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Financial Management & control - Essay Example

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The company has not been able to earn more from the money of its shareholders. In 2011, it has earned approximately 30% lesser than 2010 from the money invested by its shareholders which resulted in a decline in return on equity. The debtors’ collection rose by 47 days over the previous year which means that in 2011, the company now required 130 days to get the money from its debtors which it did in 83 days in 2010. This not only blocks the money for the company but also makes the company lose on the interest of the money blocked with the debtors. The chance of the debtors going bad also increases if the payment cycle expands which has been proved by bad debts going up by more than 200%. The operating profit of the company has halved from 17% in 2010 to 8.5% in 2011, which implies that even when the company has sold more than the previous year, it has not been able to make profits out of the sales. This can be due to many reasons. The company might have sold at lesser price or the company might have incurred greater selling expenses. ...
The current ratio of the company increased from 1.5 in 2010 to 1.8 in 2011. The increase in the current ratio is a result of the increase in current assets which includes an increase in the debtors’ collection period due to which the debtors are rising, an overdraft bank balance and more than doubling of bad debts inflating the current ratio. The acid test ratio increased from 1.2 in 2010 to 1.5 in 2011. This indicates that the company now has lesser short-term assets to sell in order to cover up its immediate liabilities without selling off its inventories. The company’s ability to pay off its interest expenses has also declined and it is indicated by the fall in the interest cover ratio from 9.6 times in 2010 to 4.34 times in 2011. This is due to the shortage of funds which has been blocked by the debtors, increasing bad debts, bank overdraft balance etc. The gearing ratio describes the level of the company’s capital being funded by the owners’ money versus the money of creditors. Here, it has declined by 3% as the creditors collection period has also slightly decreased. This means that the company is paying off its creditors earlier than it used to do in the previous year. This results in lesser availability to creditors’ funds and more reliability of the business on the owners’ equity. The earnings per share of the company declined from 0.63 in 2010 to 0.29 in 2011. A decline in EPS is the result of a decline in the profitability of the company. EPS measures the allocation of company’s profit to each of its outstanding shares. Since profit has declined, the allocation to each share also declined and hence the EPS. The operating cash flow per share of the company increased from 1.2 in 2010 to 1.5 in 2011 ...Show more


Financial Management & control Contents Part A: Solvent PLC 3 Part B: Mega PLC 6 Question1 6 Question2 8 Question 3 9 Question 4 9 Part C: Brothers Ltd. 10 Question1 10 a) Payback Period 10 b) Accounting Rate of Return 10 c) Net Present Value 11 d) Internal rate of Return 11 Question 2 11 Part D 12 References 15 Part A: Solvent PLC As per the financial ratios of the company, it is observed that the company’s turnover has increased by 5% from 2010 to 2011, but it has not resulted in increase in the profitability…
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