Financial Position of Button Plc - Ignoring the Inconsistency in the Profitability of the Business - Coursework Example

First Part

Following are the ratios calculated for Bradley Plc. For the year ended 31st January 2016.

a)

Return on Capital Employed =

Net Profit after tax/Capital Employed

=

6.25%

Capital Employed

480

(Total Assets - Total Liabilities)

The above ratio indicates that Bradley Plc. had generated high profit from the capital employed. The value of 6.25 percent shows that it has a potential to utilize its capital for generating profits at the year-end. The reasons for high value are effective operations management of the company that utilized variety of resources to grow its business (Bull, 2007).

b)

Gross Profit =

Revenue-COS/Revenue

=

50%

COS

300

Bradley Plc. had potential control over its cost in 2015-2016 that indicates the production department of the company is reliable in controlling the cost of production. It shows that it was able to manage Cost of Sales (COS) to be the half of total revenue. It depicts that the variable cost is extensively managed and controlled by the manufacturing department of the company (Maynard, 2013).

c)

Mark-up =

Gross Profit/COS

=

100%

COS

300

The mark-up ratio of 100 percent reveals that Bradley had managed to generate 100 percent gross profit from the units produced. It represents that the company has potential to set the price of goods to recover the full amount of COS. The economies of scale and regular checks and balances on COS and Gross Profit made it possible for the company .

d)

Net Profit =

Net profit after tax/Net Sales

=

5%

Net sales

600

The net profit margin of Bradley Plc. was low in 2015-2016 due to ineffective control over its operating expenses. The company was failed to control or manage its revenue expenditures in this period. Bradley Plc. requires lowering its administration expenses that reduce the amount of net profit .

e)

Acid Test =

Current Assets-Stocks/Current Liabilities

=

0.83

Current Liabilities

120

The ratio shows that the liquidity position of the company is high due to the high amount of current liabilities. The company did not potentially maintain its liquidity position as indicated by the ratio (0.83 to 1). Bradley Plc. requires either paying off its current liabilities or increasing its current assets immediately to improve its liquidity position (Warren et al., 2015).

f)

Fixed Asset Turnover =

Net Sales/Fixed Assets

=

1.75

Fixed Assets

343

The fixed asset turnover of Bradley Plc. was high in 2015-2016. It represents that the company is potentially generating high revenues by utilizing its fixed assets. Bradley has potential to grow in future as it is efficiently utilizing potential assets to obtain high return on this investment .

g)

Debtor Collection Period =

Accounts Receivables/Credit Sales*No. of Days

=

60.83

Credit sales

600

No. of Days

365

The average debt collection period of Bradley Plc. in 2015-2016 was good. However, it depends on the credit term allowed by the company to the customers to pay. If the collection period is less than the days allowed in credit term, then the management is efficient in controlling and maintaining its debt collection and vice versa .

h)

Capital Gearing =

Stock Holders' Equity/Fixed Interest Funds

=

6.20

Fixed Interest Funds

50

The low Gearing ratio of 6.20 indicates that the company was able to maintain strong financial position. The reason for low gearing is that the company did not borrow the amount more than its capital. The ratio also indicates that the company has high cash flows to meet its long-term liabilities .

Second Part

Preliminary Report on Button Plc.

The report is prepared to evaluate the financial position of Button Plc. that is selected for acquisition by Advance Plc. It contains the interpretation of various ratios calculated for the year 2015 and 2014 to determine the actual performance, efficiency, and capital management of Button Plc. The report will highlight some important elements that will be considered significant in decision-making. Also, limitations are also included in this report to provide information on the facts that affect the decision making for acquiring Button Plc.

Performance

The performance of Button Plc. is not good in generating high profits from the available resources. The reason for the decline in sales and increasing cost may be due to the external factors such as inflation in the economy. The return of capital employed decreased in 2015 as compared to 2014 that indicates Button Plc. was weak in obtaining high profit from the available resources (Bull, 2007). The reasons for the decline were decreasing operating profit and earnings per share of the company. The decline of gross profit margin by 5.2 in 2014-2015 shows that the company is inefficient in controlling its cost of sales. Button Plc. did not have potential control over its direct and indirect costs. Also, it had also put a direct effect on the mark-up that decreased to the same extent. The operating profit margin of Button Plc. was declined by 3.6 percent in the period 2014-2015. The overall performance of Button Plc. is not good and the declining figures of different components of financial statements predict that it may face difficulties to grow in future. The short-term profitability has significance for a company that should be maintained and managed to bring a positive change in the annual financial statements. Effective management can improve the financial statements of the company that is the main source for analysing the current performance of a company. In this case, Button Plc. is not showing a strong financial position as indicated by the ratio calculated for 2014-2015. The main reason for unexpected performance is the lack of attention of management towards sales, cost, and operating expenses of the company (Griffin & Media, 2016).

Efficiency

The efficiency of the management of Button Plc. was shown in the year 2015 as it keeps an eye on the leverage and solvency position of the company. The current assets of the company were not increased or decreased in the period 2014-2015 that shows Button Plc. had efficiently maintained its leverage position by increasing assets or paying off current liabilities. Also, there is no change in the ratio of acid test ratio that represents Button Plc. maintained consistency and stability in controlling its leverage position (Walsh, 2008). It also ensures the efficiency of management of Button Plc. The inventory turnover of Button Plc. is also maintained stable by the operation management in this period. It shows that the company has a potential to convert its finished goods into sales efficiently. The slight decrease in fixed asset turnover shows that the company failed to generate high revenues in 2015 as compared to 2014 (Baker & Powell, 2009). However, debtor collection period became weak in 2015 as the company did not pay attention to recover the amount of debt from its customers. The increasing number of days of debtor collection period is an alarming situation for the management to recover the amount from trade debtors quickly. On the other hand, the efficiency of management was shown in the rapid payment to creditors. It indicates the management is interested in strengthening the leverage position of the company. In short, Button Plc. was able to sustain their position in the stock market by utilizing its assets and paying off its current and non-current liabilities (Mishkin & Eakins, 2015).

Capital Management

Capital management of a company indicates it potential to manage stockholder’s equity and provide high returns to shareholders. The capital management of Button Plc. is effective in declaring a fixed amount of dividend to its shareholders depending on its current position of the company. However, the earnings per share of Button Plc. declined in 2015 by 20.96 due to the declining operating profit of the company. It shows that the company failed to utilize its capital for obtaining potential returns. The price to earnings ratio is increased by 4.1 that indicate the investors are ready to invest in this company. The reason for the increasing investment may be due to the estimated growth of a company in the long run (Walsh, 2008). Button Plc. is effective in maintaining its position in the capital market and committed to pay a dividend to the shareholders even in a critical situation.

Limitations

There are certain limitations that do not support the suggestion to acquire Button Plc. Firstly; the company cannot provide short-term profits as the performance seems to be decreasing rapidly. Another problem is its efficiency to recover the debts from the customers that represent the company does not have potential cash inflows that can be utilized to generate high revenues. Moreover, the earning per share of Button Plc. is declining extensively that is an alarming situation for investors. Although it has a potential to maintain its leverage and solvency position, Button Plc. has not controlled over its fixed and variable costs. The situation of Button Plc. is not good for the investors who are willing to get potential returns in a short run.

Recommendation

The financial position of Button Plc. is beneficial to great extent ignoring the inconsistency in the profitability of business. Utilizing available resources to generate high revenue can increase the performance of Button Plc. The costs and expenses can be controlled by the effective management techniques and strategies. The company has strong leverage position in the market, and the investors are seeking growth in long run. In fact, Button Plc. is expected to provide returns in the long run due to its strong position in the capital market. Advance Plc. should purchase Button Plc. as it will prove to be profitable in long run. However, it is essential to create an effective management team to control the operations of business.