Financial Management - Kingfisher Plc - Assignment Example

? Financial Management Table of Contents Table of Contents 2 Introduction 3 Comparative Analysis 3 Ratio Analysis 3 Liquidity Ratio 4 Current Ratio 5Quick Ratio 5 Profitability Ratios 6 Gross Profit Ratio 6 Operating Profit Ratio 7 Net Profit Ratio 8 Solvency Ratios 9 Debt Equity Ratio 9 Debt to Total Assets Ratio 10 Debt Ratio 11 Efficiency ratios 12 Inventory Turnover Ratio 12 Asset Turnover Ratio 13 Strengths and Weaknesses 14 Reference list 15 Introduction Comparative Analysis The analysis of the financial performance of any organization is done by the evaluation of essential accounting information by means of various financial tools. The financial performance analysis helps in evaluation of the relationship in between different components present in the financial statement for obtaining a transparent and accurate understanding related to the position and performance of an organization. The analysis of the data present in the financial statements helps the top level management of the organization to take a correct decision. The decisions taken after proper analysis of the financial statements are appropriate having reduced chances of flaws. The financial statement is known as the raw form of data which cannot be utilized by anyone without proper knowledge. In such case implementation of different types of analysis tools bring accuracy in the analysis process. Ratio analysis is one such important analysis tool which helps in the analysis of the financial performance of an organization. Ratio Analysis Any sustainable business needs effective financial planning. Ratio Analysis is an essential management tool which helps in improving the financial performance of an organization over time along with providing key indicators associated with the organizational performance (Siddiqui, 2006). The managers use ratio analysis for assessing the strengths and weaknesses of the organization based upon which new strategies can be evaluated. Ratio analysis is used for measuring the financial results of an organization for making judgements related to the management effectiveness of the organization. Functions of ratio analysis: The financial ratios provide benchmark for performing the comparative analysis. When the management of the company assesses its financial performance, the financial ratios act as an indicator indicating the places where the company requires rectification for achieving competitive advantage. Moreover when the ratios are far above or below the industry standards then it indicate that the company needs to change its existing strategies for bringing their ratio values close to the industry average. There are mainly four types of ratios: 1) Liquidity ratio 2) Profitability Ratio 3) Solvency Ratio 4) Efficiency ratio Liquidity Ratio The liquidity ratios help in finding out whether a company is able in repaying its short term debt in a proper manner. This ratio is very significant because if any company fails in meeting its short term liabilities then it may even lead to bankruptcy (Gallagher and Andrew, 2007; Hitchner and Mard, 2011). High liquidity ratios signify that the organization is performing in an efficient manner for meeting the short term liabilities. In the context of liquidity ratio, two ratios of Kingfisher Plc have been calculated. The first is the current ratio and the second is the quick ratio. Current Ratio Current Ratio is measured as: Current Ratio = Current Assets/ Current liabilities Calculation of Current ratio As on 1.1.2012 As on 1.1.2013 Current assets 2989 3068 Current liabilities 3050 2870 Current Ratio 0.98 1.07 The current ratio will help in finding out whether Kingfisher Plc is performing in an appropriate manner in order to meet the short term liabilities or not (Kuppapally, 2008). The current ratio of the company has increased from the year 2012 to 2013. This implies that the inventory value of the company has increased significantly. Kingfisher Plc is utilising the current assets in efficient manner for meeting the current liabilities. Quick Ratio Calculation of Quick ratio As on 1.1.2012 As on 1.1.2013 Current assets 2989 3068 Inventories 1844 2083 Current assets less inventories 1145 985 Current Liabilities 3050 2870 Quick Ratio 0.38 0.34 Quick ratio helps in determining that how much efficiently the company is utilising its cash and other assets readily convertible into cash (excepting the inventories) for meeting the current liabilities. It can be seen that the Quick ratio of the company has decreased within a year which implies that the company is not utilising the quick assets, after excluding the inventory value, in proper manner for covering up the short term obligations of the company. The quick ratio has decreased because of the decrease in the cash or the accounts receivable. Kingfisher Plc should focus on increasing its cash or accounts receivable value for increasing the quick ratio. Profitability Ratios The profitability ratio helps in determining the ability of any organization to earn profit. This ratio is highly significant as it helps in evaluating the financial performance of any organization in terms of its profit earning capability. It is the business metrics used for assessing the business’s ability in generating earnings after meeting all the expenses and various other relevant costs. Gross Profit Ratio Gross Profit Ratio can be measured as: Gross Profit Ratio= (Gross Profit/Sales)*100 Gross Profit ratio As on 1.1.2012 As on 1.1.2013 Gross Profit 4083 3955 Sales 10831 10573 Gross Profit ratio 37.70 37.41 Gross profit ratio shows how much amount of cash is left with Kingfisher Plc after paying off the variable costs or the costs related to production of its products/services. The aforementioned graph shows that the gross profit ratio of Kingfisher Plc has decreased slightly within one year. This implies that the company should focus on increasing its sales value for increasing the profit earnings. Kingfisher Plc should focus on reducing the variable cost or cost of goods sold for increasing the gross profit margin. Operating Profit Ratio Operating Profit Ratio As on 1.1.2012 As on 1.1.2013 Operating Profit 724 659 Sales 10831 10573 Operating Profit Ratio 6.68 6.23 The operating profit ratio will provide important information related to the profitability of Kingfisher Plc specifically in terms of its cost control. It will help in displaying that how much cash is left with the company after all the expenses has been met. The operating profit ratio of the company has decreased in the year 2013 as compared to the year 2012. This implies that the company should focus on increasing the operating income of the company before it starts declining significantly. It should adapt new strategies of cost control in order to increase the sales. Net Profit Ratio The net profit ratio is calculated as: Net profit ratio= (Net Profit/ Sales)*100 Net Profit Ratio As on 1.1.2012 As on 1.1.2013 Net Profit 640 564 Sales 10831 10573 Net Profit ratio 5.91 5.33 The net profit ratio will help in displaying the after tax profit of Kingfisher Plc. The net profit ratio has helped in finding out the amount of sales that have been converted into profit after the deducting out all the expenses. The net profit ratio of the Kingfisher Plc has decreased from the year 2012 to 2013. Thus the company should keep its primary focus on increasing the sales volume for earning a significant amount of profit. Kingfisher Plc should efficiently increase the revenue figure for generating high net profit figure. Solvency Ratios The solvency ratios help in assessing the ability of a company in meeting its long term obligations (Schmidgall, Hayes and Ninemeier, 2003). The solvency ratio measures that how quickly can an organization satisfy its long term creditors and investors. Debt Equity Ratio Debt to Equity ratio As on 1.1.2012 As on 1.1.2013 Debt 856 871 Equity 5727 6126 Debt to Equity Ratio 0.15 0.14 The Debt Equity Ratio helps in assessing the total liabilities of Kingfisher Plc as compared to the shareholder’s equity (Gibson, 2012). It reflects the leverage position of the company. From the aforementioned table it can be seen that the Debt-Equity ratio of kingfisher Plc has decreased in the year 2013 as compared to the previous year. This implies that the company has increased its reliance on the equity financing for funding all the requirements. Thus the company is performing in an impressive manner by decreasing its dependence on the debt financing. It has helped Kingfisher Plc in decreasing the risk involvement due to high debt. Debt to Total Assets Ratio Debt to Total Assets Ratio As on 1.1.2012 As on 1.1.2013 Debt 856 871 Total Assets 9633 9897 Debt to Total Assets 0.089 0.088 The debt to Total asset Ratio will act as an indicator of the financial leverage of kingfisher Plc. It determines what portion of the company’s assets is financed by the external sources of financing. In the aforementioned table and graph it can be seen that the debt to total asset ratio of Kingfisher Plc has decreased in the year 2013 as compared to 2012. This implies that the company has reduced its reliance on debt for financing its assets. Thus the company is performing well and reducing its dependence on the debt financing thereby decreasing the risk involvement. Debt Ratio Debt Ratio As on 1.1.2012 As on 1.1.2013 Total Liabilities 3906 3741 Total Assets 9633 9897 Debt ratio 0.41 0.38 The debt ratio is a financial ratio which has helped in assessing the risk involved in terms of the debt position of Kingfisher Plc. The ratio has decreased significantly within a year which implies that the company is improving its internal sources of financing in order to reduce the dependence on the short term and long term liabilities Efficiency ratios The efficiency ratios help in analyzing that how well an organization is utilizing the assets as well as the liabilities. The efficiency ratios are important as they help in identifying that how can a business be managed in better way. Generally the improvements in these ratios turn into the improvement of profitability for the organization. In this context, two types of efficiency ratios have been calculated for measuring the efficiency of Kingfisher Plc. Inventory Turnover Ratio Inventory Turnover ratio= Sales/ Inventory Inventory Turnover Ratio As on 1.1.2012 As on 1.1.2013 Sales 10831 10573 Inventory 1844 2083 Inventory turnover ratio 5.87 5.08 The inventory turnover ratio helps in determining exactly how many times Kingfisher Plc’s inventory has been sold or replaced within a particular period. The inventory turnover ratio of Kingfisher Plc has decreased slightly within one year. Thus the company needs to increase the utilization of its inventory in order to increase the sales. Asset Turnover Ratio Asset Turnover ratio is calculates as below: Asset Turnover ratio= Sales/ Total Assets Asset Turnover Ratio As on 1.1.2012 As on 1.1.2013 Sales 10831 10573 Assets 9633 9897 Asset Turnover ratio 1.12 1.07 The Asset Turnover Ratio has helped in measuring the efficiency of Kingfisher plc in using the assets for increasing the sales value. High asset turnover ratio indicates that the company is performing impressively for generating high sales. In the aforementioned table it can be seen that the asset turnover ratio of Kingfisher plc has decreased in the year 2013 as compared to 2012. This implies that the company should utilise the assets more efficiently for increasing the revenue. Strengths and Weaknesses Strengths Kingfisher Plc is efficiently utilising its current assets by increasing the inventory value for meeting the short term liabilities. The company is performing in an impressive manner and improving its short term debt condition. The biggest strength of the company is that the debt condition has improved significantly within one year and is expected to improve further in future. High debt involves higher risk for an organization leading to bankruptcy. But Kingfisher Plc depends on internal sources of financing for funding the requirements. This states that the company has strengthened its position in terms of internal resources. Weaknesses The financial ratios state that the profit of Kingfisher Plc has decreased in the year 2013. This is a reason of concern for the company. Reduced profitability indicated decreased financial performance of the company in the context of cost control and generation of sales. It should increase the sales for increasing the profitability. The efficiency ratios of Kingfisher Plc state that the revenue of the company has decreased in the year 2013. This states that the company should utilise the inventories and assets effectively for increasing the sales figure in the future. This would help in increasing the profitability of the company as well. The profitability ratios state that the company does not possess an effective cost structure. Kingfisher Plc should implement an effective cost structure for increasing the revenue. Reference list Gallagher, T.J. and Andrew, J.D., 2007. Financial management: principles and practice. New York: Freeload Press, Inc. Gibson, C. H., 2012. Financial reporting and analysis. Connecticut: Cengage Learning. Hitchner, J. R. and Mard, M. J., 2011. Financial valuation workbook: Step-by-step exercises and tests to help you master financial valuation. New Jersey: John Wiley & Sons. Kuppapally, J.J., 2008. Accounting for managers. New Delhi: PHI Learning Pvt. Ltd.  Schmidgall, R.S., Hayes, D.K. and Ninemeier, J.D., 2003. Restaurant financial basics. New Jersey: John Wiley & Sons. Siddiqui, S.A., 2006. Managerial economics and financial analysis. New Delhi: New Age International. Read More