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Analysis of the Performance and Financial Position

Explain Ubuntu Technologies Plc.

Ubuntu Technologies Plc is a Midlands based organization, operating for the past 20 years. The company has specialized in manufacturing a special type of versatile motor engine part. Initially, Ross-Royce engines used this part. However, over the years the client base of Ubuntu enhanced and it included large automakers such as Toyota, Ford, Honda and Mercedes. Formerly, the business activities of Ubuntu Technologies Plc were limited to United Kingdom and some other parts of Europe. Presently, the market of Ubuntu has expanded in various parts of India, China, Japan and North America. In the past decade the sales of Ubuntu outside the European market has been increasing while it is declining in the European market. In the post global financial crisis era, the company has encountered difficult situation. Actually, the entire, motor manufacturing industry has suffered in that period. The impact of global financial crisis was severe in the USA, EU and UK. The traditional market of the company automatically declined and Ubuntu faced major challenges. Consequently, the company has focused on exploring the emerging markets of Asia. However, the company do not have adequate knowledge regarding the Asian markets. Additionally, it has been observed that the emerging markets are highly competitive and penetrating those markets will require effective strategies and adequate knowledge. Due to increased competition and some other factors the company has encountered a loss in the last financial year. In this situation, the board members of the company are very much concerned about the future prospect and they have been looking for various options. It has been observed that a board of director of Ubuntu arranged a meeting for exploring the possibility of acquiring the outright of the organization.  Though some board of directors are willing to sell off the company the managing director is hopeful about the long term prosperity of the company (Klemstine and Maher, 2014). The managing direction of the organization has been preparing to represent some strategies that would help in reviving the financial position of the company. This paper will focus on analyzing the financial position of the company along with estimating the value of the organization.

Ubuntu Technologies have been encountering some issues and it is important to analyze its performance and present financial position for making rational decision. Financial performance analysis focuses on considering the financial information of the company and analyzes its performance over the past few years. Analysis of the financial performance provides an insight to the major weaknesses as well as strengths of the company. The results of the financial performance analysis will identify the weakness of the organization and the company can focus on overcoming those issues in order to maximize the performance of the company. On the other hand, the major strengths of the company can be recognized which will be helpful in maintaining the position of the company. In order to analyze the financial performance, ratio analysis can be used for analyzing various performance aspects of Ubuntu. This analysis will be helpful for the board of directors of the company for making rational decision on the basis of past performance analysis. This section will include ratio analysis for analyzing the financial performance of the firm over the last three years.

Ratio Analysis

Ratio analysis is a useful tool for analyzing the financial performance of an organization. It considers the important and relevant financial information of the company in order to calculate some financial performance indicators (Oliver and Horngren, 2010). Financial statements such as balance sheet, income statement and balance sheet are considered for gathering relevant information which will be used in order to calculate various performance indicators or financial ratios. This effective too has been extensively considered by various organizations in order to analyze the financial performance of the company. Ratios are considered by the internal as well as external users of the companies for making decision (Epstein and Lee, 2014). Different type of ratios such as profitability ratio, efficiency ratio, liquidity ratio etc helps in getting an insight regarding organizational performance (Garrison, Noreen and Brewer, 2010). Profitability ratio gives an overview of the potential of the organization in making profits in relation to revenue. On the other hand, liquidity ratios estimate the short term cash position of the business firm. Efficiency ratio helps in understanding the efficiency level of the organizational activities. Investor’s ratios are largely considered by the investors in order to assess the return on investment in this organization. In this section, important financial ratios of Ubuntu Technologies Plc have been calculated for three consecutive years 2012, 2013 and 2014.

Profitability ratios help in estimation of the profit generation capacity of the company. Gross profit margin is calculated for indicating how much money is available to the company after deducting the cost of goods sold (Klemstine and Maher, 2014). There are two important profitability ratios that will be calculated in this section: gross profit margin and net profit margin. Gross profit margin estimates the ratio of the revenue to the amount left after considering the cost of goods sold. From the following table, it can be found that the gross profit margin of the company has declined over the past 3 years. It can be found that the cost of goods sold is increasing but the revenue is not increasing in the same proportion (Oliver and Horngren, 2010). It does not have a positive indication for the financial health of the organization. It can be stated that the marketing strategies have not been effective in enhancing the revenue of the organization.  On the other hand, net profit margin is calculated after considering the total expenditure of the company (Horngren, Harrison and Oliver, 2009). It is calculated by the ratio of revenue of that organization for that financial year to the amount left after costing all the expenses of that firm (Peterson Drake and Fabozzi, 2006). In case of Ubuntu, the net profit margin of the company has been found to be negative in 2014. It started declining since 2012 and in 2014, the company encountered loss of 3.87%. It does not indicate a favourable financial position of the company (Garrison, Noreen and Brewer, 2010). The expenditures of the company have increased significantly. However, the sales revenue has not increased in the same proportion. Hence, it can be clearly implied that Ubuntu Technologies have not been able to generate consistent profit over the three financial years (Kieso, Weygandt and Warfield, 2012).

Profitability Ratio

(*values are in millions)

   

2014 

2013

2012

Profitability Ratio

       

Gross Profit

 

 £         115.00

 £         125.00

 £  135.00

Revenue

 

 £         630.00

 £         610.00

 £  580.00

Gross Profit Margin

 

18.25%

20.49%

23.28%

         

Net Profit

 

-£          24.40

 £             5.00

 £    12.00

Revenue

 

 £         630.00

 £         610.00

 £  580.00

Net Profit Margin

 

-3.87%

0.82%

2.07%

(Source: (Peterson Drake and Fabozzi, 2006))

Liquidity ratios are very important for understanding the short term liquidity of the firm (Seal, Garrison and Noreen, 2009). It basically focuses on estimating the cash position of the company in order to meet the obligation that is short term (Wernz, 2014). Liquidity ratio helps in assessing whether the company has adequate potential to conduct its day to day operational activities. Current ratio and quick ratio are considered to be two important ratios for evaluating the solvency of an organization. Liquidity ratios consider the short term assets and short term liabilities form the balance sheet in order to determine the short term cash position of that business firm.

Current ratio is the proportion of short terms assets and short term liabilities of the company. If the ratio is greater than 1, it indicates the company has potential to meet the short term obligations with the aid of its current assets. In contrast, if the current ratio is less than 1, it implies the business firm does not have adequate current asset for meeting the short term liabilities of the firm. The company needs to arrange short term assets such as cash, bank balance, inventory, and accounts receivable for maintain moderate level of current asset which can be sufficient for meeting the requirement of the company.  The liquidity position of Ubuntu has declined over the period and in 2014 the current ratio is less than 1. In 2012, current ratio was 1.15 which indicates the company had adequate current asset that helps in meeting the short term obligation of the company. However, the current ratio declined in the consecutive two financial years: 2013 and 2014. It indicates an unfavourable position for the company.

Quick ratio is another important liquidity ratio that helps in estimating the short term cash position of the organization. Quick ratio does not consider inventories as current asset as it cannot be converted to cash quickly (Kieso, Weygandt and Warfield, 2012). The quick ratio of Ubuntu has declined over the three years and it is very poor in 2014. It means the company has been struggling to meet its short term liabilities in the past three financial years. Moreover, it can be implied that the inventory of the company is significantly high and when it is not considered in the current asset, the liquidity ratio declined sharply.

   

2014

2013

2012

Liquidity Ratio

       

Current Asset

 

 £         278.30

 £         225.00

 £  230.00

Current Liabilities

 

 £         349.30

 £         239.00

 £  200.00

Current Ratio

 

0.80

0.94

1.15

         

Current Assets

 

 £         278.30

 £         225.00

 £  230.00

Inventories

 

 £         120.00

 £         100.00

 £  110.00

Current Liabilities

 

 £         349.30

 £         239.00

 £  200.00

Quick Ratio

 

0.45

0.52

0.60

Liquidity Ratio

Efficiency ratios are calculated in order to assess the efficiency level of the organizational activities in terms of inventory conversion, utilization of assets etc (Cummins and Weiss, 2013). The efficiency ratios are determined in terms of the asset turnover ratio and the inventory turnover ratio. The asset turnover ratio determines the ability of the company to use the assets in an efficient manner for generating revenue. This section will focus on discussing two major efficiency ratios: inventory turnover ratio and asset turnover ratio for 2012, 2013 and 2014. Asset turnover ratio is calculated for estimating the capacity of the company in utilizing its assets for generating revenue (Kieso, Weygandt and Warfield, 2012). It has been found that the asset turnover ratio is less than 1. It clearly indicates that the company has been unable to utilize its assets effectively. On the other hand, inventory turnover ratio indicates the time taken for converting its inventory into sales (Peterson Drake and Fabozzi, 2006). If the inventory turnover ratio is high it implies that it takes greater time to convert its inventory into sales and the chance of obsolesce increases (Drury, 2012).  It has been found that the inventory turnover ratio was highest in 2012 and then it decreased in 2013. Again in 2014, it has increased which is not favourable for the company (Horngren, Harrison and Oliver, 2009).

It is seen that in the year 2012, the revenue of the company was £580 millions. The total asset of the company comprising of the current assets and the tangible assets is £730 million dollars. The asset turnover ratio for 2012 is 0.79.  The revenue of the company for 2013 is £ 610 million dollars and the total assets have been £825 million. In the year 2014, the revenue of the company is £630 million and the total assets of the company are £957 million. The ratio for the year is 0.66. It is seen that the investment of the company in the total assets has been increasing from the year 2012 to the year 2014. The increase in investment in total assets of the company for the year 2014 has been 31%. This has resulted in the increase in the revenue of the company. The revenue of the company has increased from 2012 to 2013 is £30 million and the increase in the revenue from the year 2013 to 2014 is £20 million. There has been 8% increase in the total revenue of the company. This has resulted in the variation of the ratio from 2012 to 2014 as it is seen below. Similar change in noticed in the inventory turnover ratio as the inventory of the company has been increasing in the year 2014. The cost of sales for the year 2014 has increased by 2012 to 2014 by 13%. But the increase in number of days is not favourable for the business. The company must reduce its inventory amount and use it efficiently.

   

2014

2013

2012

Efficiency Ratio

       

Revenue

 

 £         630.00

 £         610.00

 £  580.00

Total Asset

 

 £         957.30

 £         825.00

 £  730.00

Asset Turnover

 

 £             0.66

 £             0.74

 £       0.79

         

Inventories

 

 £         120.00

 £         100.00

 £  110.00

Cost of Sales

 

 £         515.00

 £         485.00

 £  445.00

Inventory Turnover ratio (days)

 

               85.05

              75.26

      90.22

Capital structure plays a crucial role in analyzing the risk associated with the business operations (Peterson Drake and Fabozzi, 2006). Gearing ratio and interest coverage ratio are the important ratio that will help in analyzing vulnerability relating to debt and equity. Gearing ratio helps in estimating the ratio between debt and equity of the firm (Kieso, Weygandt and Warfield, 2012). Higher amount of debt indicates greater level of risk (Seal, Garrison and Noreen, 2009). In case of Ubuntu, gearing ratio has been estimated to be greater than 1 in 2014. Debt was significantly low in 2012 and in 2014 it had exceeded the equity. The company has become more leveraged and the risk has increased (Horngren, Harrison and Oliver, 2009). Interest coverage ratio indicates the ability of the company to meet liability associated with debt (Zhu, 2009). In 2012, the interest coverage ratio of Ubuntu indicated that the company had significant potential to pay off its liability (Kieso, Weygandt and Warfield, 2012). However, in 2014, the company encountered loss and does not have the capability to pay interest against the borrowings. Hence, it can be stated the financial position of Ubuntu is not good in 2014 and it has deteriorated over the three years period.

The capital structure ratio shows the percentage of equity and debt of the company. It is favourable for the business to have a low debt than equity. The financial risk of the company reduces. But in the present situation it is seen that the amount of debt capital of the company is increasing rapidly. The debt capital of the company has increased by 100% in the year 2014 from the year 2012. However the equity capital is same. This is risky for the company during financial turmoil. Thus it is favourable of the company to lower the debt capital so that the burden of the company is reduced in times of financial turmoil. The interest coverage ratio shows that ability of the company to pay its interest with the profit. The interest expense of the company has been increasing from the year 2012 to the year 2014. The company has suffered from huge loss in the year 2014. Thus the company will not be able to repay its interest expense within the profit. The financial risk of the company will increase in near future. Thus in such a financial turmoil, the increase in debt burden of the company will pose serious threat for the company in future.

   

2014

2013

2012

Capital Structure Ratio

       

Debt Capital

 

 £         345.00

 £         230.00

 £  145.00

Total Equity

 

 £         310.00

 £         310.00

 £  310.00

Gearing Ratio

 

1.112903226

0.741935484

0.467742

         

Profit before interest and tax

 

-£          11.40

 £           18.00

 £    25.00

Interest Expenses

 

 £           12.00

 £           10.00

 £       8.00

Interest Coverage Ratio

 

-0.95

1.8

3.125

If the anticipation of the managing director is considered to be true, i.e. introduction of a new approach will help in saving cost of £ 25 million, in calculating the value of the firm, profit and loss can be ignored. Adjusted book value method or cost approach can be adopted for estimating the value of the organization. First of all, the balance sheet must be considered to assess the value of the assets. The assets will include both current and non-current assets. Cash, accounts receivable, inventories, non-operating assets, fixed assets (tangible) and intangible assets must be considered for calculating the total assets of the organization. Current assets are already in book value and hence, adjustments are not required. In order to calculate goodwill, the company can be adopting excess earnings method.  Therefore, liabilities and equities need to be calculated by considering long term date, deferred tax, contingent liability and stockholder’s equity (Williams and Naumann, 2011).  Therefore, net assets can be calculated by subtracting liabilities from assets.

The value of the company can be understood from the above ratio analysis of the financial statements of the company. The ratio analysis clearly shows that in the last three financial years the liquidity ratios have decreased which shows the company’s failure in paying away its suppliers and also there is lack of liquid assets which could be easily transferable to cost. The liquidity position of this company is not at all good due to which it is unable to meet its short term obligations and resulted in mistrust among its investors. The profitability position of this company also showing a steady falls, where the net profit has gone to negative which means that the company has made a net loss in the year 2014. The investors and shareholders of the company will lose interest on this company and the owners are opting to sell it away to recover the loss. The capital structure of the company is also not at all good; with the source of capital shifting more from equity capital to long term debt capital is a clear indication of huge leverage the company is bearing at present. The efficiency ratios are also deteriorating which shows the lack of efficiency on the part of the company in making use of its assets and liabilities. This determines the value of the company which for Ubuntu Technologies PLC is clearly showing negative results. The value of the organization acts as a base for the organization to take important strategic decisions. It helps in decision making and all the future objectives of the organization are set based on it.

The study of the financial situation of the company at present supports the decision of the Board of Directors that it is better to sell the organization. Even if the new approach can decrease the cost of production but the capital structure and the liquidity position cannot be changed with a cost control approach. The value statement of the company shows the financial problem it is facing and despite showing good growth in the initial years it has fell miserably. The value of the organization can only be changed with a strict approach on the part of the management. So, comparing the current position of the company and understanding the approach of the managing directors selling the company is the only way to revive the value of the organization.

Conclusion

This paper has demonstrated that the Ubuntu Technologies Plc has not been performing well and the financial position of the company has deteriorated over the last three years period. Ratio analysis of the firm has demonstrated that the company has not been able to earn significant revenue by utilizing its assets properly. The inventory turnover ratio is high and it can be concluded that the efficiency of the company has been significantly poor. Additionally, the company had encountered loss in 2014 which has created a doubt among the shareholders. Liquidity ratios such as current ratio and quick ratio are estimated to be lower than 1 which clearly indicated that the company does not have enough potential to meet the short term obligations. Moreover, the gearing ratio demonstrated the proportion of debt has exceeded equity capital which has enhanced the level of risk. As the directors are planning to sell off the company, the estimated value of the business can be calculated by the above stated method.

The ratio analysis of the financial statements of Ubuntu Technologies PLC for the last three years clearly indicates its declining financial condition. We have made use of several accounting ratios to understand it better. The ratio analysis covers the income statements, balance sheet and the cash flow statements of the company. The ratio analysis supports the decision of the Board of Directors, so even though the effort of the managing director to revive the company with a new cost control approach is appreciated but it is not enough to recover the company from its poor financial condition. So, we can conclude the financial study of Ubuntu Technologies PLC.

References

Braun, K., Tietz, W. and Harrison, W. (2010). Managerial accounting. Upper Saddle River, N.J.: Prentice Hall.

Cummins, J. and Weiss, M. (2013). Analyzing Firm Performance in the Insurance Industry Using Frontier Efficiency and Productivity Methods. SSRN Journal.

Drury, C. (2012). Management and cost accounting. Andover: Cengage Learning.

Epstein, M. and Lee, J. (2014). Advances in Management Accounting. Bradford: Emerald Group Publishing Limited.

Garrison, R., Noreen, E. and Brewer, P. (2010). Managerial accounting. Boston: McGraw-Hill/Irwin.

Horngren, C., Harrison, W. and Oliver, M. (2009). Accounting. Upper Saddle River, NJ: Prentice Hall.

Horngren, C., Harrison, W. and Oliver, M. (2012). Accounting. Upper Saddle River, N.J.: Pearson Prentice Hall.

Kieso, D., Weygandt, J. and Warfield, T. (2012). Intermediate accounting. Hoboken, NJ: Wiley.

Klemstine, C. and Maher, M. (2014). Management accounting research. London: Routledge.

Oliver, M. and Horngren, C. (2010). Managerial accounting. Boston: Prentice Hall.

Peterson Drake, P. and Fabozzi, F. (2006). Analysis of financial statements. Hoboken, N.J.: Wiley.

Seal, W., Garrison, R. and Noreen, E. (2009). Management accounting. Maidenhead: McGraw-Hill.

Wernz, J. (2014). Bank management and control. Heidelberg: Springer.

Williams, P. and Naumann, E. (2011). Customer satisfaction and business performance: a firm‐level analysis. Journal of Services Marketing, 25(1), pp.20-32.

Zhu, J. (2009). Quantitative Models for Performance Evaluation and Benchmarking. New York: Springer.

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