Financial Performance and Financial Position of PQ - Example

Finance and Accounting Fma Contents Contents 2 Introduction 3 Analysis of Financial Performance and financial Position of PQ 3 Gross Profit Margin 3 Net Profit Margin 4 Return on Capital Employed:- 5 Return on Equity 5 Current Ratio 5 Quick Ratio 6 Payable Days 6 Receivables Days 7 Inventory Days 7 Selling Expenses Ratio 7 Administrative Expenses Ratio 8 Gearing Ratio 8 Additional factors concerning the future performance of PQ 8 Conclusion 9 References 9 Sinha., 2009. Financial Statement Analysis. New Delhi: PHI Learning Pvt Ltd. 10 Mittal, R., 2011. Management Accounting and Financial Management. New Delhi: Vaibhav Printers. 10 Bibliography 11 Gallagher, T., 1968. Financial Management; Principles and Practice. USA : Freeload Press. 11 Bose. D., 2010. Fundamentals of Financial Management. New Delhi: PHI Learning Pvt Ltd. 11 Robinson, T., 2012. International Financial Statement Analysis. New Jersey: John Wiley& Sons. 11 Rajasekaran, V., 2012. Accounting for Managers: For VTU. India: Pearson Education India. 11 Introduction This case is about Miss P who has received an amount as inheritance from her grandmother and started a cosmetic business of her own with the name PQ. Miss Stunning who is a friend of Miss P is the brand ambassador of the cosmetic brand and she is also a renowned actress. She was given 5% share of the cosmetic business. PQ is gaining a lot of market share and it is now selling a large number of cosmetic products to large department stores. Although, PQ is rapidly gaining the market share and it has increased revenues but during its first few years it needed to bear some costs to develop the wide range of products and the brand. It had to struggle a lot to manage an adequate amount of working capital to continue the operation and maintain the inventories. Thus to expand the business in Asia markets, PQ has issued a convertible loan in the year 2010 to Mr. Banks who is a private investor to develop the brand awareness prior to launch in the Asia markets. The loan is to be repaid in December 2014 but Mr. Banks wants to convert the loan into equity. Thus we need to analyze in behalf of Mr. Banks that whether PQ will be a successful equity investment option or not. Analysis of Financial Performance and financial Position of PQ The financial position and financial performance of the company PQ can be derived by analyzing different ratio which area s follows- Gross Profit Margin Gross profit margin shows the percentage by which gross profit has exceeded cost of production. It measures that how well a business can control its costs. Investors also use this ratio to decide whether it is most profitable to invest or not. Higher gross profit means that the company is more efficient (Thukaram, 2007, p.99). Particulars 2013 2012 Gross Profit margin 30.77 26.09 From the above table we can see that the gross profit margin of the company has increased over the years. In 2012 the gross profit margin was 26.09% and in 2013 it has increased to 30.77% which indicates that the company is efficient to earn profit over the cost of production. Net Profit Margin This ratio indicates the amount of sales is remaining after paying all expenses. It is an important ratio which should be considered while making investment. Higher net profit indicates that a company is efficient enough at converting sales into profit. Particulars 2013 2012 Net Profit margin 9.62 7.17 From the above table we can see that the net profit margin of the company has increased over the years. In 2012 it was 7.17% and it has increased to 9.62% in the year 2013. It indicates that the company competent enough to convert the sales into net profit. Return on Capital Employed:- ROCE helps to measure the return of a business earned by capital employed. It measures the profitability and effectiveness of the company to generate revenues over the amount of capital invested. Particulars 2013 2012 Return on Capital Employed 13.09 10.09 From the above table we can see that the ROCE ratio has increased over the years from 10.09 to 13.09. It indicates that the profitability of the company has increased over the years. Return on Equity It determines the amount of net income over the amount of equity shareholders. It shows the profit that a company has earned with compare to total equity on balance sheet. Particulars 2013 2012 Return on Equity 16.13 12.69 From the above table we can see that the return on equity ratio has increased over the years from 12.69 to 16.13. Higher the ratio is better for the company. It should be between 10-12%. But always higher return on equity doesn’t states good financial performance. It can also be a result of high financial leverage which is dangerous for solvency position of a company. Current Ratio It can also be called as working capital ratio. It shows the financial performance of company’s liquidity. The ideal current ratio is 2:1. But for some industries it can be 1.5 ( Mittal,2011,p.53). Particulars 2013 2012 Current Ratio 4.32 2.84 From the above table it can be seen that in the year 2012 the current ratio is 2.84 and in 2013 it has increased to 4.32. It shows that the liquidity position of the company is very well and it has improved over the years. It indicates that the company is able to pay any sudden liquidity crisis. Quick Ratio It is also known as acid test ratio. It can be calculated as (current assets- inventory)/ current liabilities. It defines the short term liquidity capacity of a company (Public.asu, No Date). Particulars 2013 2012 Quick Ratio 1.45 1.01 From the above table it can be seen that the quick ratio of the company has improved over the years. It indicates the company is well capable of paying the short term liquidity crunch. Payable Days It shows the time period in which the company pays off its creditors. It indicates how well the company is paying off its debt. This ratio is important for the suppliers and investors of the company. Particulars 2013 2012 Payable days 111.53 182.50 From the above table we can see that in the year 2012 the company has paid off to the creditors in approx 182 days and it has decreased to 111 days in 2013. It indicates that the efficiency of the company has slightly declined. Receivables Days It shows the number times in which company was able to convert the debtors into cash. It means that the ability of the company to collect the receivables from the debtors quickly. Particulars 2013 2012 Receivables days 105.29 126.96 From the above table we can see that the number of days has decreased over the years. It indicates that company is efficient enough to collect receivables from debtors and convert it into cash in 2013. Inventory Days It indicates that how many times the company is able to convert the inventory into total sales during the financial period. It evaluates the capability of the company in managing its inventory. Higher the number is better for the company (Sinha, 2009, p.133). Particulars 2013 2012 Inventory days 320.39 334.08 From the above table it can be seen that the number of inventory days has reduced over the years. Selling Expenses Ratio Particulars 2013 2012 Selling Expenses ratio 11.92% 9.13% Expenses ratio is calculated to define the relationship between the expenses and the sales. From the above table it can be seen that the ratio has increased over the years. Administrative Expenses Ratio Particulars 2013 2012 Administrative Expenses ratio 4.38% 5.96% From the above table it can be seen that the ratio has decreased over the years. Gearing Ratio Particulars 2013 2012 Gearing Ratio 18.85 20.54 It measures the financial leverage of the company. It shows the degree to which the company’s operations are funded by the owner’s funds versus the borrowed funds (Demonstrating Value.org, No Date). From the above table it can be seen that the gearing ratio has decreased over the years which means that the company is less depending on borrowed funds. Additional factors concerning the future performance of PQ Apart from the above ratios, there are some additional factors that should be considered by Mr. Banks that the company is trying to expand itself in international market. Although the company has good position in domestic market but Mr. Banks should consider the current political legal and socio economic concerns of the Asia markets as the company is going to launch their products in the market. Conclusion From the above study it can be seen that the profitability position of the company has improved over the years as the gross profit margin, net profit margin, return on capital employed and return on equity ahs increased over the years. It indicates that the company is efficient enough to boost its profitability over the years. From the liquidity position of the company it can be said that liquidity of the company has increased over the years as the current ratio and quick ratio has increased over the years. It indicates that the company has a very strong liquidity position and it can pay any sudden liquidity crunches. From the payable days and the receivables days it can be said that although it has decreased over the years but still the company has good payable and receivable days in the year. The efficiency of the company has also decreased over the years in maintaining the inventory and converting the inventory into total sales. The gearing has also decreased over the years which indicate that the company is less depending on the borrowed funds from the creditors in the year 2013. Thus from the above analysis it can be said that the company is profitable enough to invest in the equity and there is huge chance the company will prosper in future also. Apart from this, the company is also thinking about expanding in Asia markets. Thus it can be concluded that it will be profitable for Mr. Banks to convert the loan into equity investment of the company. References Thukaram, R., 2007. Management Accounting. New Delhi: New Age International. Sinha., 2009. Financial Statement Analysis. New Delhi: PHI Learning Pvt Ltd. Mittal, R., 2011. Management Accounting and Financial Management. New Delhi: Vaibhav Printers. Demonstrating Value.org., No Date. Financial Ratio Analysis. [Online]. Available at: http://www.demonstratingvalue.org/resources/financial-ratio-analysis#Liquidity. [Accessed on 4/10/2014]. Public.asu., No Date. Ratio Analysis. [Pdf]. Available at: http://www.public.asu.edu/~bac524/liquidity_ratios.pdf. [Accessed on 4/10/2014]. Bibliography Gallagher, T., 1968. Financial Management; Principles and Practice. USA : Freeload Press. Bose. D., 2010. Fundamentals of Financial Management. New Delhi: PHI Learning Pvt Ltd. Robinson, T., 2012. International Financial Statement Analysis. New Jersey: John Wiley& Sons. Rajasekaran, V., 2012. Accounting for Managers: For VTU. India: Pearson Education India. Sheeba, K., 2011. Financial Management. New Delhi: Dorling Kindersley. Read More