The Financial Management And Control For Cold-Well PLC (Essay Sample)

FINANCIAL MANAGEMENT AND CONTROL
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Table of Contents
 TOC \o "1-3" \h \z \u HYPERLINK \l "_Toc460395171"Table of Contents  PAGEREF _Toc460395171 \h
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HYPERLINK \l "_Toc460395172"Financial Management Report  PAGEREF _Toc460395172 \h
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HYPERLINK \l "_Toc460395173"Part A  PAGEREF _Toc460395173 \h
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HYPERLINK \l "_Toc460395174"Introduction  PAGEREF _Toc460395174 \h
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HYPERLINK \l "_Toc460395175"1. Financial Report of Coldwell PLC: Ratio Analysis  PAGEREF _Toc460395175 \h
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HYPERLINK \l "_Toc460395176"Profitability Ratios  PAGEREF _Toc460395176 \h
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HYPERLINK \l "_Toc460395177"Liquidity Ratios  PAGEREF _Toc460395177 \h
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HYPERLINK \l "_Toc460395178"Gearing Ratios  PAGEREF _Toc460395178 \h
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HYPERLINK \l "_Toc460395179"Asset Utilisation  PAGEREF _Toc460395179 \h
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HYPERLINK \l "_Toc460395180"Investor Potential  PAGEREF _Toc460395180 \h
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HYPERLINK \l "_Toc460395181"2. Working Capital Cycle  PAGEREF _Toc460395181 \h
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HYPERLINK \l "_Toc460395182"3. Limitations of Ratios  PAGEREF _Toc460395182 \h
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HYPERLINK \l "_Toc460395183"Part B  PAGEREF _Toc460395183 \h
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HYPERLINK \l "_Toc460395184"Branston LTD  PAGEREF _Toc460395184 \h
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HYPERLINK \l "_Toc460395185"Assumptions that underlie BEP Model  PAGEREF _Toc460395185 \h
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HYPERLINK \l "_Toc460395186"Part C  PAGEREF _Toc460395186 \h
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HYPERLINK \l "_Toc460395187"Source of Finance  PAGEREF _Toc460395187 \h
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HYPERLINK \l "_Toc460395188"Investment Appraisal Techniques  PAGEREF _Toc460395188 \h
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HYPERLINK \l "_Toc460395189"Non-Discounted Cash Flow Methods  PAGEREF _Toc460395189 \h
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HYPERLINK \l "_Toc460395190"Discounted Cash Flow Methods  PAGEREF _Toc460395190 \h
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HYPERLINK \l "_Toc460395191"Conclusion  PAGEREF _Toc460395191 \h
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HYPERLINK \l "_Toc460395192"Appendix  PAGEREF _Toc460395192 \h
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Financial Management and Control
Part A
Introduction
Every entity engages in business with the soul aim of making profit and generating favourable returns to providers of funds. Businesses operate in very dynamic, highly riskier, and volatile environment. This makes it necessary for the management with the help of the accounting and finance department to regularly review the operations of their entities by habitually preparing the various books of accounts and doing all necessary analysis on the financial statements to identify any eminent risks before they get out of hand. One of the tools used to examine the performance of a business is ratio analysis (Graham, Klein and Darst 2009).
Financial Report of Coldwell PLC: Ratio Analysis
Through ratio analysis, the operations of a company in terms of how much revenue the entity generates, the expenses incurred in the process of generating revenue, and any risks encountered in previous periods are reviewed. The analysis acts as an eye opener and helps firms to forecast their future with some degrees of certainty. The analysis also helps firms rectify any negative variances in advance. As a result, this guarantees businesses regular and certain cash flows. It should be noted that financial reports are very useful to business survival and success; hence, should be prepared with due diligence and from accurate data (Khan and Jain 1982).
This article considers report to the board of directors of Coldwell plc by assessing the company’s operations and financial performance for the two years ended 31st December 2014 and 2015. The report is formulated after a thorough analysis of the company’s financial statements using ratios. The financial ratios that are used to carry out the analysis include the profitability, liquidity, gearing, and asset utilisation as well as investor potential ratios. The report was based on the data provided in the statement of compressive income and the statement of financial position for the two years, 2014 and 2015. Perceptively, this document contains the computations of all the above ratios and recommendations on the financial position of the company noticeably, the financial analysis is divided into four parts where each portion gives the definition of the individual ratios, followed by the computations and recommendation on the course of action to be taken next year.
Profitability Ratios
They are ratios used to determine whether the operations of a company are profitable or not.They measure the firm’s use of assets and control of its expenses to generate acceptable return (Khan and Jain 1982). They can be sub-divided into four classes, which include:
Return on Capital Employed (ROCE)
It measures a company’s profitability, and the efficiency with which its capital is employed. It is computed by dividing the firm’s earnings before interest and tax (EBIT) by capital employed. Capital employed is total assets less current liabilities. Intuitively, a higher ROCE implies efficient use of resources.
ROCE=EBIT/capital employed
The ROCE for Coldwell Plc has declined meaning that the profitability and the efficiency in capital usage has gone down (Bird and McHUGH 2006).
Return on Equity (ROE)
It measures the rate of return on the money invested by common stock owners. It is used to determine the company‘s ability to generate profit from shareholders’ funds and shows if the company is using shareholders’ money to generate growth or not. Preference stock is excluded when computing ROE (Atrill 2006).
ROI=net income/average shareholder’s equity
Average shareholder’s equity = (beginning shareholder equity + ending shareholder equity)/2
Coldwell Plc’s ROI has declined from 0.3 in 2014 to 0.1 in 2015, thereby implying that the returns to equity shareholders ratio has gone down.
Gross Profit Margin, GPM
Gross profit margin is used to determine how a business manages the use of its resources in the production process. Notably, the higher the gross profit margin the better the performance of the company.
GPM =gross profit/net sales (revenue)
Coldwell Plc’s GPM has also declined meaning that the management did not utilize the business’ resources properly
Net Profit Margin, NPM
It determines the profit a company can generate after interest and tax expense. It is computed using the relationship below;
=net income/net sales (revenue)
NPM of Coldwell declined from that of 2014, suggesting reduced profit after interest and tax.
Liquidity Ratios
They measure the company’s capacity to meet short term maturing obligations. They determine the company’s ability to pay its short-term liabilities when due. The ratios under this category include;
Current Ratio
This ratio analyses the liquid assets of a company. Liquid assets are those that are either cash or easily convertible to cash. A high current ratio implies that the company has a high liquidity position (Bird and McHUGH 2006)
CR = current assets/ current liabilities
Quick Ratio / Acid Test Ratio, QR
This determines liquidity position of a business in terms of the liquid assets. Unlike current ratio, it excludes stock since stock is not liquid in some businesses.
QR = (current assets-inventories)/current liabilities
Both the current ratio, and the quick acid test ratio declined slightly in the year 2015. The reductions in the current ratio imply that the ability of the company to pay its current liabilities from the current assets decreased. In addition, the reduction of the acid test ratio implies that ability of the company to meet its short-term liabilities from liquid assets went down.
Gearing Ratios
Gearing measures the proportion of a company’s borrowed funds to its owners’ equity. Gearing helps assess a company’s financial structure and hence the firm’s financial position in the long run. The common ratios under this are:
Interest Earned Ratio
IER =EBIT/Total interest
Debt to Equity Ratio, DER
DER =total debt/total equity
Debt Ratio, DR
DR =total debt/total assets
Equity Ratio, ER
ER =equity/assets
Accordingly, interest ratio reduced from 26.59 to 4.49 indicating increased leverage, whereas debt to equity ratio increased from 0.0641 to o.2054, meaning that the company acquired new debt. Also, debt ratio increased suggesting rise in the capital structure. The equity ratio declined from0.779 in 2014 to 0.677 in 2015, and this confirms the increased level of debt financing.
Asset Utilisation
The ratios show how a company utilises its resources. They try to determine if the company is efficiently utilising the resources it has. They include:
Inventory Turnover
It determines the total period/ how fast inventory stays in the warehouse before it is purchased. Decrease in inventory turnover ratio implies a reduction in demand of the product (Lewellen and Edmister 1973). Inventory turnover is computed as follows;
=cost of goods sold/average inventory
Accounts receivable collection period
Accounts receivable collection period refers to the period a firm offers to its customers to pay credit. Credit may be due to either goods or services offered on credit (Lewellen and Edmister 1973). Decrease in accounts receivable collection implies fast rate of credit collection; hence, increased availability of cash for spending is computed as below;
=sales/average accounts receivable
Both inventory turnover and accounts receivable collection period went down in 2015 when compared to 2014. This implies that the level of efficiency at which resources were used decreased in 2015.
Accounts payable payment period
It refers to the period allowance given by suppliers to the business for it to pay for goods and...