ACC9703M Financial Analysis Appraisal and Decision Making Assignment
Introduction
Business growth is considered to be one of the greatest achievements of organisations that implies the positive performance and strength of the company in attaining market attention. Expansion of product lines is one of the strategies that companies rely on for growing their business thereupon stabilising their competitive advantage in the market (Matalamäki and Joensuu-Salo, 2022). The current report analyses the financial condition of Green Suit Company Ltd to understand the company’s growth potentials in the future years. It also focuses on analysing the different growth options put forward by the management of the company. However, recommendations based on the evaluation have also been provided in this report that positively benefits the company in growing thereby selecting one or more growth options.
Financial analysis of Green Suit company Ltd
Financial analysis reflects on the evaluation of the financial health of organisations reflecting the efficiency in management of assets, liabilities as well as creating positive revenue earnings. As per the words of Palepu et al., (2020), analysing financial condition is basically the evaluation of the transactions executed by organisations, the system of budgeting and other finance-related business activities. In addition to this, it is also referred to as the analysis of the financial statements published by the organisations in their annual reports that contains detailed financial information of the company. This view sheds light on an understanding that analysis of financial information included within the financial statements is considered to be financial analysis along with the evaluation of the financial planning and efficiency of the management in managing the financial instruments. Financial ratios are considered to be the best accounting tool that helps in conducting financial analysis as it reflects on the financial condition or performance of companies (Lee et al., 2023).
Ratio analysis has further shed light on the financial performance trend of the company which has further assisted in understanding the growth potentials of the company based on its finances (Fridson and Alvarez, 2022). Liquidity, solvency and profitability ratios have been integrated in this study that has helped in analysing the performance of Green Suit Company for the two years such as 2022 and 2021.
Profitability ratios
- Gross profit margin ratio
Figure 1: GP margin
(Source: Self-developed)
With respect to the analysis of the company’s capability to retain profits generated from the direct sales of the organisation, it has been found that the performance improved in 2022 compared to 2021. As reflected, the ratio value in 2021 has been 61.46% which increased to 61.75% in 2022 showcasing an increased capacity of the firm in retaining gross revenues. This has been due to the increased sales and reduced cost of sales of the company that supported the company in depicting ratio value more than the average ratio percentage of 20% (Nariswari and Nugraha, 2020). However, this implies the profitability performance of the company has been outstanding.
- Net profit margin ratio
Figure 2: NP margin
(Source: Self-developed)
Referring to the analysis of the company’s ability to retain the amount generated after the deduction of the costs incurred such as from the net profits, it has been found that the performance of the company has significantly improved. For instance, from the ratio percentage of 4.74%, the company reached the benchmark percentage of 10.61% reflecting better performance of the company.
Liquidity ratios
- Current ratio
Figure 3: Current ratio analysis
(Source: Self-developed)
In relation to the analysis of the company in paying off the short-term obligations with the usage of the current assets, it has been evident from the ratio values that the management of assets has been inefficient in 2021 reflecting higher ratio value of 4.25 than the industry standard. In 2022, it was further found that the company has improved its performance by reducing the value to 2.63 which is considered to be stable as per the benchmark. This has been due to the increase in the value of inventories (Madushanka and Jathurika, 2018).
- Quick ratio
Figure 4: Quick ratio analysis
(Source: Self-developed)
The quick ratio value analysed to understand the organisation’s capability to pay off the short-term liabilities without liquefying inventories, it emerged that the liquidity of the company declined in 2022 reflecting a ratio value of 0.81. It has been evident from the given information that this has been due to the decrease in the value of cash and cash equivalents in 2022 compared to 2021 depicting values of £609 million compared to £8924 million.
Solvency ratio
- Interest coverage ratio
Figure 5: Interest coverage analysis
(Source: Self-developed)
Analysing the company’s potential to pay off the interests, it has been found that compared to the 2021 ratio value of 3.01, the value increased in 2022 depicting 5.25. It implied that compared to 2021, the company’s ability to pay the outstanding interests increased reflecting payment capacity of around 5 times in a year (Rashid, 2018).
- Debt to asset ratio
Figure 6: Debt to asset ratio analysis
(Source: Self-developed)
The organisation is reflected to be solvent depicting balanced structure with respect to its debt and equity depicting ratio values lower than 1 in each of the year such as 0.46 in 2021 and 0.48 in 2022. However, it also implied that the asset possession of the company has been higher compared to the debts (Husna and Satria, 2019).
Analysis of growth options
In accordance with the given information with respect to the growth options of the company in the market, it has been noticed that acquisition has been suggested as one option by the CEO. In addition to this, the sales manager of the company was found to reflect on the option of expanding the range of clothes offered to the customers such as organic range or recycled range. Furthermore, the marketing manager suggested expanding the warehouse so that the company is capable of storing the vintage or preloved clothes by the customers and sells the same on their websites. In this regard, analysing the first option of acquisition, it has been evident from the studies that the company can face the challenge of lower liquidity which can impact the company’s acquiring strength. In addition to this, there is a risk of overpaying the other company which can further reduce the liquidity position of the company (Wangerin, 2019).
Furthermore, despite having the benefit of acquiring a greater resource and market share, the company can face legal complications due to lack of due diligence conducted by the organisational managers (DePamphilis, 2019). On the other hand, with respect to the product range, referring to the cash flow, the company can be stated to be benefited with the launch of recycled products as the average performance percentage of the product range is higher compared to the organic one reflecting 40%. In addition, even in a recession of 25%, the product range can deliver a profit of 250,000 to the company whereas organic products can provide a loss to the company of the same amount. Upon further analysis of the warehouse extension option, NPV analysis of the investment has been done for five years which reflects a positive NPV value of 1463630. However, this implies that due to positive NPV, the growth option can be stated to be profitable for the company and thus it can also be considered by the same for future growths (Marchioni and Magni, 2018).
Recommendations
Referring to the financial analysis, the company has been found to face a lower liquidity capacity reflecting low cash flow generations. In this context, the company can be recommended to improve its cash generation by encouraging customers to make digital transactions compared to credit sales (Afrifa and Tingbani, 2018). Moreover, with the recommendation of including an effective digital marketing strategy, the company can be stated to improve its sales in the market that can increase the cash flow from operations. However, on the other hand, analysing the growth options, the company can be recommended to accept the proposals of the sales and the marketing manager thereby choosing the product launch of recycled clothes as well as extending the warehouse for storing pre-loved or vintage clothes for online sales.
Conclusion
As per the analysis of the financial performance as well as the benefits and risks related to the growth options suggested by the CEO, sales and marketing manager, the company has been found to reflect a strong profitability and solvency performance. The liquidity performance of the organisation has been found to be stable, yet the cash position has been low which affects the company’s liquidity strength. Additionally, the company has been found to seek an opportunity of growth with the acceptance of the offers or proposals made by the marketing and the sales manager. However, the company has been recommended to invest for warehouse extension and introduce recycled products for future growth.
Reference List
Afrifa, G.A. and Tingbani, I., 2018. Working capital management, cash flow and SMEs’ performance. International Journal of Banking, Accounting and Finance, 9(1), pp.19-43.
DePamphilis, D., 2019. Mergers, acquisitions, and other restructuring activities: An integrated approach to process, tools, cases, and solutions. Academic Press.
Fridson, M.S. and Alvarez, F., 2022. Financial statement analysis: a practitioner’s guide. John Wiley & Sons.
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), pp.50-54.
Lee, J., Chang, J.R., Kao, L.J. and Lee, C.F., 2023. Financial Analysis, Planning, and Forecasting. In Essentials of Excel VBA, Python, and R: Volume II: Financial Derivatives, Risk Management and Machine Learning (pp. 433-455). Cham: Springer International Publishing.
Madushanka, K.H.I. and Jathurika, M., 2018. The impact of liquidity ratios on profitability. International Research Journal of Advanced Engineering and Science, 3(4), pp.157-161.
Marchioni, A. and Magni, C.A., 2018. Investment decisions and sensitivity analysis: NPV-consistency of rates of return. European Journal of Operational Research, 268(1), pp.361-372.
Matalamäki, M.J. and Joensuu-Salo, S., 2022. Digitalization and strategic flexibility–a recipe for business growth. Journal of Small Business and Enterprise Development, 29(3), pp.380-401.
Nariswari, T.N. and Nugraha, N.M., 2020. Profit growth: impact of net profit margin, gross profit margin and total assests turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), pp.87-96.
Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis and valuation: Using financial statements. Cengage AU.
Rashid, C.A., 2018. Efficiency of financial ratios analysis for evaluating companies’ liquidity. International Journal of Social Sciences & Educational Studies, 4(4), p.110.
Wangerin, D., 2019. M&A due diligence, post‐acquisition performance, and financial reporting for business combinations. Contemporary Accounting Research, 36(4), pp.2344-2378.
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