Financial Resource Management - Essay Example

Financial resource management Summary of financials Company PB Petroleum PLC current year previous year current year previous year fixed assets 44500m 38 000m stocks 5000m 6000m sales 32400m 30820m debtors 9000m 6000m cost of sales 24300m 23115m cash 4000m 3000m operating profit 8 l00m 7705m current liabilities 15000m 14000m interest 276m 180m debentures 2300m tax provision 2430 2311m capital and reserves 6000m 4500m net profit 5394m 5214m issued capital 36200m 30500m preference shares 600m 600m dividend paid 2440m dividend proposed 2534 Company 2: NoFat Ltd current year previous year current year previous year fixed assets 165000 180000 sales 412500 358696 stocks 730000 384000 cost of sales 268125 233152 debtors 150000 90000 cash 15000 16000 operating profit 144375 125543 current liabilities 350000 200 000. debentures 2010 150000 150000 debentures 2030 250 000 capital and reserves 20000 100000 issued capital 90000 90000 preference shares 200000 130000 dividend paid 1800 dividend proposed 2700 By analyzing the above financials it is evidenced that the PB Petroleum as its size is more profitable against the new born company, No Fat Ltd. the profits of petroleum is very much higher and the dividend yield is excellent from the investing point of view. The main point that keeps the petroleum from the other id the business of the company, as PB has over 150 subsidiaries and is in business from a long period. We recommend MR Raj Moosani to invest his money in PB Petroleum for higher earnings with a lower risk. Part B In this part we are going to discuss the principle methods of analyzing a company. These principle methods includes three methods namely 1. Financial ratio analysis 2. SWOT analysis 3. PESTLE analysis Financial Ratios Financial ratios are helpful in finding the performance of the company immediately. It uses key figures from the financial statements and analyses by comparing the results of the ratios to the ratios of a successful business corporation. These ratios also help in identifying the areas experiencing problems and thus can be helpful in eliminating such factors which may be a problem for the firm. Categories of Financial Ratios The Financial ratios are divided into various categories, each identifying a key perspective of the business of the company. Liquidity ratios performance/activity ratios Activity ratios how well the facilities at the disposal of the concern are being used. The ratio is usually calculated on the basis of cost of sales. Gearing/Investment ratios These are of two types. Capital based ratios and Income based ratios. Capital based ratios establish the relationship between the capital provided by proprietor and the other sources of funds whereas income based ratios establishes the relationship between the total revenue of the company its financial charges. Profitability ratios It is used as a performance meter of the company. Models for predicting financial distress There are two kinds of models in practice in the financial world. Univariate models of distress predictions. Multivariate models of distress predictions. Univariate model A univariate model makes use of a single ratio for predicting financial distress of any firm or company. The basis of predicting whether a firm is experiencing financial distress or not depends upon the following element. The average ratio of the non distressed firms will differ from the average of the same ratio of distressed firms. The difference shall be used for predicting financial distress of the firm. Multivariate model Multivariate model uses various ratios at a time to work out a certain figure on which the prediction is based upon. Most multivariate models uses a specific formula which gives out a figure which tells us whether the firm or company is in non distress zone, or distressed zone. The analysis of the figure on which the decision is made varies with the size of the company and the business which is carried out. Likewise univariate models of predicting financial distress, multivariate models chooses a point of score which is then compared with the score of the company calculated on the basis of a formula. Scores above the point are considered indicating a financially safe company while the score falling below the point is considered indicating a financially distressed company. An American academic, Altman, in 1968 worked out the first multivariate model which is also known as Altman's Z score. The Z score is calculated by the following formula: Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where A = Current assets - current liabilities Total Assets B = Retained earnings Total assets C = Profit before interest and taxation Total Assets D = Market value of preferred and ordinary shares Book value of total liabilities E = Sales Total assets The score calculated through the formula is known as Altman's Z score. According to his theory, the cut off point is 1.8, if the score of a company is above 2.99; it is predicted to be financially safe. If it is within 1.8 and 2.99 the company may or may not suffer from bankruptcy. If it falls below 1.8, the company is likely to suffer from financial distress and the lower it falls the higher are the changes of bankruptcy of the company. Usefulness of ratio analysis: - The importance of accounting ratio, that is, relationship worked out among various accounting data which are mutually independent and which influences each in a significant manner. - Figures in accounts are often only meaningful when considered in relation to other figures. - Enables us to compare businesses of different size. - Enables us to gain a vision of the company's trading pattern. - Comparison with published industrial averages. - The substitution of a small set of ratios to replace the complexity of the detailed financial statements Limitations of financial ratios: - Ratio selection - Accounting estimation - Unavailable data - Unsynchronized data - Non-standardized accounting - Negative numbers and small divisors SWOT analysis SWOT analysis is used for strategic analysis which determines the strength, weakness, opportunities and threats to a company or project The purpose of the SWOT analysis is to analysis the external and internal factors that influence the company policies and performance. The usefulness of SWOT analysis is that it reveals the company's ability to move on. Pest analysis: Pest analysis is used by analysis for the analysis of the macro environmental factors. It includes Political Economic Social Technological factors The pest analysis provides the information about the environment in which the company is doing business. References MC.Shukla, TS.Grewal. Advanced Accounts: financial ratios: New Delhi, 1995 Read More