BFK450: Measuring and Enhancing Financial Performance Assessment Answer

TASK 1

Profitability Ratios

Profitability ratios refer to the ratios which indicates the profit earning capacity of the company. It helps to evaluate the profits generated by the company in comparison to the sales. Higher profitability ratios indicate greater ability of the company to earn profits.

Return on capital employed denotes the ability of the company to generate operating profits from the amount that have been invested in the business during a year. It can be seen that the return on capital employed have increased in year 2033 as compared to year 2032 indicating efficiency and profitability of business operations. The gross profit margin indicates the ratio of gross profit with the amount of sales. It is computed by dividing the gross profit by the sales revenue. It can be seen that the gross profit margin have increased in year 2033 as compared to year 2032. This indicates that the company is working effectively and efficiently and is able to lower its cost to increase its revenue. The operating profit margin indicates the proportion of operating expenses in relation to the sales revenue. In 2033. The operating profit margin has increased showing that the company has been able to manage its operating expenses so that it can earn more profits. The other hand operating expense to sales ratio have declined to little extend showing that the company have been effectively managing its Expenses. The company reflects high profitability ratios in comparison to its previous year and industry averages.

Efficiency Ratios

Efficiency ratio is referred to the ratio which indicates the ability of the business to generate revenue from its various business operations. It indicates the efficiency of the business in managing its operations so that it can make most effective and efficient use of its available resources.

It can be clearly seen that there is a reduction in receivable days as well as payable days, which indicates that the company has reduced its length of time to collect cash from its customers and also have reduced its days of payments to its creditors. This shows that the company has become efficient in managing its debtors and creditors. Also, it can be seen that the inventory days has zero indicating no inventory held by the company. The return on capital employed have declined indicating fall in revenue generation capacity of the company.

Liquidity Ratios

Liquidity ratios refers to the ratio which indicates the ability of the company to meet its short term obligations. A higher liquid ratio is preferable as it indicates that the company has enough current assets to pay its current obligations. The ratios indicate the sufficiency of the assets of the company to pay off its current liability and the surplus available with company to take care of working capital requirements.

Current ratio refers to the ratio between the current assets of the company to its current liabilities. The most ideal current ratio is 2:1 i.e. assets it should be twice its liabilities. A good current ratio indicates that the company has enough assets to be its short-term obligations and therefore shall meet its obligations fully. In the case provided, it can be seen that the company has a very high ratio in year 2033 as compared to year 2032 and industry averages. Thus it can be said that the company holds high current ratio and has a good liquidity position. On the other hand, it can be seen that the acid test ratio has also increased the current ratio in acid test ratio of the company or seen since the company do not hold any inventories. All the current assets available with the company can be readily converted into cash to be of its current liabilities.

Stability Ratios

Stability ratios refer to the ratios which indicates the ability of the company to meet its long-term obligations. Different sources of finance have different level of risk associated with them. Thus, to analyse the risk associated with the company. It is their important to analyse the stability ratios.

Gearing ratio is the total finance used by the business in the form of interest-bearing applications. The gearing ratio of the company have reduced to 18% in the year 2033 indicating reduction in debt financing of the company. The interest coverage ratio indicates the ability of the profits of the company to meet its interest obligations. The interest coverage ratio has increased drastically in year 2033 indicating that the company is in a position to pay off its interest applications.

Recommendations

The overall analysis of the financial statements of the company indicates that the company holds strong financial health and has improved its performance in the year 2033. Ratio analysis to not to present a future performance as it is only based upon the historical performances but future is always based on the past and is the past of the company is good future shall itself be good. The company is growing through its effective management, team and effectiveness and efficiency in managing its operations. It should take on more steps and cost cutting and improving the quality of products to increase its revenue and profits. The company has strong profitability, liquidity, stability and efficiency ratios and the company is likely to reach great heights with continued success and growth. The report clearly makes an analysis of the various ratios and accordingly recommendation has been provided. The ratios have been computed using the profit and loss statement, balance sheet and cash flow statement. All the ratios show favourable growth rates in comparison to previous year and also industry averages. The company has become efficient in managing its debtors and creditors. Also, it can be seen that the inventory days has zero indicating no inventory held by the company. All the current assets available with the company can be readily converted into cash to be of its current liabilities depicting strong liquidity position.

It is highly recommended that Electrosave should keep focussing on its ratios to depict good profitability and liquidity position and an overall strong business position.

TASK 2:

b)

NPV and payback period are capital budgeting techniques which help in analysis of the projects and to choose the best option among the various alternatives available. A positive NPV indicates that the project shall provide positive returns and a lower payback period indicates the time frame within which the initial capital investment shall be recovered by the company. There are two projects provided under one capital investment project. On the basis of financial evaluation of the investment opportunity, it can be seen that both the investment opportunity yield positive cash inflows. The NPV of both projects are positive which have been computed by subtracting the total cash inflows from the cash outflows. However it can be seen that the net present value of project 19 is higher than project18. A higher in NPV denotes profitability and inflows to the company. Also the project needs the requirements of the required in NPV. However, the payback period for the project is 2.11 years which is approximately equal to its required criteria of two years. Since the project needs the requirements, it can be accepted.

The three most important changes that can be adopted to improve the investment appraisal approach and assumptions made are as follows.

• Discounted payback period is a better measure, then the payback period as it considers the time value of money. It helps in better analysis of the project and the period within which the initial investment shall be recovered by the company.
• The discount rate is just an assumption and therefore it should be computed, taking into consideration the current financial position of the company and the future inflation.
• The assumptions on the basis of which the future cash flows a computed are to be analysed in a detailed manner so that the assumptions hold correct and produce accurate results.

The investment appraisal approaches are based upon assumptions which may not hold correct in all life circumstances. Thus, the assumptions must be adopted on the basis of the most appropriate methods so that it can hold itself true in the life changing circumstances. These approaches are fundamentals of decision making and thus, are to be adopted wisely.

TASK 3

The various stakeholders uses the accounting information to analyse the financial position of the business. However, the accounting system treats money constantly ignoring the time value of money. The value of money changes due to inflation. However, the accounts maintained on the basis of historical cost and the value remains constant. The ignorance of fair values leads to improper representation of financial statements. When a company owns an asset it is recorded at historical cost and accordingly depreciation is charged over its useful life. That asset is then carried at carrying amount in the balance sheet, ignoring inflation. Also, the inventory is always recorded at its cost price, ignoring the time value of money. Therefore, in my opinion, it can be said that management accounting is more accurate than the current accounting system. The financial statements of the company should reflect an accurate financial position, considering the changes going around that is inflation, change in value of money etc.

Financial accounting is of utmost importance for business and for stakeholders as it depicts the actual business position to the stakeholders and management but it is not a developed science. There are certain misconceptions involved in it and thus it does not show accurate and perfect results. There are no common global standards for accounting and thus, its interpretation may vary among different users. The matters which cannot be stated in monetary terms and not recorded in the balance sheet. Therefore, the balance sheet is not reflecting the LG and repetition of the management of the company. Human error is always a possibility because accounting is done by humans. Another concern is the possibility of account modification to hide a fraud. Thus, accounting is not the simple solution for everything it involves in it certain imperfections and faults.

The key learnings from the module are as follows:

• The financials and capital budgeting decisions are all based upon assumptions. The assumptions may not told correct in all situations. There is inability of the company accounting method to access the data subjects in occurrences, which do not have any Monetary Value. The matters which cannot be stated in monetary terms and not recorded in the balance sheet. Therefore, the balance sheet is not reflecting the LG and repetition of the management of the company.
• The financial position of the company as of the preparation date is shown in the financial statements. The statement's audience is more concerned with the company's long- and short-term prospects. Accounting, on the other hand, does not make any such projections. Furthermore, a lot can change between such dates because of how dynamic the business environment is. To address these accounting limits, auditors occasionally do reveal significant events that occurred after the balance sheet date. Human error is always a possibility because accounting is done by humans. Another concern is the possibility of account modification to hide a fraud.

Thus, accounting involves a lot of misperceptions and problems due to which it does not always show positive results. The financial position of the company as of the preparation date is shown in the financial statements. The statement's audience is more concerned with the company's long- and short-term prospects. Accounting, on the other hand, does not make any such projections. Accounting is historical in nature and thereby, shows result on the basis of past historical data.

From the above report I learnt that ratios play a very important role to understand the financial position of any business enterprise. Ratios are computed on the basis of financial statements of the company which provides a basis for any company. Good ratios depict good and stable financial position which becomes attractive to the stakeholders. Ratio analysis to not to present a future performance as it is only based upon the historical performances but future is always based on the past and is the past of the company is good future shall itself be good. The company is growing through its effective management, team and effectiveness and efficiency in managing its operations. Capital budgeting techniques used in project appraisal are based upon assumptions which may not hold correct in all situations. Thus, accounting is neither an art nor science as it is not perfect. It has its various imperfections and faults and accordingly steps are required to overcome such deficiencies.

Appendix

Task 1:

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