Financial Ratio Analysis of Uber Tools: A Case Study

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BUSINESS FINANCE
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Executive Summary
The report is all about the “financial ratio analysis” of Uber Tools. The case study of the
company has been analysed in the report. The “profitability”, “liquidity”, “efficiency” ratios
have been analysed in the project. The report will help the readers to understand how to apply the
strategy and where to change the strategy to improve the ratios of the company. The report is a
detailed guide to understand the impact of the financial ratios in the company.
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Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Part 1................................................................................................................................................5
Part 2................................................................................................................................................8
Conclusion.....................................................................................................................................14
References......................................................................................................................................15
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Introduction
Financial ratio is the important financial information of an organisation that can help to analyse
the financial situation of the company. The “ratio analysis” is a significant part of financial
accounting of a company. It can help the company to reduce the financial risk. This report will
outline the problems of Uber Tools limited. The company is facing some problems regarding the
payments with the cream clients. The company has several payments withheld with the clients.
The ratio analysis of the company will be given for better understanding of the position of the
company and the report will help the company to understand the strong and weak areas and how
the situation can be improved. Different information regarding “financial accounting” will be
explained such as the cash flow, profit and loss account and the working capital. This report will
help to understand all the details of the financial accounting in the company.
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Part 1
i. Using the reading list provided on the VLE, explain:
a. Explain and compare profit and cash flow.
The profit is the amount that can be kept by the company after the deduction of all the expenses
in the organisation. Higher profit means the company has a strong strategy to reach up to
customers that are more new. On the other hand, the cash flow is the statement that helps to show
the cash inflow and the outflow of the company (Aktas et al., 2015). The amount of the total
cash can be kept by the company can be understood by the cash flow of the company. Not
always, the cash flow and profit of the company depends on each other. Sometimes the high
profitable business might have low amount of cash flow. The profitability helps to understand
the progress of the organisation. The “net income” is considered as profitability of the
organisation. The profitability of the organisation comes by using the cash and earning of the
company effectively.
b. Explain Working Capital and, Receivables, Inventory and Payables.
Working Capital
The “working capital” is the amount that is remained after the deduction of current liabilities of
the organisation. The liquidity can be measured by the working capital. Higher amount of
working capital denotes that the organisation will be able to disburse its long as well as short
term financial obligations effectively (Axsäter, 2015). It helps the company to measure the risk
rate of the company; the risk can be reduced by managing the amount of working capital in the
company.
Receivables
The receivables of the company are considered as the current assets. The company can use the
amount of receivables to pay the short and long-term financial obligations (Gunelius, 2017). The
receivables are the amount that will be received by the company from the creditor of the
company. It helps the company to manage the liquidity. More liquidity is better for all the
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companies, it will help the companies to become more capable to pay all the obligations and the
reputation of the company can be improvised.
Inventory
Amount of raw materials or finished goods available in the company for sales are called the
inventory. The inventory of the company should be managed effectively to keep the process of
the production smooth and effective (Boyd, 2019). The inventory management helps the
company to become more cost effective. The company should always handle the inventory with
high care. If the inventory is not managed properly, the company will not be able to manage the
demand and supply.
Payables
Payables are the amount that should be paid by the company to its creditors. Payables are the
current liabilities of the company that should be managed for managing the amount of liquidity
(Lakshmi et al., 2016). If the amount of payables in the company is high, it denotes the company
is unable to pay its obligations. By the high amount of payables, the company will not be able to
gather funding from bank.
c. How changes in Working Capital affect Cash flow.
The sum of assets left subsequent to being deducted from the liability is the working capital and
the cash flow denotes the flow of cash in the company. The cash flow and the working capital of
the company go hand in hand. If the working capital is high, the amount of cash in the company
will also be high. In case the company sells any assets, then the fixed assets of the company will
be decreased but the amount of cash and the current assets will increase (Mohanram et al., 2018).
This is the key relation between the working capital and the cash flow. The cash flow and the
working capital are directly related. If one increases, the other will also increase.
The cash flow of the company is the statement that helps to increase the management and the
effectiveness of the cash in the company. The cash flow can be negative or positive. The positive
cash flow denotes that the company has more current assets than the current liabilities (Peavler,
2019). Different activities of the company can be enlisted in the cash flow of the organisation.
The company should update the cash flow with time. The working capital can be changed
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anytime. If the amount of payables increase the working capital will be decreased but not
necessarily, the cash amount will be changed. In case of buying inventory with cash the working
capital will not change but the amount of the cash will be reduced in the company.
ii. Apply the concepts in (i) above to this company to show how the way the company is
being managed might affect its financial results.
Uber Tools is presently facing some problems regarding the payments with the clients. Some
issues have affected their normal activities of the cash flow (Satterley, 2017). The amount of
receivables is increasing and the company is becoming unable to pay the financial obligations.
The company cannot manage the financial obligations of the company. As the problems with the
clients have gone up to the level of court case, now the company has decided to gather fund from
the shareholders by investing more money to their shares. It will help the company reduce the
amount of payables. By gathering, an adequate amount of fund the company will be able to
increase the current assets and the liquidity of the company will increase. It will help the
company to become more effective. The present situation of the company is making the situation
more risky. The debt of the company is increasing and the amount of payables is increasing. It
will lead the company to a high-risk zone.
iii. Analyse and recommend what steps should now be taken to improve this company’s
cash flow through better Working Capital management.
The organisation has already started taking necessary steps for the current financial situation.
The company should now concentrate more on managing the cash flow (Williams and
Dobelman, 2017). Some of the fixed assets of the company can be sold to increase the amount of
the cash flow in the company. On the other hand, the company can come to personal compromise
with the clients to get the money from the client and it will help the company to increase the cash
flow of the company. At this time, the company should now more concentrate on managing the
cash flow and it will help the company to increase the effectiveness.
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Part 2
a. Explain what element of financial performance each of them describes.
i. Sales Growth
The amount of sales that has been increased in the company from the previous year to this year is
referred to the sales growth. The amount of increasing in the sales or revenue is called the sales
growth. The growth of sales in the company denotes the health of the company. The high sale
growth denotes that the current strategy of the company is highly effective and it can be
continues and the low growth in sales denotes that the company can change the strategy to get
more effective revenue.
ii. Gross Profit Margin
The profit amount left in the company after subtracting the revenue cost from the revenue total is
called the gross profit margin. It is the total profit that the company has earned before deducting
the operating expenses and the tax and interest. High gross profit margin is more preferable for
the companies to grow.
iii. Operating Profit Margin
Operating profit is the amount that is left in the company after deducting the amount of operating
expense. The cost management of the company can be understood by the amount of operating
profit margin of the company. The operating profit is the amount that is earned from the
operations of the company.
iv. Gearing
Gearing ratio can measure the risk of meeting the financial obligations in the company. The
gearing ratio is one of the most important ratios in the company. The gearing ratio should always
be lower than 50% and a gearing ratio of more than 50% denotes higher risk in the company.
v. Interest Cover
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The ability of the company to pay the rate of interests is called the interest cover ratio of the
organisation. Higher amount of the interest cover ratio denotes higher capability of the
organisation to attain its financial compulsions.
vi. Liquidity Ratio
The “liquidity ratio” of the organisation indicates the capability of the organisation to meet the
short and long-term financial obligations. The standard amount of the liquidity in the company is
1 to 3. The amount of liquidity more than 3 denotes that the company has a low risk appetite and
unable to invest the assets in proper fund and below denotes that the company is unable to meet
its financial obligations.
vii. Return on Equity
The equity of the company should be invested in proper funds. The return from the equity is
added to the income of the company. The income from the equity depends on how effective the
fund of investment is. Higher return from the equity is more helpful for the company.
viii. Return on Capital Employed
There are some funds available that helps to increase the amount of capital. The company invest
the excess amounts of capital helps to get an extra income to the company from the return of the
capital engaged.
b. Calculate the ratio for each year for this company.
Income Statement
Particulars 2019 2020 2021
Sales 360 396 459
Cost of Sales -130 -144 -187
Gross Profit 230 252 272
Operating Expenses -58 -72 -115
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Depreciation -65 -79 -108
Operating Profit 108 101 49
Expenses -9 -12 -16
PBT 99 89 33
Tax @ 20% -20 -17 -7
Profit for Shareholders 79 72 26
Dividends 0 -29 -29
RP Change 79 43 -3
Table 1: Income statement of Uber Tools
(Source: Created by the learner)
Balance Sheet
Fixed Assets 490 648 936
Accumulated depreciation -36 -115 -223
Net Fixed Assets 454 533 713
Cash 14 35 0
Inventory 14 36 43
Trade Receivables 36 43 50
Current Assets 65 114 94
Total Assets 518 647 807
Short Term Debts 0 0 37
Trade Payables 14 17 14
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Interest Payables 7 9 22
Tax payables 7 22 29
Current Liabilities 29 48 102
Non-Current Liabilities 186 252 360
Total Liabilities 304 347 344
Share Capital 187 187 187
Retained Profits 117 160 157
Shareholders Fund 304 347 344
Table 2: Balance Sheet of Uber Tools
(Source: Created by the learner)
Ratio Analysis Formulae 2019 2020 2021
Sales Growth =(Present- past)/ past 0.10 0.16
Gross Profit Margin =(Gross Profit / Sales)* 100 63.9
%
63.6
%
59.3
%
Operating Profit
Margin
=(Operating Profit / Sales)* 100 30.0
%
25.5
%
10.7
%
Gearing = (Long term Liabilities/ Capital) * 100 99% 135
%
193
%
Interest Cover = (Earnings before Interest and Taxes/
Interest Expenses)
-
12.0
0
-
8.42
-
3.06
Liquidity Ratio = (Current Assets/ Current Liabilities) 2.24 2.38 0.92
Return on Equity = (Net Income / Shareholders' Equity) 0.53 0.48 0.18
Return on Capital = (Operating Profit / Capital )* 100 58% 54% 26%
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Employed
Table 3: Ratio Analysis of Uber Tools
(Source: Created by the learner)
c. Apply the result to consider why the ratios might have changed using the information in
the scenario.
i. Sales Growth
The sales of the organisation have been improved over these two years. The amount of increase
in the sales is high enough and it denotes that the customers still trust the company. The
marketing strategy of the company is still effective to the customers and it is a positive sign for
the company.
ii. Gross Profit Margin
Event after having the positive sales growth the company does not have the increasing gross
profit margin. The gross profit margin of the company has decreased. It denotes that the cost of
revenue of the company is high and the cost of the revenue should be managed more effectively
to increase the amount of the gross profit margin of the organisation.
iii. Operating Profit Margin
The operating profit margin of the company has been decreased by a huge rate and it denotes that
the company cannot manage the operating cost. The costing is increasing over the revenue in the
company and it results in decreasing the profit margin of operations of the organisation.
iv. Gearing
The gearing ratio of the organisation is very high and it indicates that the amount of risk in the
company is very high. The company needs to manage the gearing ratio more effectively and the
debt amount should be reduced to increase the strength of the company.
v. Interest Cover
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