The current study presents a theoretical basis of finance and hereby presents financial analysis of the firm Cromwell Tools. The study presents a review of the financial performance of the firm based on outcomes of key financial ratio. Moving further, the study presents the threats as well as opportunities faced by the firm from the perspective of both financial as well as non-financial measures. Thereafter, the study also presents ways of resolving the detected threats of the corporation.
Critical assessment and evaluation of theoretical basis of finance
The corporation mainly includes several interested parties such as owners, management, customers, suppliers, contenders, regulatory agencies, personnel and academics, everyone having their opinions in implementing financial statement evaluation in their analysis. Practitioners utilize financial ratios for instance, to estimate the upcoming success of corporations; whilst the researcher’s primary interest has been to develop models exploiting the ratios.
The current paper delivers a theoretical structure for the analysis of financial instruments of the corporation. Theoretical base associated to development and implementation of financial strategy policy instruments in general and then attempts to deliver classification of pertinent information. The investigation of important finance theories includes discussion of different types of financial evaluation that are mainly of two types: analysis based on requirements of the clients and analysis based on modus operandi. Based on requirements of the client, financial analysis includes external analysis and internal analysis. Again, based on modus operandi, financial analysis includes horizontal analysis and vertical analysis (Wahlen et al., 2014)..
The analysis of financial assertion can be utilized to ascertain overall financial position and outcomes of functions as well. Different methods that can be used include the following:
- Comparative statement analysis
- Trend analysis
- Fund flow analysis
- Analysis of cash flow
- Financial ratio analysis
- Cost-volume-profit analysis (Wahlen et al., 2014).
Critical analysis and interpretation of financial data
Ratios used for analysis: It is important for investors to utilize financial ratio for analysing performance of the company before deciding to make investment in the company. A ratio analysis is useful in the quantitative analysis of the information that is contained in the organization financial statements. Ratio analysis is generally used to assess the numerous aspects of the organization in the areas of operating and financial performance namely the efficiency, liquidity, profitability and solvency. Ratio analysis serves as the tool in analysing the performance of the organization over the period of time with the present and historical financial information. The data that is derived from the statements is put into the use to compare the organizations performance over the period of time to determine whether the organization has been improving its performance or has been experiencing a fall in its performance.
Profitability Ratios:-The profitability ratio can help in measuring ability of the corporation in generating profits (Wahlen et al., 2014). The profitability ratio represents how the company is deriving profit from the operations. Additionally, the profit margin ratio, return on asset ratio, return on equity ratio, return on capital ratio and the gross margin ratio is computed to gauge into the profitability of the organization over the given period of time. Every organization is largely concerned with the profitability of its operations and one of the most recently sought after tool of assessing the financial ratios analysis is the profitability of the organization. They are used to determine the overall efficiency of the organization and its performance.
Return on total assets: Return on assets reflects the way the business concern is utilizing their available assets for the purpose of generation of income/earnings (Grant, 2016). Essentially, this can be derived by dividing the net income by total net earnings of the company by their total assets possessed. The return on assets is one of the financial ratio that represents the percentage of profit an organization derives in respect of the overall resources. The return on assets is largely defined as the net income divided by the total amount of assets.
Profit Margin (%): Profit margin can be considered to be an important profitability ratio enumerated as net earning that is necessarily divided by revenue, or else net profits divided by the total sales (Grant, 2016). The profit margin ratio is expressed as the percentage of the total amount of sales. The profitability ratio represents the measurement of those amount of the income derived against each dollar of the sales generated by comparing the net income and the net amount of sales of the organization.
Return on Shareholders Fund: Taking into the considerations the return on shareholder funds the company reported over the period of five years have been tumultuous and the firm did not reported the steady flow of trend. In respect of this during the year 2012 the company reported return on shareholder’s fund of 24.74 and in the following year of 2013 the return on shareholder for the firm stood 22.74 respectively. On the other hand, in the year 2014 the return on shareholder stood 20.08 and in the subsequent year it stood 10.58. The return on shareholder represented a declining trend over the period of five years for the company.
EBIT Margin: As evident from the return on EBIT the company reported over the period of five years have been tumultuous and the firm did not reported the steady flow of trend. In respect of this during the year 2012 the company reported return on EBIT Margin of 9.35 and in the following year of 2013 the EBIT Margin for the firm stood 9.26 respectively. On the other hand, in the year 2014 the EBIT Margin stood 8.88 and in the subsequent year of 2015 it stood 3.96. The EBIT represented a falling trend trend over the period of five years for the company. This can be attributed largely to the falling revenue and increasing administrative expenditure of the firm.
Review of the performance from the perspective of profitability
Analysis of performance of the firm Cromwell Tools reflects the fact that the return on total assets has declined considerably 7.67% during the year 2015 in comparison to the year ago period. Essentially, a declining return on total asset ratio indicates an favourable financial condition for the firm as this replicates decline in total income of the firm in comparison to the total assets possessed by the corporation.
Again, it can be observed that the profit margin has also decreased considerably during the year 2015 to 4.22% in 2015 as compared to the previous year figure of 8.94% in 2014, 9.29 in 2013, 9.23% in 2012, 7.75% in 2011, 4.73% in 2010, 3.75% in 2009 and 7.44% in 2008. The registered figures reveal an undesirable financial condition of the firm as decline in profitability ratio shows decrease in net earnings of the firm out of the generated sales.
On the whole, it can be thus being inferred that Cromwell Tools has an unfavourable financial condition of considered from the perspective of profitability
Net Asset Turnover: It is an important operational ratio that enumerates potential of a corporation to essentially generate sales out of the available assets by comparing overall net sales with the average assets. In other words, this ratio replicates the extent of efficacy of a firm to utilize the assets of the company to make sales (Cucchiella & Rosa, 2015).
Debt Turnover: It is essentially an accounting dimension that is used to enumerate the extent of efficiency of a corporation in offering credits and at the same time collecting back the debts (Cucchiella & Rosa, 2015).
Review of the performance from the perspective of operations
Review of the financial performance of the firm reveals the fact that the net asset turnover of the company Cromwell Tools has increased to 2.50 during the financial year 2015 as compared to the figures registered in the previous years. It can be hereby stated that higher ratio implies towards greater efficacy of the firm to aptly utilize the available assets. Thus, it can be considered as a favourable financial condition for the firm. Again, debt turnover ratio has also increased for the firm to 4.98 during 2015 in comparison to previous years. Generally, the higher the debts turnover ratio, the better it is. Essentially, this represents effective collection on the part of the company (Cucchiella & Rosa, 2015).
Thus, from the perspective of operation it can be hereby mentioned that financial health of the firm is favourable from the perspective of operations.
Current Ratio: It is essentially a ratio that enumerates potential of a corporation to disburse diverse obligations that are primarily short term in nature (Vogel, 2014). The current ratio of the firm has been somewhat steady over the period of five years and with the current ratio standing 2.77 for the year 2012 whereas in the year 2013 it stood 2.60. In the following years of 2013 the current ratio stood 3.33 while in the subsequent year it stood 2.87 respectively. An assertion in this regard can be bought forward by stating that the current ratio has been steady and the company has been successful in meeting its short term debt obligations.
Liquidity Ratio: This ratio is mainly used to gauge potential of a corporation to repay or pay back their debts (Grant, 2016).
Review of the performance from the perspective of structure
Current ratio is recorded to be 2.87 during the year 2015 and is observed to have decreased in comparison to the year ago period. The standard current ratio is said to be 2:1 that necessarily implies that current assets is double to that of the current liabilities. Considering it from the perspective of the yardstick, it can be said that the current ratio shows a favourable condition. However, the same has declined in comparison to the year ago period. The liquidity ratio reflects the capability of the corporation to repay current liabilities. The liquidity ratio of the firm has decreased to 1.71 during the period 2015 as compared to the year ago period that is 2.06. This shows that the company’s potential to pay off the debts has decreased. Thus, it can be hereby inferred that the liquidity condition of the firm Cromwell Tools has deteriorated in comparison to the previous periods.
Per Employee Ratio:-
Profit Per employee: It is a ratio that is measured as firm’s acquired profits are divided by the total number of employees of the firm (Grant, 2016).
Turnover per employee: It is a ratio that is enumerated as firm’s revenue is divided by the firm’s present number of workforce
Review of the performance from the perspective of per employee
The profit per employee of the firm Cromwell Tools has declined significantly to 5629 during the year 2015 as compared to the previous year periods. This shows that profit acquired by the firm for each and every worker has declined reflecting decline in overall productivity of the corporation (Robinson et al., 2015). In addition to this, the turnover per employee has also decreased during the year 2015. This reflects that turnover of the corporation for per person has declined reflecting unfavourable financial condition of the corporation. Thus, it can be hereby inferred that productivity per employee has lessened for the firm Cromwell Tools.
Main risks as well as opportunities the company is facing and the way the company is addressing the same
The main threats/risks faced by the Cromwell Tools include the following:
-Altering consumer purchasing behaviour from online platforms can be considered to be risk to the subsisting physical infrastructure driven by supply chain form
-Increase in strengths of regional distributors also delivers a threat in certain markets since the competition is playing greater margins to the regional distributors (Robinson et al., 2015)
-Replication of the counterfeit and low quality product can also be considered to be threat to the company Cromwell Tools
- Presence of intense competition – stable profitability has also enhanced the total number of participants in the industry over the past two years that has put downward strain on not only profitability but also on total sales.
-No standard supply of innovative products. However, over the years the corporation has developed several products; nonetheless those are frequent response to the development by the other players. Secondly, the supply of novel products is essentially not regular, thereby leading to high as well as low swings in the number of sales over a specific time period (Wahlen et al., 2014).
Different opportunities of the firm Cromwell Tools
Diverse opportunities of the firm include the following:
- Cromwell can be considered to be leading British owned distributor of industrial products has more than 1,800 employees.
- Presence of 67 Distribution Centres globally shows that the company has a strong community of dealers and strong distribution network
- An export segment functioning in more than 50 nations and 5 continents
- A panel of “time-served” engineers of sales in each segment helps in
- International product research, product evaluation unit, a panel studying production mechanisms globally helps in development of new products and innovation of product
- An exclusive every day inter-company delivery scheme helping swift admittance to products, services as well as information (Frias?Aceituno et al., 2014).
Threats and opportunities analysed from the financial dimensions
The corporation Cromwell faces the risk of lower productivity per employee in the present period. Thus, the management of the corporation can consider methods for developing and raising productivity of the employees. So, augmentation of profit per employee and turnover per employee can help in enhancing the financial condition of the firm. The company management can consider reduction of cost and enhance overall turnover as well as productivity and aid in planning for change as well as growth. The decline in the liquidity ratio can also expressed as a threat to the overall liquidity of the corporation. Again, the decrease in the profit margin and return on total assets can be identified as a threat to the financial condition of the firm. Therefore, the management of the corporation can consider ways of enhancement of profit of the corporation.
Based on the findings of the above study, it can be hereby stated that management of the firm Cromwell Tools can devise strategies for addressing the detected problems of lower productivity as well as lower profitability of the firm. Again, the management of the firm can also consider innovative and advanced ways of enhancement of profit of the firm and maintain the efficiency of the firm in terms of operation.
Critical evaluation of the appropriate pricing strategy
For a business it can make the use of the several variety of pricing strategies at the time of selling the product or service. A business can undertake the decision of setting the price in order to increase its profitability for every amount of unit sold in the market (Dutta &Reichelstein, 2017). For a business to implement the appropriate pricing strategy contribution margin based pricing strategy is regarded as one of the most appropriate method of pricing. The contribution margin based pricing strategy can be defined as the pricing strategy which works without any mentioning of the gross margin percentage.
This methodology helps in maximising the profit that is derived from an organization assortment depending upon the differences between the price of the product and variable cost (Hemmer &Labro, 2016). Similarly, for the Cromwell Group Holdings Limited the adoption of the contribution margin based pricing strategy will help in making one assumption concerning the association between the products price and the number of the units which can be sold at that price. The contribution of the products to the total profit of Cromwell Group Holdings Limited would be maximised when the price is selected that would increase the contribution margin per unit of the total number of units sold by the firm(Dutta &Reichelstein, 2017).
For Cromwell Group Holdings Limited contribution margin per unit represents the differences amid the price of the product and the sum of the variable cost of one unit of that product (Hughes, 2016). The variable cost would represent all the cost which would increase with the greater the amount of the unit of product is sold or fall in the sale of unit. The contribution margin for each unit of the product is multiplied by the units sold and the same is equivalent to the contribution made in the profit from the sale of that products.
By assuming the converse relationship between the price and units sold as it is noticed in most of the cases a lower price would generally result in higher amount of unit sold (Braun et al., 2014). As a result of this Cromwell Group Holdings Limited would be able to assume less likely number of unit’s sales at the numerous level of price which is arrived by computing the contribution margin per unit for each of the product at those price levels. Therefore, for a firm like Cromwell Group Holdings Limited it would be able to maximize the profit by determining the price which would increase the contribution margin in respect of the profit.
The fixed cost that will be subsequently subtracted would by virtue of the definition would remain constant irrespective of the number of units sold by the firm (Giri& Sharma, 2014). One of the biggest advantage of implementing the contribution margin based pricing strategies would be the ease of use for the Cromwell Group. This is because the contribution margin is computed after subtracting the sales from the variable costs and the same can be converted to the unit based measurement by merely dividing the number of units sold (Nagle et al., 2016). The unit measure can be very useful for the manager of Cromwell Group since it helps the manager in determining the amount of profit that the company would be able earn for every unit sold after passing the point where Cromwell Group would break even.
The total contribution margin would be beneficial in the present case of Cromwell Group.Henceforth, an assertion can be bought forward by stating the most appropriate pricing strategies which would be appropriate for Cromwell Group Holdings Limited is the contribution margin based pricing strategy would help the managers in quicklydetermining the critical points together with the spectrum of profit.
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