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Analysis of the Financial Statement of the Company

Discuss about the Financial Management Practices On Profitability.

The present report will undertake analysis of the financial ratios and the financial elements of the company. The analysis will be conducted for the purpose of ascertaining the validity of the performance and the position of the group in order to invest in it by the shareholders (Titman et al., 2017).

The analysis of the financial statements of the entity provides an overview of the financial position and the performance as is recorded by the company. It also demonstrates the various trends that are present in the individual elements of the financial statements of the company.

  1. Balance sheet:

From the balance sheet of the company, some of the key points that can be deciphered easily are as follows:

  1. The current liabilities of the company have reduced within the period of one year. The current liabilities of the company reduced from $329.8m in the year 2016 to $323.2m in the year 2017 (Renz & Herman, 2016).
  2. The cash and cash equivalents of the company has reduced significantly over the period of one year. The cash and cash equivalent of the company has increased from $15.6m in the year 2016 to $19.9m in the year 2017.
  3. The company has also been able to reduce its tax liabilities. The tax liabilities of the company have reduced from $3M in the year 2016 to $1.5 m in the year 2017.
  4. Income statement of the company:

It can be observed from the income statement of the company that significant changes have occurred in the operations of the entity. Some of the significant changes that have occurred in the operations of the entity are as follows:

  1. The revenue of the company has increased significantly from $2422.2m in the year 2016 to $2465.8 in the year 2017
  2. The company has been able to reduce its total expense from $2336 m in the year 2016 to $2326.5 m in the year 2017.
  3. The company has been successful in reducing its finance costs substantially from $19.4 m in the year 2016 to $16.9 m in the year 2017. This suggests that the company is reducing its liability in respect of paying back the capital raised by it. It focuses more on increasing the efficiency with which it is utilising the funds that has been raised from the public (Finkler Smith, 2016).

The analysis of the key ratios of the company is extremely important for determining the financial performance and the financial position of the entity for a particular period. The ratios help in establishing the relationship between the various elements of the operations of the business. Some of the key ratios that are going to be studied for determining the health and the efficiency of the performance of the organisation are as follows:

  1. Net Profit Margin:

Net Profit Margin

2017($m)

2016($m)

Net Profit

100.5

58

Sales

2465.8

2422.2

Net Profit Margin

4%

2%


It can be seen from the above table that the net profit margin recorded by the entity for the year 2016 and 2017 amounted to 2% and 4% respectively. In other words, the company has been able to nearly double the net profit margin over a short period of one year. This increase in the net profit margin of the company can be attributed to the increase in the sales of the company along with the reduction of the expenses. A good profit margin will ensure that the company enjoys stability and creates value for its stakeholders in the future (Zietlow et al., 2018).

The debt equity ratio establishes the relationship between the total liabilities of the entity with the total equity share capital of the company. More will be the amount of the ratio more will the shareholders be subjected to the external liabilities of the company.

Debt Equity Ratio

2017($m)

2016($m)

Total Liabilities

804

835.5

Shareholders’ Equity

756.5

735.1

Debt Equity Ratio

1.06

1.14


It can be seen from the above table that the debt equity ratio of the company for the year 2016 and 2017 amounted to 1.14 and 1, 06 respectively. This suggests that the company has been able to reduce the burden of the external liabilities on the shareholders of the company (McKinney, 2015). The reason for this can be attributed to the increase in the value of the shareholders equity and the decrease in the total liabilities of the company. This is good for the shareholders of the company.

Identification of the Key Ratios of the Company

The current ratio of the company establishes the relationship between the current assets and the current liabilities of the company. It demonstrates the ability of the company to pay off its short term liabilities using its current assets.

Current Ratio

2017($m)

2016($m)

Current Assets

544

560.2

Current liabilities

323.2

329.8

Current Ratio

1.68

1.70


It can be seen from the above table that the company’s current ratio amounted to 1.70 and 1.68 respectively for the year 2016 and 2017. The reason for this can be attributed to the decrease for current assets and the decrease in the value of the current liabilities (Schaeck & Cihák, 2014). As the rate of decrease in the current liabilities of the company was less than the rate of fall in the value of the current assets, the current ratio of the company decreased over the period. This shows the reduction in the ability of the company to meet up with the short term liabilities that crop up during the regular business operations of the company.

The quick ratio establishes the relationship between the liquid assets of the company and the current liabilities of the company. The ratio is concerned with the ability FO the company to meet the very short-term liabilities that arise in the operations of the business.

Quick Ratio

2017($m)

2016($m)

Current Assets

544

560.2

Inventories

481.5

501.9

Quick Assets

62.5

58.3

Current Liabilities

323.2

329.8

Quick Ratio

0.19

0.18


It can be seen that the company’s quick ratio has increased very slightly over the period of one year. The quick ratio of the company amounted to 0.18 and 0.19 respectively for the year 2016 and 2017. This can be attributed to the simultaneous increase in the value of the quick assets of the company and the decrease in the value of current liabilities of the company (Petty et al., 2015).

This ratio establishes the relationship between the gross profit and the sales of the company. It demonstrates what percentage of the sakes amount is contributed by the gross profit amount.

Gross Profit Margin

2017($m)

2016($m)

Gross Profit

1101

1049.8

Sales

2465.8

2422.2

Gross Profit Margin

45%

43%


It can be seen that the gross profit of the company amounted to 43% and 45% in the year 2016 and 2017 respectively. This suggests that the company has been able to increase its gross profit margin within a period of one year.   

Cash ratio is similar to the current ratio and the quick ratio. This ratio determines the relationship between the cash available with the company and the current liabilities of the company (Attig et al., 2016). It states the ability of the company to pay back its current liabilities with the help of its cash.

Cash Ratio

2017($m)

2016($m)

Cash

19.9

15.6

Current Liabilities

323.2

329.8

Cash Ratio

0.06

0.05

Net Profit Margin


It can be observed from the above table that the company has been able to improve its cash ratio over the period of one year.

This ratio determines the relationship between the fixed assets and the sales FO the company.

Fixed Assets Turnover Ratio

2017($m)

2016($m)

Sales

2465.8

2422.2

Fixed Assets

1014.6

1009.3

Fixed Asset Turnover Ratio

2.43

2.40


It can be seen from the above table that the fixed asset turnover of the company has improved slightly over the period of one year (Dudin et al., 2014).

This ratio establishes the ratio between the sales and the total assets of the company.

Total Assets Turnover Ratio

2017($m)

2016($m)

Sales

2465.8

2422.2

Total  Assets

1558.6

1569.5

Total Asset Turnover Ratio

1.58

1.54

It is seen from the above the table that the company has been able to improve its total assets turnover ratio over the short period of time of one year.

  1. Inventory turnover ratio:

This ratio determines the relationship between the COGS and the inventory of the company.

Inventory Turnover Ratio

2017($m)

2016($m)

COGS

1364.8

1372.4

Inventory

481.5

501.9

Inventory Turnover Ratio

2.83

2.73


It can be observed from the above table that the company has been successful in improving its inventory turnover ratio over the period of one year.

  1. Debt to asset ratio:

This ratio establishes the relationship between the total liabilities and the total assets of the company

Debt To Asset Ratio

2017($m)

2016($m)

Total Liabilities

804

835.5

Total Assets

1558.6

1569.5

Debt To Asset Ratio

0.52

0.53


It can be observed from the above table that the company has been able to improve its debt to asset ratio over the period of one year.

After the analysis of the financial statements and the various ratios of the company it can be said that, the company will be successful in the future and will be able to create value for its shareholders in the near future. The company is well prepared than before to counter the challenges faced by it from its competitors in respect of the various digital used by them for the delivery of their respective products (Ward & Forker, 2017). The company has incorporated procedures for facilitating the incorporation of the change in the operational model of the company.

The impact of the completion on the operations and the scalability FO the entity has been immense. The reason being that the competition faced by the company is primarily concerned or focused on the digital prowess of its competitors. It has beocmevery difficult for the company to cooperate with the complete change in the operating model of the business. For the purpose of staying afloat and significant player in this ever changing platform of  the industry the company is focussing its attention to create an emotional connect with the customers rather than putting its chips on the historic levers and price discrimination (Martin, 2015). For the purpose of accomplishing the objective, the company is trying to connect emotionally with the customers using their passion for the leisure activities that are being offered by the company. the group is also undertaking global strategic change programs for the purpose of developing the relevant capabilities of the group that are required for the purpose of staying successful in the global market at present. However, the competitors are continuously trying to enter into the market every day. This has led the group to the conclusion that the competition is going to rise in the near future (Waxman, 2017).

Debt Equity Ratio

One of the most important rules in case of ethical principles that are applicable on all the entities is the Iron Law of Responsibility and the trusteeship relationship with the society. Every entity must remember that it understands that the society has given it the right to use its resources. The main motive or the purpose behind granting this right to the entity is that it is expected of the entity that it will create value for all the stakeholders of the company (Cashin et al., 2017). However, if the entity fails to comply with the same that is it fails to create value for the stakeholders or misuses the resources, the society has the power to take it back. It must be ensured by the entities that while there is a possibility of insolvency or the process of the insolvency has already started the organisation need to address several issues. Some of the issues to be addressed by the entity are as follows:

  1. It must be ensured that the information regarding the possibility FO the insolvency of the entity must be given out to the public and specifically to the stakeholders of the company at the earliest possible time.
  2. No effort must be made by the company in respect of hiding any sort of valuable information pertaining to the insolvency of the company. All the matters or information that can materially affect the decisions of the shareholders must be disclosed to them irrespective of the interest of the company (Falconier, 2015).
  3. While in the process of the liquidation, it is ethical on the part of the company to make sure that there is ample amount of cooperation between the liquidator and the management of the company. It is one of the ethical principles that are applicable on the entity that entails it to abide by all the rules and regulations as laid down by the statute (Dunham-Taylor, 2014).
  4. It is also the duty of the shareholders of the company to ensure that there is no negligence on the part of the management of the company to abide by all the rules and regulations that are applicable on the entity (Ashmarina et al., 2016).

There are several factors that demand the consideration of the management to ensure thee profitability and the financial health of the entity. Some of the key factors that demand the attention of the management on an immediate basis are as follows:

  1. Digital environment-

The business environment of the industry in which the company operates there has been many changes and introduction of several sales and marketing channels that primarily use the digital media. It will become challenging for the company to stand out from the crowd (Mulherin & Aziz Simsir, 2015). There will be increased digital disruption in the future. For the purpose of coping up with the challenge, the company will need to amend the development models currently implemented by the company.

  1. Supply chain and inventory management:

The company will need to ensure integration of maturity and agility of its supply chain and inventory management procedures in order to keep up with the expectations of the customers. The group immediately needs a huge investment in respect of acquisition or development of a supply chain network and a supporting information system. The group needs to continuously monitor the costs that are being incurred by it in respect of the maintenance and the development of the present supply chain network of the company (Chung & Chuang, 2016). It must ensure to increase the synergies with various trade partners by undertaking mutual business opportunities.

  1. Organisation structure, culture and capabilities:

For the purpose of registering steady growth in the financial retail sector, the company will have to address certain key and significant issues pertaining to its team members. The key features include attraction, retention, engagement, safety and succession. There are significant risks present in respect of these matters. The group must ensure that significant steps are being taken for the purpose of mitigation of these risks. At present, the group is undergoing a review in respect of the present operating model of the company (Andreou et al., 2014). The review will determine the transformation required in the way of working of the group for the purpose of supporting the group’s aim of becoming a world class Omni retailer. The change of the operating model of the group will increase these risks in the short term while reducing them in the medium and the long term.

  1. Management of the stakeholders and their respective expectations:

Current Ratio

The group has to conduct its operation under the influence of some key and significant stakeholders that can severely influence the operations of the business. They can have substantial say in the development of the group’s reputation. Hence, the group will have to minimise the risk of breaching certain key policies such as the corporate policy, fraud or malpractice in legislations regulations. The cost implication of the group is getting significantly influence by the increase in the regulatory controls, and obligations of the compliance and in addition to that the impact of the corporate social responsibility expectations from the company (Ogiela, 2015). The groups will have to implement dedicated focus in respect of ethical sourcing that ensures that the products are being sourced from acceptable community standards.

Conclusion and recommendation:

After the analysis of the various ratios and the elements of the financial statements of the company it can be concluded that, the trend of the performance of the company is positive. The company is fully capable of creating value for its shareholders. Hence, it is a good option for investment by the shareholders.

Reference

Andreou, P. C., Louca, C., & Panayides, P. M. (2014). Corporate governance, financial management decisions and firm performance: Evidence from the maritime industry. Transportation Research Part E: Logistics and Transportation Review, 63, 59-78.

Ashmarina, S. I., Zotova, A. S., & Smolina, E. S. (2016). Implementation of financial sustainability in organizations through valuation of financial leverage effect in Russian practice of financial management.

Attig, N., Boubakri, N., El Ghoul, S., & Guedhami, O. (2016). The global financial crisis, family control, and dividend policy. Financial Management, 45(2), 291-313.

Cashin, C., Bloom, D., Sparkes, S., Barroy, H., Kutzin, J., O'Dougherty, S., & World Health Organization. (2017). Aligning public financial management and health financing: sustaining progress toward universal health coverage. World Health Organization.

Chung, S. H., & Chuang, J. H. (2016). The effect of financial management practices on profitability of small and medium enterprise in Vietnam.

Dudin, M., Lyasnikov, N., Yahyaev, M., & Kuznecov, A. (2014). The organization approaches peculiarities of an industrial enterprises financial management.

Dunham-Taylor, J. (2014). Financial Management for Nurse Managers-Merging the Heart with the Dollar. Jones & Bartlett Publishers.

Falconier, M. K. (2015). Together–A couples’ program to improve communication, coping, and financial management skills: Development and initial pilot?testing. Journal of marital and family therapy, 41(2), 236-250.

Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, R. M. (2016). Financial management for public, health, and not-for-profit organizations. CQ Press.

Martin, L. L. (2016). Financial management for human service administrators. Waveland Press.

McKinney, J. B. (2015). Effective financial management in public and nonprofit agencies. ABC-CLIO.

Mulherin, H., & Aziz Simsir, S. (2015). Measuring deal premiums in takeovers. Financial Management, 44(1), 1-14.

Ogiela, L. (2015). Intelligent techniques for secure financial management in cloud computing. Electronic commerce research and applications, 14(6), 456-464.

Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Pearson Higher Education AU.

Renz, D. O., & Herman, R. D. (Eds.). (2016). The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.

Schaeck, K., & Cihák, M. (2014). Competition, efficiency, and stability in banking. Financial Management, 43(1), 215-241.

Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and applications. Pearson.

Ward, A. M., & Forker, J. (2017). Financial management effectiveness and board gender diversity in member-governed, community financial institutions. Journal of business ethics, 141(2), 351-366.

Waxman, K. T. (Ed.). (2017). Financial and business management for the doctor of nursing practice. Springer Publishing Company.

Zietlow, J., Hankin, J. A., Seidner, A., & O'Brien, T. (2018). Financial management for nonprofit organizations: Policies and practices. John Wiley & Sons.

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