7BUS2041 Financial Data Assignment Sample
Section1:Introducton
Gentry Electronics’ performance, according to the company’s CEO, Erica Harding, has caused her concern. This is true even though the company’s sales have risen regularly over the last decade, according to Harding. Gentry Electronics is a maker of electrical components based in the United Kingdom. This has resulted in the call for a meeting of the company’s top executives, during which the financial performance of the organisation will be evaluated. At various points throughout conference, Erica observes and notes the following observations, which she subsequently discusses with the rest of the group (Lakhtionova, 2021)
Section 2
Is there justification for Erica’s concerns?
As a consequence of the discontinuation of out-of-date items in each of the previous three years, we have had to write down a significant amount of inventory each of those years. As a direct consequence of this, the cost of inventory storage has grown significantly as a direct effect of the current circumstances. Due to the rising diversity of our goods, we will need four more warehouses to satisfy the demand. It was less than 20 percent of our total assets when we first began five years ago, and it is now more than 50 percent (Khusnah,2020). With a whopping 35 percent of the world’s population, the nation has become unfathomably large. Contrary to common opinion, “stockouts,” as measured by customer complaints that the desired product is not available, have increased by 40% over the preceding three years, despite the fact that all of this inventory is accessible for purchase.
Problems
On top of that, it seems as if we are always under pressure to lower the amount of items that we already have in plenty.” “We need the expertise of one of these recent finance graduates in order to assist us in addressing this situation. Nothing else matters to me other than finding a solution that would conceal our financial difficulties and prevent the bank from demanding repayment of its loans from us. In other words, even if we’re on the edge of losing, I’m not going to even consider declaring a loss. In the event that we fail to fulfil our duties, the board of directors and investors will be very disappointed in us. As our company grows, we must take steps to ensure that our clients’ financial well-being is never a subject of concern for them.
Implications
Under certain circumstances, it is feasible for a firm in which the Group has at least a 20 percent ownership to be acquired by a different group. These criteria include but are not limited to: Generally speaking, a successful organisation is one that generates yearly revenues in excess of €20 million, has total assets in excess of €20 million, and has debt in excess of €5 million.
The fact that they operate individually or collectively makes no difference; non-consolidated firms have no influence on the overall performance of the organisation.
Potential causes of changing ratios
In the case of consolidated subsidiaries, they are those that are managed by the parent company either directly or indirectly. At the time of the finding, a business is considered to be under control of a group if that group has more than 50 percent of the voting rights in the corporation. Another possibility is that a group of shareholders might take over the management of a company via the execution of shareholder agreements, which are legally binding.
All subsidiaries have been amalgamated into the Group as of the date on which control has been transferred to the Group’s control. Control over the company has been terminated, and as a consequence, they are no longer included in the consolidated financial statements as of the date of loss of control over the company. (Migliaccio, 2020)
Section 3
Remedies
Companies over which the group has significant influence but not control are accounted for using this method. The group’s ownership share in the business usually represents between 20 percent and 50 percent of the company’s voting rights. It is not applicable to organisations that are in compliance with International Financial Reporting Standards when using the equity approach of consolidation (IFRS 11).
Only euros are used for the publication of the financial reports for the Faurecia group; no other currencies are accessible. Unless otherwise stated, all statistics are presented in millions of euros, unless otherwise stated, unless otherwise stated. Because these data have been rounded to one millionth of a percent, it is possible that there will be tiny differences between the stated total and the sum of the rounded values in this calculation. The ratios and variances that are shown are computed using precise numbers rather than rounded quantities, which makes intuitive sense in this context.
An alternative approach will be utilised to discover a big number of indicators that are statistically significant in their relationship with one another, and then a small number of indicators will be selected for this research using grey connection analysis. Example: This technique generates signals that are more theoretically sound while simultaneously reducing the time constraints associated with data collection and the risk of deceptive distribution types being formed as a result of the data collection (Ichsan,2021). With the use of logistic regression analysis, it will be possible to analyse 26 enterprises in the electronics industry. Once enterprises with insufficient data have been eliminated, nine organisations will be evaluated based on applied finance and corporate governance indicators with the purpose of constructing a financial distress prediction model that takes into consideration the differences across sectors. There are seven financial indicators and two corporate governance indicators that may be used to indicate financial troubles in the electronics industry(Erfan,2019). A few examples of these indicators are as follows: After one year, there is no significant difference in the financial hardship evaluations provided by the two models; however, when looking back two years, the GRA model had a lower likelihood of being erroneous than the other. According to the experimenters’ experience, the difference in error rate develops exponentially in proportion to the number of years they spend working on the topic (Septyanto,2018).
How each remedy will alleviate Erica’s concern or improve co. performance
When a company establishes a subsidiary in another nation, the functional currency is almost always the currency of the country in which the subsidiary is located and run. Financial statements are typically translated into euros using the year-end exchange rate, and income statement items are typically converted into euros using the year-end average exchange rate, if applicable, before being reported. It is the balance sheet of a corporation that is used to record the earnings and losses resulting from foreign currency operations. Another thing to keep in mind is that, as time goes on, the difference in error percentages between the two models becomes more large. In other words, when a firm in the electronics industry draws closer to encountering a financial crisis, its predictive power improves.
As we can see from the model above, profitability on turnover and asset efficiency both have an impact on return on assets (also known as return on assets) (ROA). Business profitability is measured by a company’s return on sales (ROS), which is calculated based on the amount of money it receives in revenue from its operations. In order to evaluate the profitability and long-term prospects of their organisations, current and potential business owners should be aware of the presence of this problem. It is popular among corporate executives because it demonstrates a direct connection between management activities and cost reduction. The ability to have a rapid turnover of assets and an efficient use of the firm’s assets in order to generate money is achievable in an environment where there are numerous asset cycles available. This figure is very useful when it comes to investors and suppliers, to name a few of examples. It is common for executives of a corporation to be pressed into seeking out new and innovative means of generating more money for the organization’s activities in order to increase the value of the firm’s assets. To put it another way, the objective is to earn the most amount of money feasible from the assets that are under control and being used.
Section 4
Two possible concerns
As a result, the balance sheets and net profits of Group companies that operate in hyperinflationary nations must be revised in order to account for fluctuations in the purchasing power of local currencies. In order to comply with International Accounting Standards, it is not necessary to make a restatement of comparable period financial statements (IAS 21). After that, they are converted to the euro monetary system.
Comparing Motorola’s current ratio and quick ratio to the industry standards of 1.52 and 1.23, respectively, shows that the company is doing better than the industry as a whole. Motorola’s current ratio is 1.77 and its quick ratio is 1.47. Comparatively speaking, this is decent when compared to the rest of the industry On the basis of the fact that both ratios are greater than one, we may assume that Motorola has a strong short-term cash position.
Two alternative sources of finance
However, although Motorola’s absolute liquidity position is vital, the development of the company’s debt-to-equity ratios over time is just as essential to debt investors as the company’s absolute liquidity position in the near term in the long run. It is clear that Motorola’s liquidity has increased dramatically in both 1999 and 2000, indicating a positive trend in the company’s overall financial health (Kaur,2018). Many reasons, including smaller notes due and a reduced current portion of long-term debt, might have contributed to the improvement in cash flow seen over the last few months. In contrast, the substantial increases in cash and cash equivalents are responsible for a significant portion of the improvement in the situation, as seen in the chart below. The amount of cash and cash equivalents in circulation surged by 97 percent throughout the course of this era (Husna,2019).
Section 5
Financial or Operating Risks
In order to “further boost” Motorola’s financial position, the company has taken further steps, including the sale of Nextel stock for $325 million dollars, which was recently revealed. Motorola has sold Nextel stock to a third party for a total of $325 million, according to reports. More than 108 million Nextel shares have been sold by Motorola, which says the sale would allow it to “realise the price increase associated with a part of its investment in the wireless communications services provider” while also “strengthening its already robust financial position.” Motorola bought 108 million shares of Nextel in 2006, and it has sold 25 million of those shares in the subsequent years. Motorola’s investment in Nextel is now worth more than $1 billion, according to the company. The sale of $325 million in Nextel shares will result in Motorola maintaining a 9.1 percent ownership stake in the business, making it one of the company’s major investors (Abu Talha Al-Ansari,2019).
Corporate governance or ethical issues
Final thoughts on Motorola’s financial situation: what should the business do with all of its money is a fascinating subject. The fact that the company is collecting such a large quantity of money is quite understandable (Palepu,2020). This problem presents a very difficult challenge since the quantity of publicly available information is so restricted. It is a more straightforward issue if Motorola has an excessive amount of cash on hand, given the fact that cash holdings do not generate dividends for the company’s owners. Motorola has an excessive amount of cash on hand. Given the grave financial condition in which Motorola found itself in 1999 and 2000, it’s possible that the corporation was justified in increasing its equity holdings during that period. Maintaining an excessive amount of cash in a company’s bank accounts, on the other hand, may detract from the value of the company; for example, holding onto 25 million shares of Nextel may increase the value of the company more than allowing the money from the sale to remain in a bank account. Alternatively, analysts feel that the increase in cash holdings, which investors see as being idle rather than delivering at least a risk-free market return, may have contributed to the decline in the value of the firm during the previous few years, particularly during the financial crisis (Valaskova,2018).
Financial Distress Prediction, Logistic Regression Model, and Grey Relation Analysis are just a few of the concepts covered in this chapter.
The use of document feedback or factor analysis to identify signs of financial distress was once the norm, but this has changed in recent years. The former, although less conceptually founded in its theoretical foundation than the later, is still confined in its application options, just as the latter is. Obtaining practical results from a combination of financial distress indicators from different industries is challenging since each has its own separate components, which makes it impossible to mix data from other sectors. This study will be focused on the Taiwanese electronics sector in particular, and grey relation analysis will be used to discover indicators that have significant relationships to the industry in question. By strengthening the theoretical basis of these indicators, it will be possible for them to transcend the limitations imposed by the availability of limited data. Not to mention, a model of financial difficulty is being constructed using logistic regression, and this model will be used to compare the predictive powers of grey connection analysis with models developed utilising the fundamental components discovered in previous research.
Financial difficulty forecasting models that are tailored to the individual characteristics of each sector are required in order to predict financial trouble across a large number of firms. Because there was a dearth of data in this investigation, grey connection analysis was employed to identify indications and provide theoretical justification for the model under consideration. The researchers were able to overcome the limits given by a paucity of data as a result of this. Following that, using logistic regression methods, a model for predicting financial difficulty was created to test the hypothesis. The models constructed using grey relation analysis for the electronic sector, when compared to previous research’s factor analysis and documentary feedback-based predictive models, contain nine financial distress prediction indicators (seven financial ratios and two corporate governance indicators) when it comes to financial distress prediction indicators (seven financial ratios and two corporate governance indicators). When it comes to financial distress prediction indicators, the models created using grey relation analysis for the electronic industry comprise nine financial distress prediction indicators—seven financial ratios and two corporate governance indicators—that are based on grey relation analysis. With regard to financial choices, the return on assets and the gross profit margin are the most dependable indicators for making short-term investment decisions and making financial judgments, respectively. A company’s performance may be measured by a variety of corporate governance indicators, including the proportion of managers who hold shares and the stock pledge ratio, according to the two models provided.
Initially, there is no statistically significant difference in error percentage between the two models; however, after another year, the GRA model has less error and can be relied upon to predict the likelihood of financial distress in the electronics industry during the two years preceding a financial crisis in the electronics industry.
According to the conclusions of the Dupont model, organisations that desire a high return on assets (ROA) must also be profitable. A high level of asset turnover and use is indicative of this situation. Recognizing the importance of return on investment in company resource management cannot be overstated (ROI).
Return on investment (ROI) accounts for a significant portion of a company’s total capital expenditure because it is so expensive to use stock to promote one’s own interests. When it comes to evaluating a company’s efficiency, return on equity (ROE) is a statistic that is frequently employed by equity analysts [3]. This index, which evaluates the amount of equity a shareholder provides to the firm as well as the amount of profit the company makes, may be helpful to investors and joint stock enterprises alike. When determining whether or not to make an investment in a company’s shares, investors typically use the stock market as a benchmark as it is usual procedure in the industry to do so. When a company’s return on equity (ROE) exceeds that of its rivals, the company is said to be profitable.
Conclusion
In spite of the fact that a company’s return on equity (ROE) is high, this is not always in the best interests of shareholders, particularly when the company is in serious trouble as a result of the high ROE. In order to get a deeper understanding of the factors that impact return on investment, it is usual for analysts to use the Dupont model (ROI). The following paragraphs give a full explanation of the Dupont model:
This technique may be used to analyse the variation of the return on equity (ROE) in greater depth. It is important for a company’s return on equity to rise in order for net margins, asset turnover, and financial leverage to all be greater. The profitability and efficiency of asset utilisation are reflected by the return on assets (ROS) and the total asset turnover, both of which have a good impact on the return on equity of a corporation. If you look at it from a different angle, the equity-to-equity ratio may have both favourable and poor aspects. Financial leverage is good, while financial risk is bad. From the standpoint of financial leverage, this component has the power to improve the return on equity of the organisation.
Whenever a big percentage of a firm’s total capital is made up of debt, the business is exposed to severe financial risks. As a result, in calculating the return on investment, we must take into consideration all of the elements that have an effect on it.
As a result, return on equity and return on assets (also known as return on assets and return on equity) are key financial measures for firms. Using the technique proposed by Dupont, it is feasible to examine both the two primary signals as well as the organization’s financial health. Managers will benefit from this knowledge as it will allow them to make decisions in a more timely way.
References
Abu Talha Al-Ansari, A.A., 2020. Financial Statement Analysis of Grameenphone Limited.
Easton, P.D., McAnally, M.L., Sommers, G.A. and Zhang, X.J., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge Business Publishers.
Erfani, G.R. and Vasigh, B., 2018. The impact of the global financial crisis on profitability of the banking industry: a comparative analysis. Economies, 6(4), p.66.
Husna, A. and Satria, I., 2019. Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), p.50.
Ichsan, R., Suparmin, S., Yusuf, M., Ismal, R. and Sitompul, S., 2021. Determinant of Sharia Bank’s Financial Performance during the Covid-19 Pandemic. Budapest International Research and Critics Institute-Journal (BIRCI-Journal), pp.298-309.
Kaur, A., A Comparative Financial Statement Analysis of Selected Steel Companies in Public-Private Sectors.
Khusnah, H. and Primasari, N.S., 2021. Tournament Incentives and Frauds in the Financial Statements. Procedia Business and Financial Technology, 1.
Lakhtionova, L., But, V., Kalabukhova, S. and Hnylytska, L., 2021, June. Modeling of Forecasting Financial Statement. In International Conference on Comprehensible Science (pp. 144-157). Springer, Cham.
Migliaccio, G. and Pavone, P., 2020. Economic and capital structure of Italian social enterprises: results of a multizonal quantitative study on financial statements. In SIDREA International Workshop (SIW) Corporate Social Responsibility: Theoretical analysis and Practical implications (pp. 196-227). FrancoAngeli.
Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis and valuation: Using financial statements. Cengage AU.
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Sathavara, M.J.A. and Poojara, J.G., An Analysis of Financial Statement of Selected Co-Operative Bank using Financial Ratio to predict their Profitability (INS Bank).
Septyanto, D. and Figrita, N., 2018. Efect of current ratio, debt to asset ratio, and return on assets on financial distress in Indondesia stock exchange. Esa Unggul, pp.1-17.
Valaskova, K., Kliestik, T. and Kovacova, M., 2018. Management of financial risks in Slovak enterprises using regression analysis. Oeconomia Copernicana, 9(1), pp.105-121.
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