is increasing gradually.
4. Current ratio:Ratio shows that company's liquidity position is quite good in the year 2013
and 2014 as compared to period 2015 to 2017. Company was able to repay its liabilities
but from 2015 there is a decreasing trend in the current ratio. That triggers that company's
liquidity position is getting worse and its assets are not enough to pay company's total
liabilities.

Question 2
Investment decisions are very significant for an governing body to carry out its mission
as it create earnings and ensures long term survival of the governing body(Aisaiti And et.al,
2019). Investment decisions are very popularly known as Capital Budgeting.
Thomas's Construction Products Limited is considering setting up their own training
department to help their employees, as well as other companies. To analyse whether this project
is profitable or not, management should consider decision making concepts. Decision making
concepts include incremental revenue and costs analyse. Incremental benefit analysis is
performed as follows for the above stated project:
Particulars Amount (£)
Revenue 183000
Total Revenue 183000
Less:-
Administrator's salary 27000
Hotel conference hiring cost 34008
Training booklet costs 3640
Trainer's salary 124800
Advertising cost 13500
Fees to the professional training cost 8216
Annual insurance cost 850
Total Cost 212014
Total Incremental Revenue (29014)
As there are no incremental benefits form the above project and there will be a loss of
£29014 if company consider the project of operating training department to train own employees
and other external employees, company should not consider the proposal. The courses are not
enough to permit Thomas's to train their staff and to generate funds therefore company should

increase the numbers of courses and focus to reduce and control the costs so that this proposal
will be beneficial for the company.
Margin of safety is the difference between the current revenue and the break-even point
of the sales(Barnett And et.al, 2018). It shows that how much company is earning over and
above the break-even point. Company should focus to earn extra revenue over the break-even
point so that it will remain profitable and sustainable for a longer period.
There is always a another side of the coin. There are some non-financial factors along
with financial factors which requires to analyse over the period of time by the company(Rugman
And A., 2019).
The proposal of setting up a training department to run courses for both their own staff
and staff from other external companies will helps company in the long term to remain
sustainable. This will assist the employees to enhance their knowledge in the specific field and in
generating revenues as well for the company. If company consider this proposal, it will be in
overall favour for the company so company should consider financial as well non-financial
measures while deciding upon the proposal.
Question 3
Investment decisions mainly focus the overall utilization of funds to increase the value of
the organisation. Investment decisions are very crucial for an organisation to fulfil its
objectives(Khan And et.al, 2021). Investment decision means applying the principles of
budgeting for capital investment. The capital budgeting decisions are critical business decisions
because it emphasis on long time period and complex decisions.
In an uncertain world, Thomas's Construction Products Limited needs to make a decision
about where to build their first manufacturing and distribution centre. There are only four options
which are UK, France, Vietnam or Brazil. There is a upper limit of the initial investment of £20
million. With the help of investment appraisal techniques, company can analyse which market is
most beneficial for the company to make investments. The investment appraisal techniques on
which the consideration is taken into account are as follows:-
Net Present Value Technique: Net present value technique is a discounted cash flows
method that considers the time value of money(Mingyue And et.al, 2022). In this method, a
discounting rate is considered to sort all the future cash flows at their present values. The net

present value of a project is the amount, the investment earns after paying cost of capital in each
period.
NPV = present value of net cash inflow – Total net cash outflow
For the company's above stated investment proposal, NPV for each place is calculated as under:-
 UK
Total NPV of the project in UK is £3878.
 Hungry
Total NPV of the project in Hungry is £3245.
 Cambodia

Total NPV of the project in Cambodia is £6862.
 Brazil

Total NPV of the project in Brazil is £7985.
Since the highest NPV of the project is in the Brazil, company should consider the investment
decision in the country in which NPV is the higher than others. Therefore company should
consider its investment decisions in Brazil as by making this decision it will be able to generate
more revenue as well wealth to its stakeholders.
Profitability Index: This is an another investment appraisal technique which is also
known as desirability index or factor or present value index method(Hamilton, M., 2020). This
method is also taken into account the concept of time value of money. If present value index is
greater than and equal to 1 then the project should accepted otherwise reject project.
Profitability Index = Total of the discounted cash in flows/ total discounted cash outflow.
For the company's above stated investment proposal, present value index for each place is
calculated as under:-
 UK
=23878/20000
=1.1939.
 Hungry
=23245/20000
=1.16225.
 Combodia
=23862/20000
=1.1931
 Brazil
=27985/20000
=1.39925.
The Present value index factor is higher in the Brazil from other countries. As per the
profitability index, project having higher PI should be selected. Therefore company should

consider the investment decision in Brazil as both the NPV and PI techniques is higher in case of
Brazil. It will be beneficial for the company to generate more wealth and revenue if company
consider the investment decision in the country having higher NPV and PI.
Note: for the above calculations discounting rate is consider at 10 percent as based on the risk
assessment it is the most appropriate rate to use in the projects involving higher risks. Because of
this change in discounting rate from 15 percent which the company uses for its major
investments to 10 percent the NPV will be higher. This rate is based on the market rate which
encapsulates all the market risks in it. If company uses the higher rate for discounting its project,
NPV will be lower so company should try to use the IRR which equates the present value of the
expected cash inflows with the initial cash outflow.
CONCLUSION
In this report, several ratios are performed to examine the financial presentation of the
Thomas's Construction Products Limited in the context of its profitability and liquidity. Further a
project is proposed by the company to set up a training department in the company for that a
detailed analysis is presented and later various calculations are performed in context to the
investment decision explaining in which company should make investments.

REFERENCES
Books and Journals
Aisaiti And et.al, 2019. An empirical analysis of rural farmers’ financing intention of inclusive
finance in China: The moderating role of digital finance and social enterprise
embeddedness. Industrial Management & Data Systems.
Arner And et.al, 2020. The future of data-driven finance and RegTech: lessons from EU big bang
II. Stan. JL Bus. & Fin. 25, p.245.
Barnett And et.al, 2018. Banking and finance issues in emerging markets. Emerald Group
Publishing.
Ejiogu And et.al 2018. Agricultural finance and opportunities for investment and expansion. IGI
Global.
Hamilton And M., 2020. Blockchain distributed ledger technology: An introduction and focus on
smart contracts. Journal of Corporate Accounting & Finance. 31(2), pp.7-12.
Khan And et.al, 2021. Artificial intelligence and NLP-based chatbot for islamic banking and
finance. International Journal of Information Retrieval Research (IJIRR), 11(3), pp.65-
77.
Mingyue And et.al, 2022. RESEARCH ON THE HOUSEHOLD INTERNET CONSUMPTION
BEHAVIORON THE PERSPECTIVE OF INCLUSIVE FINANCE
DEVELOPMENT. Economic Theory and Business Management. 42(2), p.24.
Rugman, A.M., 2019. From globalisation to regionalism: The foreign direct investment
dimension of international finance. In Shaping a new international financial system. (pp.
203-219). Routledge.
Shi And et.al, 2018. Product market competition and earnings management: A firm‐level
analysis. Journal of Business Finance & Accounting. 45(5-6), pp.604-624.
Wang And et.al, 2021. Value creation in blockchain-driven supply chain finance. Information &
Management, p.103510.