Financial Analysis Report: Unsinkable Kayaks - Financial Performance

This report presents a financial analysis of Unsinkable Kayaks, examining the company's financial performance over a three-year period. The analysis includes an evaluation of profitability ratios such as gross profit margin, net profit margin, and return on equity. It also assesses asset utilization through inventory turnover and the age of accounts receivable. Furthermore, the report explores financial stability using liquidity and interest coverage ratios. Findings indicate declines in revenue, gross and net profit margins, and operational efficiency, along with recommendations to improve revenue generation, reduce costs, and enhance asset utilization. The report also discusses internal control processes, specifically focusing on accounts receivable, and suggests measures to minimize bad debts and improve cash flow.

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Contents
1.0 Introduction...............................................................................................................................3
1.1 Purpose of Financial Analysis and Interpretation...................................................................3
1.2 Limitations of Financial Analysis..........................................................................................4
2.0 Findings: Financial Analysis..........................................................................................................5
2.1 Profitability..................................................................................................................................5
2.2 Asset Utilisation..........................................................................................................................7
2.3 Financial Stability........................................................................................................................8
3.0 Recommendations...........................................................................................................................9
4.0 Internal Control........................................................................................................................10
4.1 Internal Control Process.......................................................................................................10
4.2 Internal Control for Accounts Receivable............................................................................10
Bibliography........................................................................................................................................11
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1.0 Introduction
The financial data of a company can be used in many ways to aid to the development and
progress of an organisation. The data can be used in many ways. In our report below we have
discussed about the financial data of Unsinkable Kayaks.
1.1 Purpose of Financial Analysis and Interpretation
The financial analysis of an organization can be useful to both the management and the
stakeholders of an organisation in many ways. We have discussed below few purposes of the
financial analysis and interpretation:
- Financial analysis helps the management evaluate the profitability of the business over
the years. It helps in trend recognition, which helps the management evaluate the best
conditions to work in order to maximize the returns
- Analysis of financial information helps the management have a look in the working of
the organisation. This helps in recognition of weak areas which are then taken care of.
- Financial analysis helps the management improve the efficient in the organisation. It
helps in recognition of wastages, which can be controlled in order to minimise cost and
result in efficiency.
- Financial analysis helps the investors and stake holders read into the financial
performance of the organisation. This provides for basis to the investors to invest in the
organisation.
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1.2 Limitations of Financial Analysis
Though the financial analysis of the data of an organisation can be useful in many ways, there
are certain limitations to it:
- Financial analysis only pertains to financial data. This fails to identify the weaknesses
within the organisation which fail to affect the profits immediately.
- The analysis is based on past data, the value of the elements involved in the analysis
change over time. Thus, financial analysis fails to incorporate these changes in the
values, which might result in improper outcomes.
- The long term assets which are presented are not adjusted with the high inflation rates,
which give wrong interpretation of data.
- The economy is ever changing; the result of financial analysis form economy of one
period cannot be compared with that of another period. The market factors affect the
results of an organisation to a great extent.
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2.0 Findings: Financial Analysis
2.1 Profitability
The profitability ratios of an organisation help us analyse the margin earned. Studying these
ratios will help us understand the factors affecting the profit position of Unsinkable Kayaks.
- Gross Profit Margin: the gross profit margin is calculated by deducting all expenses
directly related to the production of the product from the revenue (Alvarez, 2013). The gross
profit analysis helps in evaluation of production cost and efficient in the method of
production. Decline in the revenue does not affect the gross profit. It is affected by changes in
the prices and cost of factors of production. For Unsinkable Kayaks we see decline in the
gross profit margin of the company over the period of three years. The decline in gross profit
margin indicates production inefficiencies and increased cost of production. The management
should take in to consideration the prices and methods of production in order to improve the
efficiency of production processes which will increase the gross profit margin. The decline in
the GP margin for the organisation has been for about 45% over three years. Hence the
company should take in to consideration these factors to improve its GP margin.
2016 2017 2018
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
160.00%
Gross Profit %
Gross Profit %
- Net profit margin: the net profit of a company is calculated by deducting all expenses
incurred by an organisation from the revenues earned. The net profit analysis helps in
evaluation of overall profitability of the organisation (Easton, 2010). It is similar to gross
profit except for the inclusions of all costs. Just like gross profit margin the net profit margin
is not affected by the changes made to the revenues figures. The net profit margin for the
company has declined from 32% to 15%. The decline in profit margin indicates increase in
costs. The management should make sure to incur costs which are only necessary for running
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the operations of the entity. There has been considerable increase in bad debt expenses for the
company. Measures should be opted in order to minimise the bad debts for the company.
2016 2017 2018
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
Net Profit %
Net Profit
(beforetax) %
- Return on equity: the return on equity calculates the return generated on the investments
made by the equity shareholders fund (Elaine, 2015). There has been a decline in the return
on equity for the company from 100% to 23%. This is due to increasing equity fund and
declining profit margins of the company. This margin indicates that the company was earlier
earning $1 for every dollar invested as equity, but in the period of three years the company
has reduced its earnings to 23 cents on every equity dollar invested. Increase in this margin
can be made only when the investments and profit increase hand in hand. The funds invested
should be efficiently used and invested in order to earn maximum returns.
2016 2017 2018
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
Return on Equity %
Return on Equity %
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2.2 Asset Utilisation
The asset utilisation ratios focus on the assets usage and turnover. This helps us analyse the
application of assets in the organisation.
- Inventory turnover ratio: the inventory turnover ratio calculates the number of times the
inventory is moved by the organisation (Fridson & Alvarez, 2012). Higher the ratio better is
the production cycle of the company. The inventory turnover of the company has declined
from 5.19 times to 3.44 times. This is due to decline in the internet sales of the company. Due
to the accident, the internet sales have declined, which have reduced the inventory turnover of
the company. Lower inventory turnover indicates increased in hand stock which indicates
increased invested funds which cannot be recovered. The inventory turnover should be
increased in order to keep the cash flowing within the organisation.
2016 2017 2018
0
2
4
6
8
Inventory Turnover
Inventory Turnover
- Age of accounts receivable: the age of accounts receivable helps the company analyse the
average number of days within which the amount from the debtors are recovered. Lower the
number of days better it is for the company (Ittelson, 2009). Increased turnover of cash
received from the debtors helps in better cash position of the company. This results in
improved liquidity of the company which helps in sooth running of the operations. The
debtor turnover has increased from 41.98 days to 77.72 days. This is in increase in debtor
turnover for more than one month. Steps in order to ensure early recovery of amounts form
the debtors are taken. High debtor’s turnover ratio may result in liquidity crunch for the
company.
2016 2017 2018
0
20
40
60
80
100
Age of Accounts Receivable
Age of Accounts Receivable
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2.3 Financial Stability
The financial stability ratios of the company help the management and the other stakeholders
analyse the stability in the financial position of the company.
- Liquidity ratios: the liquidity of the company plays a very important role in the success
of the company. High liquidity indicates proper movement of cash, which results in better
functioning of the various departments of the company (Penman, 2012). The liquidity of
the company has declined from 3.90 times 3.33 times. Though the liquidity of the
company it still is in a good position. Steps in order to maintain this level of liquidity
should be taken.
2016 2017 2018
0
1
2
3
4
5
Liquidity Ratio
Liquidity Ratio
- Interest coverage ratio: the interest coverage ratio of the company calculates the profits
earned by the company are sufficient enough to cover the interest expenses of the
company. Higher the ratio better it is for the company (Simpson, 2012). There has been a
decline in the interest coverage ratio of the company. Even though the debt used by the
company has declined, the interest coverage ratio has not improved. This is due to lower
profits earned by the company in the current year. The capital structure of the company
should be efficiently designed in order to ensure lowest cost of capital for the company.
2016 2017 2018
0
50
100
150
200
250
Interest Cover
Interest Cover
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3.0 Recommendations
The following has been observed form the financial analysis of Unsinkable Kayaks:
- Decline in the revenue of the company over three years: due to the accident the decline in
sales of the company from internet sales has been for about 34% and form that of retail
sales is 18% as compared to last year. The management should opt for the following
measures in order to ensure better revenue generation:
 The management should focus more on retail sales till the current situation comes
in control. The retail sales are not as affected as the internet sales. This provides
the management with the chance to build back there reputation
 The management should also make sure to include all necessary information in
the entire inventory still in hand in order to avoid future liabilities. This will help
in improved sales for the company.
- Decline in gross profit and net profit margins of the company: due to increased import
duty and other administrative expense the margins of the company earned have declined.
 The management should take steps in order to reduce cost per unit in the
production process. This will result in lowered cost.
 Cutting unnecessary expenses is important. Though the sales of the company have
declined there has been a considerable increase in selling and distribution
expenses. This should be taken care of.
- Decline in the operational efficiency of the company: due to decline in efficiency of the
operations of the company, the company is facing issues of reduced margin and increased
cost:
 Management should use its assets in a more efficient manner so as to increase the
output with the existing resources. This will result in efficiency in production
processes.
 Recognising the areas with major wastages will also help the management to
improve the efficiency of the management.
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4.0 Internal Control
Internal control refers to the processes of the organisation which ensures to provide reliable
and correct data of the organisations working.
4.1 Internal Control Process
The internal control of the company makes sure that all the processes within the organisation
are being carried in such a manner so as to provide correct information. Also it is checked if
they are in compliance with all applicable laws and regulations (Skonieczny, 2012). It is
important to have proper internal control processes implemented in order to have a healthy
working organisation.
4.2 Internal Control for Accounts Receivable
We see that the company has reported a major expense for bad debts in the current financial
year. Also, the debtor’s turnover ratio of the company has increased considerably. In order to
have smooth functioning of the business it is important that the cash flows be regular (White,
2015). There are certain internal control checks which should be made in order to minimise
the losses from debtors. These internal control checks include methods such as credit
approval before making the sale, verification of contract terms with the parties, proper
authorisation of credit memos, restricted access to billing software, audit of invoice packets,
etc (Siciliano, 2015). Therefore, if the management puts these internal checks in place it will
help hem reduce the losses from bad debts and also help increase the cash flows.
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Bibliography
Alvarez, F. (2013). Financial statement analysis. Hoboken, N.J.: Wiley.
Easton, P. (2010). Financial statement analysis & valuation. Cambridge, UK: Cambridge
Business Publishers.
Elaine, H. (2015). International financial statement analysis. Hoboken: John Wiley & Sons.
Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner's Guide.
New York: John Wiley & Sons.
Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and
Creating Financial Reports. Franklin Lakes, N.J.: Career Press.
Penman, S. (2012). Financial statement analysis and security valuation. Boston, Mass.:
McGraw-Hill.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Simpson, M. (2012). Financial accounting. Basingstoke: Macmillan Press.
Skonieczny, M. (2012). The basics of understanding financial statements. Schaumburg, Ill.:
Investment Publishing.
White, G. (2015). Solutions manual to accompany The analysis and use of financial
statements. New York: Wiley.
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