Financial Ratio Analysis of UberTools Ltd: A Comprehensive Report

Desklib provides past papers and solved assignments for students. This report analyzes UberTools Ltd's financial performance.

Business Finance
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Executive Summary:
Under UberTools Ltd organization there is a brief explanation of cash flow, working capital,
receivables, profit, and payables are done. And also their manner of use by UberTools Ltd for
the purpose of improving or increasing their financial position. How working capital is managed
in the daily activities of business for managing the cash. There are many financial ratios
discussed in the following report and also how they create an impact on the results of the
company.
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Table of Contents
Executive Summary:........................................................................................................................2
Part 1................................................................................................................................................4
I)...................................................................................................................................................4
a)...............................................................................................................................................4
b)...............................................................................................................................................6
c)...............................................................................................................................................7
II)..................................................................................................................................................8
III)................................................................................................................................................9
Part 2..............................................................................................................................................10
I).................................................................................................................................................10
a).............................................................................................................................................10
b).............................................................................................................................................12
c).............................................................................................................................................14
II)................................................................................................................................................15
Conclusion.....................................................................................................................................16
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Part 1
I)
a)
Profit- Profit is said to be the amount which is earned by the business from its activities or
operations. The most essential element of any organization is profit. UberTools Ltd also profit
plays a very crucial role in running the business efficiently and effectively (Hoppe, 2015). It is
the income and realized when sales or revenue go beyond the expenditures or expenses, other
costs and taxes. In general, profit can be divided into three parts namely, operating profit, gross
profit, and net profit.
In simple words, Profit = Income fewer expenses.
It simply provides resources for participating in the operations or activities of the future and if it
is absent then the company may suffer from the loss.
Cash flow- It is said to be the financial statement of all the given data which is related to the
cash inflows and cash outflows by the purpose of doing the business operations. The amount
which is cash or cash like that the company gives and takes by paying to an acceptor are called
cash flow. CFA (cash flow analysis) can be used to examine the liquidity position of UberTools
Ltd. It basically gives an image of cash amount which is coming in the business, from where,
and amount flying out (Ball, et. al., 2016). Here UberTools Ltd uses this statement for knowing
the total available cash in the business and how much more cash is needed to borrow from
outside to run or continue the production in business. Cash flow statement can be divided into
three activities named as operating, investing and financing activities.
Cash flow and profit can be found different in the following ways:
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BASIS PROFIT CASH FLOW
Determination Helpful in determining the
total profit earned during a
particular period.
Helpful in determining the
total available cash in the
business.
Organization type
Financial parameters
It used by every organization.
It uses all activities of
business which is related to
accrued and cash.
It is only be used by the large
scale organization.
It only uses the transactions
related to cash inflows and
outflows
Accounting principles use It is dependent on AS- 5. It is dependent on AS- 3.
Note- AS means Accounting Standard.
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b)
Working Capital- It helps in determining the liquidity of UberTools Ltd. It shows the total
investment in the current assets of the organization. In financial-related terms, current assets and
current liabilities difference is working capital (Mathura, 2015). Working capital is very much
needed in the daily transactions of business activities. Capital is just another word for money
whereas working capital is the money which is available for funding the day to day operations of
the company.
The formula of Working Capital= CA-CL
Where Current Assets is said to be CA, Current Liabilities is said to be CL.
Receivables- The document that shows the amount which is going to be received by the
customers for the purpose of providing the services and or selling of the goods on credit. Period
of credit is based on the operations of a business and also size (Mannan, 2016). Credit period is
allowed for a short time whether it can be days or months. Receivables come under the Assets
column of the Balance sheet.
Inventory- It's the primary basis for generating sales or revenue. Also named as stock and refers
to the total available goods in the business for selling. Work in progress stock is also taken under
this. Generally, inventory is the largest current assets which the company has. By giving the
collateral securities, the rising of the capital can be done with the help of stock.
Payables- It is the document that shows the amount which is owed or taken from the outside
sources by business. It is something which is imposed or liability on business that should be
payable within one year. Also named as short term borrowings and can be shown in the
Liabilities side of Balance sheet.
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c)
Whenever between current assets and current liabilities difference is found it is known as
Working capital whereas the cash-flow shows the overall availability of cash in business from
the operations of the business. Changes can affect the cash flow in both a positive and negative
way. Positively, a working capital increase means there are the current assets and cash-inflow of
the organization increase and if there is a working capital found a decrease in the organization
then there is more cash used which is borrowed that used to gather the current liabilities called as
an overdraft.
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II)
In terms of UTL (UberTools Ltd), their business is to produce power tools. The organization’s
turnover for a specific time is £400. Before implementing the inventory, payables, working
capital, receivables, UTL should examine the accounting tools factors. It helps in increasing the
profits and liquidity of the organization. However, by proper examining of the working capital
and factors of cash-flow, they are all mandatory for the development and growth of UTL. The
purpose of UTL, in holding receivables, cash-flow, working capital and payables are to minimize
the borrowed capital and create the business better and strong from inside. The debt of any
organization directly affects the cash flow statement of the organization. By using the technique
of working capital and tool of cash flow, the debts of UTL can be decreased in such a way to the
liquidity and profitability of an organization and also helps in reaching the better financial
position. Increase in the financial requirement of business can be done by increasing debts which
are £50. The amount which is raised by UTL is £12 million pounds which can be payable and
shown in the current liabilities column of the balance sheet. The management also has the
responsibility of paying the debts of the company which takes place during the particular period
and this can be payable with the help of the company's accounts payable or trade payable. the
business can determine £35 pounds of million reason being it is recorded by UTL as the capital
that was owned.
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III)
There should be maximum use of cash in cash by dealing with business operations. For
improving the cash flow, the management must ensure that they use more investment in the
current assets and also try to decrease the borrowing amount from outside. With the help of this,
cash can be generated within the organization which somehow helps in investing and introducing
the new product in the business with some good technology. By using a cash flow statement,
cash management can start making the decision regarding the introduction and expansion of the
new product of UberTools Ltd.
For increasing the cash flow and reducing the debts of UTL, the organization must follow these
below points:
 Improving the credit policies of payables-UTL must use current assets so that the
actual position can be checked which helps in minimizing the borrowed money.
 Cash Sale- For the UTL’s development and growth, managers need to subject strict
guidelines in selling on credit the power tools. This will somehow help in increasing the
working capital and also increase the cash inflow.
 Managing the expenses- UTL should reduce and manage the needless expenditure so
the association can be able to generate more profits and more available cash in the
organization which ultimately helps the organization.
All the above points should be taken into consideration for improving the cash flow by using
working capital. Cash inflow can be managed by proper use of current assets and current
liabilities by using these points.
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Part 2
I)
a)
Sales Growth- Shows the revenue/sales of an organization of the year over time. Sales can be
due to the increase in sales price and volume (Gaur, and Kesavan, 2015). Volume increase
indicates the increase in the operations scale while the increase in sales price results in product
demand or for any other optimistic tendency in other factors of the market.
Gross Profit Margin- Profit generated by the organization by doing the main functions of the
business. These functions may be dissimilar and also depend on the operations nature of the
business. This gives an idea of how the company is functioning efficiently and also check the
overall act of the company.
Operating Margin-Amount received by the organization after payment of their liabilities and
dues in the direction of the business (Williams, and Dobelman, 2017). OM can be compared with
the company’s sales signifying how much amount of profit was earned by just consider the
company’s operations or activities. It is also known as “Earnings before interest and tax (EBIT)”.
Return on Equity (RoE) -Majorly investors are found to be taken very much interest in this
ratio. It can be calculated by knowing how well an organization has used equity in generating
income in comparing to net income with equity (Birchler, 2017). On the basis of earning, the
company can easily identify the position related to the financing of it.
Return on Capital Employed- It is essentially the money that working in the business for
carrying out the activities of the business for earning the profit. Utilization of the capital
employed must be proper which make sure about the stability and profit of the company. This is
a financial ratio which helps in measuring the profitability and also measures the efficiency of
how capital is used in the generation of the profits. In simple words, capital employed is that
amount of money which helps in identifying the profitability of the company (Abuhommous,
2017).
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Gearing Ratio- It helps in measuring the financial ratios of any organization which helps in
comparing some type of equity (owner’s capital) to funds or debt borrowed by the company. It is
said to be the total debt divided by shareholder funds and the total debt’s sum.
Interest Cover- Ratio which somehow examines the capacity of the organization in payment of
the interest of the outstanding debt. Financial position can also be identified with the help of this
and also it can be judged whether outstanding debt’s interest payable or not for the period.
Liquidity Ratio- It is the ratio which helps in checking the ability of the company for the
purpose of short-term debts payment. The current assets and current liabilities difference is the
liquidity ratio of the particular organization. It is that financial ratio which shows whether the
CA of the company is enough for meeting the company’s debts whenever it becomes unpaid.
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b)
Year 2019 2020 2021
Sales 360 396 459
Cost of Sales 130 144 187
Operating Profit 108 101 49
Total Debt 0 0 37
Shareholder's Fund 304 347 344
Finance Expenses 9 12 16
Current Assets 65 114 94
Current Liabilities 29 48 102
Net Profit 79 72 26
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