Analysis of Melmotte Ltd's Financial Performance and Position

This report provides a comprehensive financial analysis of Melmotte Ltd, examining its financial performance and position. The analysis includes a review of the company's revenue, gross profit, operating profit, and cash flow statements. The report details the company's growth in revenue, highlighting the contributions of retail operations, online stores, and hotel contracts. It assesses the company's efficiency in managing costs and generating profits, examining cost of sales, overhead expenses, and operating profit margins. The report also delves into the company's assets, liabilities, and equity, including non-current assets, depreciation, and development costs. Furthermore, the report evaluates Grosvenor's proposed investment, including the impact of equity capital and the gearing ratio. The analysis identifies the reasons for net cash outflows and assesses their necessity for maintaining the company's financial health. Finally, the report provides insights into the company's financial risks and overall investment viability.

MELMOTTE LTD

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
EXECUTIVE SUMMARY.............................................................................................................1
QUESTION 1..................................................................................................................................1
a)..................................................................................................................................................1
b)..................................................................................................................................................1
c)..................................................................................................................................................1
QUESTION 2..................................................................................................................................2
a) Revenue...................................................................................................................................2
b) Goss Profit...............................................................................................................................3
c) Other SPL costs.......................................................................................................................3
d) Operating profit.......................................................................................................................4
QUESTION 3..................................................................................................................................5
a) Non Current Assets..................................................................................................................5
b) Grosvenor’s proposed investment...........................................................................................5
QUESTION 4..................................................................................................................................6
a) Reasons of net cash outflow....................................................................................................6
b) Necessity of outflow................................................................................................................7
REFERENCES................................................................................................................................8

EXECUTIVE SUMMARY
The report is about the analysis of financial performance and position of Melotte.
Company is performing with high growth rate from last year. the financial position of the
company is strong. The analysis is made for checking the viability of investments in company.
investment in company will prove to be beneficial for Grosvenor.
QUESTION 1
a)
i) Description one relates to the Statement of financial position and second one relates to the
statement of financial position.
ii) First statement will be allocated in the liabilities section of the balances sheet under the
noncurrent liabilities. Second statement will be charged as expenses in the profit or loss
statement as the operating expenses or professional fees.
b)
Statement of Financial Position
The statement is prepared for reflecting the financial position of the enterprise. It lists the
items of assets, liabilities and equity of the company. it represents the wealth of the company and
the obligations of company.
Statement of Profit or Loss
The statement is prepared for assessing the results from carrying out the business for a
given period of time. it represents the profits or loss earned after covering all the expenses from
the revenues.
Statement of Cash Flows
It is prepared for analysing the inflow and outflow of cash from the business. This
represents the cash flow from operating, investing and financing activities and the actual cash
available with company at year end (de Assis and et.al., 2017).
c)
i)
As per IAS 2 inventories should be recognised as lower of cost or net realisable value
whichever is lower. Where cost of the inventory is higher than net realisable value it should be
recognised in profit or loss as expense.
ii)
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The rule state the company to record its stocks of fashionable products at net realisable
value in the balance sheet and the loss over goods going out of cash should be charged as
expense in profit or loss statement.
iii)
If the inventories of Melmotte goes out of fashion than the company will record the
inventories at lower of NRV or cost. Also the loss occurred on wring down of inventory will be
charged as expense in Profit or loss account and the inventory will be reported at realisable value
of the goods in balance sheet.
QUESTION 2
a) Revenue
i)
2017 2018 Change
5550 9000 62%
There has been a increase of 62% in revenues from last year.
ii)
Total Revenue 9000 100%
Retail
Operations 6006 67%
Online Store 1644 18%
Hotel Contract 1350 15%
iii)
The retail operations alone have generated 67% of the total revenues of company in the
year 2018. The total change in the total revenues and the revenues generated alone by retail
operations is 67%.
iv)
This additional information is useful for Grosvenor to identify the revenues contributed
from each of the segment of the company. It will help to identify the growth achieved by the
business in two years. The growth rate shows the efficiency of operations of company. The
investment company is planning to invest in the retail operations and this will help to identify the
contribution of retail sector in overall revenues of company.
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b) Goss Profit
i)
Gross profit shows the financial performance of company in carrying out the business. It
tells how efficiently company is managing its activities for earning the profits. Gross profit is the
amount left with the company for carrying out its further business operations (Schroeder, Clark
and Cathey, 2019). Higher the gross profit better is for the company.
ii)
Total
Retail
Operation
s
Online
Store
Hotel
Contract
Total Revenue 9000 6006 1644 1350
Cost of Sales 6125 4206 1150 769
Gross Profit 2875 1800 494 581
Gross profit
ratio 32% 30% 30% 43%
iii)
The total gross profit of hotel sector is 43%. The gross profit is high as the company has
secured contract with a hotel chain to use the logo on its products. This enabled the company to
sell its products at higher rates than the ordinary market rate. The products with logo of hotel are
sold in hotel chain, online and retail sources. For this privilege company is paying a royalty fees.
c) Other SPL costs
i)
Cost of sales refer to the manufacturing costs for producing the product such as raw
materials, labour. They are dependent on the amount of production being made by the company.
Cost sales are associated only with production activities. On the other overheads are the cost
involved in running the business. Overhead expenses are required to be incurred whether or not
production is taking place such as rent, utilities, insurance. Overhead costs are required
periodically by the company that are stopped on shut down.
ii) Trend Analysis
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The trend analysis shows that the disttribution and transport cost have raised by 178 in
current year.
iii)
The distribution cost of the company has incerased from the last year as it has made an
arrangement with National companyv for the delivery of products to the door of customers in
online and hotel business. This is incerased with the increase in revenues. Royalties cost are
raised due to arrangement with hotel chain for using their logo on the products for increasing
their sales. It had also rented the machienary for logo of luxury hotel to be used on its products.
d) Operating profit
i)
Operating profit shows whether the company has earned profit or loss during the year by
carrying out the business. It is the amount left with the company after carrying out all the costs
and expenses of company (Grennan and Michaely, 2019). Profit shows the efficiency of the
company in managing its operation in cost efficient manner.
ii)
Total
Retail
Operation
s
Online
Store
Hotel
Contract
Total Revenue 9000 6006 1644 1350
Operating profit 873 544 206 123
Operating profit 10% 9% 13% 9%
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ratio
iii)
The company is having profits higher in online store as compared with other departments.
The company has incurred additional distribution costs for the business has offset other costs. the
online store do not have expenses such as rent, marketing, rates and the additional staff that are
incurred in retail stores. The reduces expenses has raised the profit margin of online stores.
QUESTION 3
a) Non Current Assets
i)
The development costs are shown separately from the PPE as it is recognised as
intangible asset as per IAS 38 for intangibles. Development cost satisfies the definition of
intangible assets and the economic benefits due to this will flow to the company. All the benefits
due to this are measureable. PPE are tangible fixed assets therefore does not include the
development cost within the same.
ii)
Every asset due to the wear and tear and use during the significant period of time loses
its value. Depreciation is charged for recognising this loss of assets in the profit or loss. There
are different types of depreciation that is charged as per nature of PPE. It reduces the value of
PPE with a fixed amount every during the useful life of asset.
iii)
Development cost is capitalised when the commercial and technical feasibility of the
assets for the use or sale have been established cost. The development costs are capitalised only
when it is certain that the future economic benefits will flow to company. Research costs are
expensed as they are incurred for the development of intangibles asset. As per IAS 38 costs
incurred prior to recognition of intangible assets are charged as expense in profit or loss
statement.
b) Grosvenor’s proposed investment
i)
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Bank
Overdraft -102 i.e. 0
Equity
capital 648
Cash 648
If the investment is made wholly in cash company, and is used for paying off the
overdraft. It will reduce the cash balance by 102 bringing it to 648 and the non current liabilities
will be reduced by 102 of the overdraft. The sales consideration is reduced by the amount of
liabilities taken over.
ii)
Gearing ratio show the amount of debt against its equity capital and interest ratio show
the ability of company to meet the interest payment on the basis of its profits (Moradi, Abtahi
and Zilouchian, 2017). It helps to assess the financial risks in the business.
iii)
Gearing
Ratio new old
Debt 618 618
Equity
750 +
1593 618+1593
Gearing
Ratio 26% 28%
iv)
If the Grosvenor invests in the company, it will be considered less riskier as the gearing ratio
has declined. The increase in equity capital will decrease the debt in proportion making the
company less riskier.
QUESTION 4
a) Reasons of net cash outflow.
 The decrease in net cash outflows is mainly due to :
 Increase in inventories from last year.
 Decrease in Trade payables of company.
 Repayment of long term borrowings.
Inflow from operating activities is lower due to increase in working capital requirements.
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b) Necessity of outflow
 The out flows were necessary as increase in inventory and trade receivables helped the
company to maintain the current ration and liquidity position. It also reduced the
inventory days that shows efficiency of inventory management.
 Repayment of loan was essential for keeping the financial risk of the company low.
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REFERENCES
Books and Journals
Moradi, H., Abtahi, A. and Zilouchian, A., 2017, June. Financial Analysis of a Grid-connected
Photovoltaic System in South Florida. In 2017 IEEE 44th Photovoltaic Specialist
Conference (PVSC) (pp. 638-642). IEEE.
Grennan, J. and Michaely, R., 2019. Fintechs and the market for financial analysis. Michael J.
Brennan Irish Finance Working Paper Series Research Paper, (18-11), pp.19-10.
de Assis, C.A. and et.al., 2017. Conversion economics of forest biomaterials: risk and financial
analysis of CNC manufacturing. Biofuels, Bioproducts and Biorefining. 11(4).pp.682-700.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
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