Financial Information - Assignment Example

Question The key activities for the business includes making and selling spreads and butter, cheese and whey and the dairies. These key activities form the main source of revenues for the business. Question 2: From the audit report, it is clear that the financial statements of the company are kept in accordance to the various regulations and this has been prominently captured by the auditors. The challenge, according to the audit report, is that the way certain figures have been provided for in the books is likely to impact on the profitability values. Indeed, reading through the audit report, it is clear that the auditors did not agree with the management with regards to a number of issues such as the how promotional accruals are accounted for and the specification of exceptional items have been done. This however does not means that money is being lost, rather it means that the final value may be too large or smaller than would have been the case if a different approach was employed. Auditors report are important because they help to point out malpractices in business. Sometimes business executives, may present financial statements with rosy figures while in actual sense, a lot of hidden in those figures and this may lead to the collapse in the business in the long term (Kakani 2). Besides, another issue is that auditors report contribute to improved performance of the business in the sense that they point out areas of weaknesses which needs to be addressed. For instance, the auditors can advise on ways of reducing tax burden and therefore improve on profitability. Question 3: Profitability • Return on equity (ROE) ROE= net income / shareholders equity 50,200,000/240,000,000 £0.209 • Gross profit margin = gross profit/ total revenue (sales) 643,000,000/1,391,000,000 0.46 • Net profit margin Net profit/sales 50,200,000/ 1,391,000,000 =0.04 Liquidity • Current ratio =current assets/ current liabilities 806,000,000/262,800,000 =3.07 Asset Management • Inventory (stock) turnover period Sales /inventory 1,391,000,000/219,600,000 6 days • Trade payables’ (creditors’) turnover period [Trade payables/cost of sales]*365 218,300,000/1,040,400,000 0.21*365 =76 days Other • Gearing ratio [Long term debt + short term debt]/ shareholders’ equity 516,600,000/111,800,000 4.62 • Price earnings ratio Market value per share/ earnings per share Market value per share 342,000,000/240,000 £142.5 EPS= 142.5/ [15.4+5.9] =£6.69 Question 4 • Sales [1391-1381.6]/1381.6*100 = 9.4/1381.6*100 =0.68% • Operating Profit [64.3-20.2]/20.2*100 44.1/20.2*100 218% • Share Price 2014 34,200,000/240,000 £142.5 2013 34,100,000/240,000 £142.08 [142.5-142.08]/142.08*100 0.42/142.08*100 0.3% Question 5 Looking at the above ratios, it is important to note a few things that have had an impact on the performance of the company. To begin with, sales grew by 0.68 per cent in the years 2014. This is a small growth in sales and it is an indicator that the company is struggling to make its sales. It may be due to the fact that the current market is mature and there are no opportunities for growth (Moore and Pareek 35). The company should now look for growth opportunities elsewhere as there is a danger that sales may eventually fall. Operating profit in the same years grew by 218% in a period where the sales did not perform well. It can therefore be said that most of revenues contributing to operating profit came from other sources other than sales. It has to be noted that these sources are never permanent and in most cases are a one off (Kakani 76), hence contributing to the fact assertion that the company should look for ways of growing its sales. The gearing ratio of 4.62 shows that the company is highly geared. There are a lot of debts such that for every £1, the company owes £4.62. The problem with this is that a lot of revenues goes to fund repayment of debts rather than grow the business. It is for this reason that the company should start looking for ways of reducing its debt burden. It should not be forgotten that a highly geared venture is always in a risk of collapse should it fall behind the debt repayments (Weil, Schipper and Francis 122) . The company can also look for ways of prolonging its creditor’s turnover period from the current 76 days as a way of reducing its repayments. Even though this is expensive in the long run, it can help boost short term profitability. The current ratio of 3.07 is also advantageous to the firm as it shows that it can meet its short term obligations and is in no way in a danger of failing to meet its obligations. For every liability of £ 1 the company is able to quickly raise £3.07. Question 6 2014 Return on Equity = Net Income /Sales × Sales /Total Assets ×Total Assets/ Total Equity 50,200,000/1,391,000,000*1,391,000,000/806,000,000*806,000,000/111,800,000 0.036089*1.726*7.209 0.4490 44.9% 2013 46,600,000/1,381,600,000*1,381,600,000/689,300,000*689,300,000/111,600,000 0.03373*2.0044*6.1765 0.41758 41.758 Looking at the above analysis, a number of issues which have led to the company’s profitability can be pointed out. Net income has risen slightly. This increase has helped to stabilize the value of equity. Indeed, the value of net income divided by sales shows only a slight increase from the 2013 figures of 0.00235. This difference has helped to keep this indicator stable at around 0.03. Whereas net income grew by£ 3,600,000 the sales grew by £9,400,000 translating to about £0.38 for every pound in sales. A huge increase in total assets was also witnessed in the year 2014 and this helped to add on the profitability of the company and helped to improve the value of the equity. It shows that the company was more prudent in applying it assets leading to an increase in value of the assets in the year 2014. The above working also shows that total equity did not grow as faster to cope with the growth of total assets. Looking at a difference in total equity of £200,000 and that of £116,700,000, it can be deduced that for every growth in £1 in total equity, the total assets grew by approximately £583.5. It has to be noted that the growth of sales has been slow and this shows when one of the values is arrived at by dividing sales by the total assets. Hence, the fall opf the value from 2.0044 in 2013 to 1.726 in the year 2014, shows that the sales in comparative figured dropped in 2014 from the levels of 2013. In actually sense, the total assets grew faster than the growth of sales in the years 2014. Works Cited Kakani, Ramachandran. Financial Accounting For Management. Delhi: Tata McGraw-Hill Education, 2007. Moore, Karl and Niketh Pareek. Marketing: The Basics. London: Taylor & Francis, 2006. Weil, Roman, Katherine Schipper and Jennifer Francis. Financial Accounting: An Introduction to Concepts, Methods and Uses. Washington: Cengage, 2011. Read More