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The report closely monitors the financial statements which are used in analysing the ratios which are being categorised as the debt equity ratios, Gross profit margin ratios etc. Apart from this the efficiency has also been taken into account so that there is proper validation of accounts to take a proper and efficient Decision. The key highlights in the report which will be discussed in the later part are the margin of safety which shows us the amount to keep for the contingencies and the point where the firm is not earning profit and should try to sell more goods after it. The two options for net present value has also been analysed to take care the best suitable option considering the rate and the amount or internal rate of return. After this the opening statements have also been analysed with the proper validation and the procedures. This whole report will give a thorough understanding of the same.
1. Gross Profit Margin
in £m (2019)
Sales
3,495
Cost of goods sold (COGS)
2,182
Gross Profit
1,313
Ratio
37.56795422%
Question 1
Gross profit margin is company’s profitability. The Formula used for calculating Gross profit margin is {Gross profit / Sales}.Gross profit margin indicates the amount of Revenue remaining in a given accounting period after a company pays for labour and material. Here company’s sale is 3495£m and its COGS is 2182£m, i.e. Gross profit will be 1313£m.
The ideal Gross profit margin is 65%. As the company has Gross profit margin of 37.57% (around); it is to be said that company is in average condition. The company should focus to increase gross profit and maintain healthy Gross Profit Margin.
2. Assets Usage
2019 (in £m)
2018 (in £m)
Property, plant and equipment (PPE)
1700
1,615
Intangible assets
425
375
Investments
0
95
Inventory
150
102
Trade receivables
1010
315
Short-term investments
75
0
Cash at Bank
452
1
Total Assets
3812
2503
Assets usage
5063.5
Assets usage refers to the utilization of Assets to increase the revenue of the company. An optimal assets usage means company is being efficient with each £m of assets held.
As company is in good condition in case of Assets Usage. The company should try to increase it rapidly which ultimately help the company to maximize its profit. Here the value of Assets being used comes to 5063 approximately which should be tried to increase in the future nearby. So, the assets which are used in day to day course should be more taken into consideration to earn profitability in the short run and whereas if we talk about the long run, the non currents assets play a vital role.
3. Current Ratio (2019)
(in £m)
(in £m)
Current Assets
Current liability
Inventory
150
Trade payables
289
Trade receivables
1010
Bank overdraft
143
Short-term investments
75
Taxation
312
Cash at Bank
452
Total Current Assets
1687
Total Current Liability
744
Current Ratio
2.267473118
Current Ratio is calculated for assess the company’s short term liquidity with respect to its available assets and pending liability. The ideal current ratio of an organisation is 2:1.As Company maintains the current ratio more than ideal ratio. The company should try to maintain it continuously. Here the ratio comes to more than 2 which is good and the business should try to maintain it. (Asare et al,2012,p194(2))
.
4 Acid Test Ratio (2019)
(in £m)
(in £m)
Current Assets
Current liability
Trade receivables
1010
Trade payables
289
Short-term investments
75
Bank overdraft
143
Cash at Bank
452
Taxation
312
Total liquid Assets
1537
Total Current Liability
744
Current Ratio
2.065860215
Acid test ratio is calculated to know whether the company has enough funding in hand to cover its current debt. Acid test ratio is more reliable as it only includes cash and cash equivalent. The ideal Acid test ratio is 1:1, and company maintain more then 2:1So, it is too said that company has good cash flow & should maintain it in future as now. So, by looking into this factor it is clearly observed that the firm should try to increase the liquidity to facilitate the performing of the daily activities of the firm. Although the ratio is more than 2 but still due to the ever-changing dynamics it should look into the matter.
5. Inventory Holding period
in £m
Inventory
150
Cost of goods sold (COGS)
2,182
Days
365
Holding period
25.09165903
Inventory holding period tell about the sale performance of a product. It is calculated by dividing Inventory from COGS*Days. INVENTORY/(COGS*365). A good inventory holding period is considered as 5-10 which means 1-2 month to restock. Basically company maintain it 25days, which shows good sales of the company’s produce. Here the company has the holding capacity very strong when compared to the other factors in the market of the competitors. It also helps to facilitate the money flow in the organisation to earn more profits for the growth and sustainability. (Khan,2012 ,p254(1)).
6. Debt to Equity Ratio
(in £m)
(in £m)
DEBT
EQUITY
Short Term Debt
744
Share Capital
1,950
Long Term Debt
170
Share Premium A/c
260
Revaluation Surplus
70
Retained Earning
618
Total Debt
914
Total Equity
2,898
Debt To Equity Ratio
0.315389924
Debt to Equity Ratio compares the total liability of the company to its shareholder’s equity and check the leverage of the company. It indicates the stability of a company and its ability to raise additional capital to grow. A good debt to equity ratio is lower than 1 as we can see in data that company maintain it lower than 1. So it can be said that company has more reliable to its equity more than debt. The ratio here is far less than what the firm has expected which means that with running a big business also it has managed its debt also.
B) As Liverton Co’s ratios are calculated above, which help the audience to understand the financial position of the company and help them to calculate the risk factor of their investment and also help them to ascertain whether they should invest in the company or not.
As per the above financial data it is easy to understand that company has a good financial position and cover its debt easily in unforeseen position. Liver ton prefers to raise fund is equity fund or it can say that its own shareholder fund as compare to debt. Company has good capture in the market as its sale of product is very frequent. The company restock its product in just 25-26 days. This shows its capability.
The company is maintaining goods ratios and other financial instrument, and try to maximize its profit by efficient use of assets. According to the data company want to increase the share of shareholder by maintaining excess profit as retained earnings and so on.
Question2.A)
Statement of financial Position
Particular
Amount
Assets
Current assets
Cash at bank
50000
Non- current assets
Tangible assets
150000
Total asset
200000
Liabilities
Owner's equity
200000
Total liabilities
200000
(Martikka,2013,p(1))
B)
Particular
Months
July (In$)
August (In$)
Sept. (In$)
October (In$)
november (In$)
December (In$)
Opening cash balance
50000
Sales revenue
150000
120000
150000
210000
260000
285000
Less:
Material payment
120000
100000
60000
60000
60000
60000
Labour cost
80000
80000
80000
80000
80000
80000
Other expenses
57500
57500
57500
57500
57500
57500
Add:
Depreciation
2500
2500
2500
2500
2500
2500
Closing balance
-55000
-115000
-45000
15000
65000
90000
Overdraft required
-55000
-115000
-45000
C)
Here, if the firm has to manage all the expenses it should definitely take financial assistance as without it there cannot be a proper working in the organisation. Although hiring a financial advisor will bear the cost but that will ultimately be settled off by earning more profit. It should clear the overdue of the overdrafts by the bank to reduce some of the extra expenses which the firm is bearing(Pae et al,2012.p123(3)).
Question3.A)
Break Even Point
2019
2020
Selling price per unit
300
309
Variable cost per unit
185
181
Fixed cost
5430
6,880
Break Even Unit
47.21
53.75
Break Even point of the company is that point on which the company can earn nominal profit.Here two year’s data is given, as per demand of the question the company only sell same amount of units of fans as in previous year (2019).
The company sells 45000 units of fans. As it can easily understand that fixed cost increase in the 2020, but variable cost decrease. According to data 2019 BEP is 47-48 units and 2020 53-54 units. Sales price of the fan is increase 3%. So sale price will be (300+3%of 300). The BEP of every company is different so there is no ideal BEP is to be said. BEP is an indicator of no loss no profit.
Sales Revenue
2019
2020
Sales price per unit
300
309
Unit Sold
45000
45000
Revenue
13500000
1,39,05,000
Sales revenue of the 2019 is 13500000 is calculated as the total sale unit is 45000 & price of the product is 300 so 300*45000 to get sales revenue of 2019 and 309*45000 for 2020.Therefore the company earns a good amount when compared with the financial year and is improving day by day to meet the expectations of the consumers and the investors for the growth. So by having a slight increase in the sales price which is because of inflation the revenue stood up. So, it is always better to keep the record of the revenues and the factors that are directly impacting them.
B)
Margin of Safety
2019
2020
Actual Sale
13500000
13905000
BEP
47.21
53.75
Margin of Safety
13499952.79
1,39,04,946
Margin of safety is calculation helps to determine the number of sale that surpass the business i.e. Breakeven point is the amount sales can fall before the breakeven point is reached and business make no profit. Margin of safety tell how much sell is made over its BEP (Batkovskiy et al,2017,p(2)).
Sales Revenue
2019
2020
Sales price per unit
300
309
Unit Sold
45000
45000
Revenue
13500000
1,39,05,000
Sales revenue of the 2019 is 13500000 is calculated as the total sale unit is 45000 & price of the product is 300 so 300*45000 to get sales revenue of 2019 and 309*45000 for 2020 (Nunoo et al,2020,p (2)).
C)
In above the case the it is considered that the company made invest in fixed cost which help in decreasing the variable cost of the product. Since the fixed cost investment is made help to increase the sale price of the product.
There in increment of 3% of the sale price of the product and it make to increase the profit of the firm . But if the investment goes down as it if is not practically applicable the company is in a situation of debt or may be suffer a great loss.
But in case the company is successfully applied its investment it create a lot of gains to the company which help to recover its fixed cost as soon as possible and also become more efficient and effective towards its goal. This will also lead to the growth and the sustainability of the organisation and expansion of its tentacles can prove to be advantageous for the organisation if these activities continue in the future.
So, by closely monitoring the variable expenses it should consider the major fixed cost which are impacting the profit of the firm and are directly linked with the reduction too(De,2012,p(3)).
Question4
A)
Present value of Cash Inflow
Year
Profit before Depreciation & Tax
Depreciation
Profit after Depreciation Before Tax
1
75000
34000
41000
2
65000
34000
31000
3
60000
34000
26000
4
55000
34000
21000
5
50000
34000
16,000
1,35,000
Depreciation: (Initial Investment + Salvage value)/ Expected life
i.e. 27000
Payback period: Initial investment/ cash inflow
>
So, here the depreciation value is 27000 and the payback period comes down to the 6.48
B)
Present value of Cash Inflow (Project B)
Year
Profit before Depreciation & Tax
Depreciation
Profit after Depreciation Before Tax
1
95000
40600
54400
2
65000
40600
24400
3
45000
40600
4400
4
45000
40600
4400
5
45000
40600
4,400
92,000
Depreciation: (Initial Investment + Salvage value)/ Expected life
I.e.>
Payback period: Initial investment/ cash inflow
(Wiesemann et al,2010,p 257(2))
Here, the amount of depreciation comes to 18400 which is less than the previous amount calculated above and the payback period comes to approximately 11. The payback period is way higher than the previous one here in this particular questioned.
C)
Present value of Cash Inflow (Project C)
Year
Profit before Depreciation & Tax
Depreciation
Profit after Depreciation Before Tax
1
500000
4600
45400
2
60000
4600
55400
3
65000
4600
60400
4
66000
4600
61400
5
57000
4600
52,400
2,75,000
Depreciation: (Initial Investment + Salvage value)/ Expected life
I.e.>
Payback period: Initial investment/ cash inflow
>
In above question project c is beneficiary project for the company its pay-back period is too short rather than project a and b behind it amount of investment is also lesser than other 2 project so it also reduce the burden of payment to the creditors as also we say that reduce the liabilities of the company if company can receive its invested amount as soon as possible so company get profit from that particular project which directly includes profit earning capacity or a growth .so company also try to find out the other project of the company .if we search and find out that project a needs higher amount of investment as compared to other project like as project c . Same thing is also applicable on project B .both the project increase the burden of creditors on the company and payback period is also higher so these project not allowed to the company to investing any other projects .on the other hand it also not beneficiary for the company profit and vise versa situation talk by company investor . as we can compared these through the table .for make comparison just go through the payback period of the project .which one is best for the company investor because a investor have an ideal idea about the investment to make in which project is going part for them .as every person invest in the something to get benefits. So company should adopt that project which is benefit for the company . to confirm for the project which one is best just go through the average rate of return which project have average rate of return is higher along with which project payback period is lesser is the best project for the company. And that selection is give higher benefit to each and every candidate or a personal of the company. Whether that personal is belong to the top management of the company, middle level or a bottom level of the company. After that manager also analysis which project charge higher deprecation or which project is charge lesser deprecation .A good manager should adopt that project which charge lesser deprecation because it increase the expenses of the company (Arshad,2012,p(3)).
Conclusion
The report clearly determines the various ratios that the company has used in the first and the foremost question and these ratios has given us the fair idea as to which are the areas to improve and whether the investors should invest in the company or not. Whereas, it has also been seen that the importance of the fundamental statements have been discussed there only. With this a proper knowledge of maintain the opening statements. The Net present value with the amount of payback period has also been considered in one of the question above. Apart from all this thorough and dept knowledge of the depreciation method has been taken into account at the later of the report. With this report the breakeven point and the Margin of safety has also been calculated which has tell us that point at which the company earns no profit no loss which is at 48 units approximately. So, this report has covered all the important point which are of due importance when running a business.
References
Arshad, A, 2012, Net present value is better than internal rate of return, Interdisciplinary journal of contemporary research in business, 4(8), pp.211-219,
Asare, S.K and Wright, A.M, 2012, Investors', auditors', and lenders' understanding of the message conveyed by the standard audit report on the financial statements, Accounting Horizons, 26(2), pp.193-217,
Batkovskiy, A.M, Semenova, E.G, Trofimets, V.Y, Trofimets, E.N. and Fomina, A.V., 2017, Statistical simulation of the break-even point in the margin analysis of the company, Journal of Applied Economic Sciences, Romania: European Research Centre of Managerial Studies in Business Administration, 12(2), p.558, https://www.ceeol.com/search/article-detail?id=532542
de Gregorio Merino, A, 2012, Legal developments in the Economic and Monetary Union during the debt crisis: The mechanisms of financial assistance,Common Market Law Review, 49(5), https://kluwerlawonline.com/journalarticle/Common+Market+Law+Review/49.5/COLA2012093
Khan, A.G, 2012, The relationship of capital structure decisions with firm performance: A study of the engineering sector of Pakistan, International Journal of Accounting and Financial Reporting, 2(1), pp.245-262,
Martikka, E, 2013, Opening Statement [International Safeguards Symposium on Preparing for Future Verification Challenges, Vienna (Austria), 1-5 November 2010], https://www.osti.gov/etdeweb/biblio/22112148
Pae, J, and Yoon, S.S., 2012, Determinants of analysts’ cash flow forecast accuracy, Journal of Accounting, Auditing & Finance Assignment, 27(1), pp.123-144, https://journals.sagepub.com/doi/abs/10.1177/0148558x11409148
Wiesemann, W, Kuhn, D and Rustem, B, 2010, Maximizing the net present value of a project under uncertainty. European Journal of Operational Research, 202(2), pp.356-367, https://www.sciencedirect.com/science/article/abs/pii/S0377221709003932
