Managing and Controlling Finances

TASK

PORTFOLIO 1

(a) Calculation of different Financial Ratios for two years (2017 – 2018):

1. Current ratio = Current assets / Current liabilities

2. Quick ratio = Quick assets / Current liabilities

4. Gross profit margin = Gross profit / Net sales x 100

5. Gearing ratio = Total Debt / Equity

6. Price earning ratio = Market Price Per Share / Earning Per Share

8. Return on capital employed = Operating profit (EBIT) / Capital employed *100

Working Note:

Capital employed = Total assets – Current liabilities

9. Average inventory turn over period = Average stock / Cost of goods sold * 365 days

10. Dividend payout ratio = Total debts / total equities

(b) Evaluation of performance, financial position and investment potential.

1. Current ratio

Interpretation: Current ratio clearly reflects a corporation's short-term liquidation status. Generally current ratio 2 or exceeding 2 is considered as most appropriate. This is most significant proportion between current assets and short-term liabilities or current liabilities over a specified time-period. RBG Plc and GSK Plc stated current ratio of 0.6 and 0.82 in year 2017, and 0.75 and 0.85 in year 2018 (About Glaxo Smith Kline plc, 2019). RBG has reported an increase in current ratio and also much better than other company GSK. This shows RBG is effectively more capable to repay all its current liabilities as compare to GSK.

3. Net Profit Margin Ratio

Interpretation: This ratio indicates how efficiently company is satisfy net profitability criteria. It clearly states a corporation's net profitability status during particular financial period. In 2017 net profit margin of companies RBG Plc and GSK Plc were respectively 53.61 percent and 5.07 percent while in year 2018 this level have been changed to 17.15 percent and 11.75 percent respectively (About Reckitt Benckiser Group plc, 2019). Here higher net profit ratio in comparison is of RBG Plc but there is also a decrease in net profit. While GSK Plc's ratio has been shown a upward trend.

4. Gross Profit margin ratio

Interpretation: This is more specifically shows company's profit generation capacity through their core trade operations. Here in gross profitability ratio GSK's ratio are more better as in comparison to RBG. In year 2018, GP ratio of RBG and GSK are 60.61 percent and 66.67 percent whereas in 2017, GP ratio of respective corporation are 59.68 percent and 66.74 percent. In both corporations, GP ratio has been increased but GSK's GP ratio is higher then another company which shows that company has more capability to generate gross profit.

5. Gearing Ratio

Interpretation: This ratio shows how effectively company is leveraged and effectiveness of company's capital structure. It relates debts level of company with equity employed (Gitman, Juchau and Flanagan, 2015). In RBG and GSK plc gearing ratios are 1.74 and nil (– 803.13) in year 2017, here negative gearing ratio represents excessive debts in organisation. While in 2018, Gearing ratios in year 2018, are 1.55 and 12.32 respectively in both corporations. GSK has improved their gearing ratio in 2018 so company comparatively has more improved leveraged position.

6. P/E Ratio

Interpretation: In 2017 companies RBG and GSK have PE ratio of 815.77 and 4317.89 respectively, whereas in year 2018, respective companies PE ratio are 2031.36 and 2000.27 respectively. RBG has improved their PE ratio in 2018 which is also higher than PE ratio of GSK. A lower figure of PE Ratio is indicator that share of corporation are undervalued and having lower earning growth. Thus RBG's share are overvalued and indicating earning growth in shares.

7. Earning Per share:

Interpretation: Increased earnings per share is almost always preferable than just a weaker ratio because that implies the corporation is more sustainable as well as the company has much more income to distribute it to its stakeholders. RBG and GSK have EPS in year 2017 amounting 8.38 and 0.31 while in 2018, EPS of respective companies are 2.93 and 0.74 respectively. This points out that RBG is providing more earning on its share comparatively, however there is decline in EPS but company is more efficient.

8. Return on capital Employed

Interpretation: This percentage proportion shows how much company can provide return on invested fund (Lee and Isa, 2015). In this ratio comparison, GSK with higher ratio is more capable to generate returns on employed funds while RBG's capital employed has been improved over period 2017-2018. Also there is a decline in ROCE of GSK but overall analysis suggest that in comparison company is more profitable.

9. Average inventories turn over period

Interpretation: It demonstrates that by keeping non-saleable stock, the organization does not over-spend by purchasing too much inventory and wasting resources. It also demonstrates the company's ability to successfully market its stock. RBG with lower ratio is more efficacious in converting stocks into sales. In 2018, RBG and GSK have reported Inventories-turnover of 94 days and 196 days respectively. While in year 2017 in respective organisations are 93.86 days and 195 days.

10. Dividend payout ratio

Interpretation: This is ratio which shows how much dividend company is paying on each of its share. In 2017, RBG has reported dividend payout ratio of 0.18 which has been increased to 0.55 in year 2018. While in other company GSK, dividend payout ratio in year 2018 is 1.08 and in year 2017 is 2.55, there is decline in payout but comparatively company is paying more dividend to its shareholders.

(c) Recommendation in order to improve the poorly performing business.

In the end of above calculation of different significant ratios it has been identified that the overall financial stability and efficiency of GSK is weak as compared to RGB. The analysis shows that Reckitt Benckiser Group plc have better performance of net profit ratio, current and quick ratio are better as well as the earning per share and ROCE are also higher (Osterhoff and Kaserer, 2016). It is also observed that after Brexit deal in 2018 there have been decrease on the financial strength of RGB but the overall financial status, solvency and liquidity are far better than other company. This is because of higher sales and significant control on additional expenses. There are several measures that can be followed by the management to improve the overall capital base of the GSK. Such as:

• In terms of raising cash flow rates, GSK directors can pay careful attention on increasing financial assets, which will facilitate short-term business activity to be carried out productively and reach the desired outcome in much less time.
• Through useful, efficient strategies and tactics like increasing sales and reducing the costs that enhance overall income per unit.
• The average inventory period of the organization is quite high so it is necessary for managers to find ways to cut the time length. Directors should create new strategies such as setting suitable re order level, regular stock audit etc. to improve their financial results in a year (Van Essen, Otten and Carberry, 2015).

It is advised that RBG company monitor the practices which are increasing at the current amount of profit and raise it in order to maintain market penetration in specific business. In terms of improving their profits, the company must compete throughout the growing market. In general, the liquidity condition needs to be controlled and long-term measures should be taken for meeting the short-term debts requirements. It is primarily improvement in the context of the ROCE so that better step must be taken for equal distribution.

Also Read:- Stock Market Behaviour in the Short-Term vs Long-Term

(d) Limitation of financial ratios.

Ratio analysis is an useful technique, particularly for an external credit analyst lender or stock analyst in order to make favourable decision (Xiang and Worthington, 2015). It mainly show the scale of a company's financial consequences and condition from the annual financial reports. Nonetheless, a variety of ratio analysis drawbacks are recognized which are discussed below:

• Historical Information: The evidence used in the study were based on the findings from the history that the organization reports. Ratio analyses do not accurately reflect potential business performance.
• Changes in accounting policies: The financial statements can have a major impact if the organization has modified its financial policies and practices. All the changes are basically recorded in the notes section of financial statement. In this situation, the major financial parameters used in the ratios study will be changed as well as the financial results obtained after the adjustment will not be equivalent to those reported before the adjustment. Until the end of the fiscal current period, adjustments in the actual accounting reports are made in all companies and no clear accurate informations are needed for investors on these figures.
• Manipulation of financial statements: The information in balance sheet can be manipulated by the person preparing reports in order to make better outcome. Therefore, the ratio calculation can not properly portray a company's real nature, since a basic analysis does not detect a false representation of facts (Throsby, 2016).
• Aggregations: It is observed that the information in financial statements are being aggregated in the past to make calculation easy for Audit. Thus, the ratio analysis do not include the specific information within whole trend period which can impact the results.
• Point in time: It is observed that ratio take information form balance sheet which is prepared at the last of the reporting year. In case if there are an unseen decline or increase in the balance of the last time then the results are going to be different which impact the overall analysis (Uchide and Imanishi, 2016).

PORTFOLIO 2

(a). Calculation of financial ratios for two years (2017 – 2018):

It is observed that to make a better and worthy investment manager uses various kind of investment appraisal techniques so that higher return are received (Alkaraan, 2015). These methods are NPV, Payback period which consider accounting rate of return in order to determine the most suitable funding option. In the present report, Harris Pvt Ltd. Is planning to buy a new machine in order make best possible outcome that support to grow overall profitability. Company have two different option for investment, thus manager uses different techniques to determine the most appropriate.

Provided information:

• Initial investment = 110 (For both the projects)
• Salvage value = Project A (0), Project B (8)

Payback Period:

Formula: Completed years + [(Initial investment – CCA of completed year) / Cash inflow of next year]

Working note:

Pay back period for Project A = 2 + (110 – 90) /45

= 2 + (20 / 45)

= 2 + 0.44

= 2.44

Pay back period for Project B = 4 + (110 – 105) / 65

= 4 + (5 / 65)

= 4 + 0.07

= 4.07

In the above calculation, it has been determined that the payback time of machine A is less than machine B, so Harris Pvt Ltd must choose option A for future use and stability.

Net Present value:

Formula: Discounted cash inflow – Initial investment

Working note:

NPV for Project A = 147.31 – 110

= 37.31

NPV for project B = 120.92 – 110

= 10.92

From the above computation it is determined that Machine B have lower NPV in comparison to option A which means that company must select the higher NPV machine to make profitable results.

From above computation, it is observed that ARR for Machine A is slightly higher than other machine and it would more advantageous to Harris Pvt Ltd.

Recommendation: It have been recommended that respective company must invest to purchase machine A as it will be a better option resulting in higher profitable outcome in specific time period. The total investment would be recovered in 2.44 year with 36.4% ARR and the net present value of machine A is 37.32 which is higher than other option.

(b) Limitation of using investment appraisal technique.

There have been various types of methods applicable to analyse the usefulness of every proposal or project by an organization (Yarram and Dollery, 2015). There are some major disadvantage of these techniques which are elaborated underneath:

• The time-value of money is among the major drawbacks of this technique. Projects obtained prematurely in comparison with subsequent cash flow obtained by the end of years have value. There are two programs of the same time offer off span, but it has been found that one plan produces additional cash flows in the preceding year.
• This comprises of various applications depending on the cost of estimation and analysis, which decreases cash flow. Depending on theories, the work is performed on premises, which challenge consequences and use this method to make successful decisions.
• This approach is not implemented in conjunction with the circumstance where expenditure into a specific project is needed and the results of business operations are at greater risk (Harris, 2017).

CONCLUSION

In the conclusion it is founded that the process of managing and controlling different kind of management and financing activity within an organisation is known as managerial finance. There are different type of ratio which are analysed for determining the actual profitability of company in an accounting year. Investment appraisal techniques are very much effective in identifying the most beneficial proposal that give higher results. There are certain limitation of ratio analysis that must be consider by investor while obtaining the actual financial status of company. Similarly each investment technique have some disadvantage and due to which results can be negative in many situation.

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