ACFI5020 Accounting for Managers
Introduction (ACFI5020 Accounting for Managers)
Financial analysis reflects the position of business in the market. Apart from this, this analysis provides scope for a business to improve its financial opposition in the market. On assessment of the financial position of a business, financial analysis plays a significant role. This study is based on the financial analysis of Hotel Chocolat. This company deals in making chocolate while maintaining Originality, Authenticity and ethics in their business module. The aim of the study is to assess performance of Hotel chocolate and provide a strategy to improve its financial position in the market.
Task 1
Calculation of ratios
| Calculation of ratio (thousand Pounds ) | |||
| profitability ratio | 2021 | 2020 | 2019 |
| Net profit ratio | |||
| net profit/ sales | |||
| net profits | 5685 | -7457 | 10928 |
| sales | 164551 | 136290 | 132479.5 |
| Net profit ratio (%) | 3.45485594 | -5.471421 | 8.2488234 |
| Gross profit Ratio | |||
| Gross profit | 85879 | 65702 | 81886 |
| sales | 164551 | 136290 | 132479.5 |
| Gross profit ratio (%) | 52.1898986 | 48.207499 | 61.810318 |
| liquidity ratio | |||
| Current ratio | 2021 | 2020 | 2019 |
| current assets/ current liability | |||
| current assets | 55554 | 51531 | 28029 |
| current liabilities | 52209 | 38271 | 21153 |
| Current ratio | 1.06406941 | 1.3464764 | 1.3250603 |
| Quick ratio | |||
| Quick assets (current assets- inventory) | 23516 | 37615 | 15219 |
| Quick liability | 52209 | 38271 | 21153 |
| 0.45042043 | 0.9828591 | 0.7194724 | |
| Efficiency ratio | |||
| Assets turnover ratio | 2021 | 2020 | 2019 |
| sales / total assets | |||
| sales | 164551 | 136290 | 132479.5 |
| total assets | 156015 | 142538 | 74193 |
| Assets turnover ratio | 1.05471269 | 0.9561661 | 1.7856065 |
| Proprietary ratio | |||
| shareholders equity/ total assets | 2021 | 2020 | 2019 |
| shareholders’ equity | 71688 | 66990 | 49330 |
| total assets | 156015 | 142538 | 74193 |
| Proprietary ratio | 0.45949428 | 0.4699799 | 0.6648875 |
| Debt equity ratio | |||
| debt/ Equity | 2021 | 2020 | 2019 |
| debt | 30503 | 35960 | 28530 |
| equity | 71688 | 66990 | 49330 |
| Debt equity ratio | 0.4254966 | 0.5367965 | 0.5783499 |
Table 1: Calculation of ratio (Source: Hotelchocolat.com, 2020)
Based on the financial information provided in the three consecutive annual reports, a different financial ratio has been calculated. Based on the table it has been found that in 2019 the company has total sales of 132479.6 which increase in 2020 to 136,290 thousand pounds. As stated by Putri and Rahyuda, (2020), an increase in revenue reflects business efficiency to increase its market reach. Moreover, on the calculation of Net profit, it has been noted that the company has a net profit of 10928 thousand pounds in 2019. However, due to the pandemic business profitability was affected and incurred a loss of 7,457 thousand pounds. As stated by Bartik et al. (2020), the impact of Covid-19 not only affected business profitability but also caused changes in consumer demands. Consumer demand continuously changed during the pandemic which affected business productivity. On the other hand, from the analysis of business liquidity ratio, it has been found that businesses have current assets in 2019 of 28029 thousand pounds which increase to 55,554 thousand pounds in 2021 (Hotelchocolat.com, 2021). Increases in current assets increase business liquidity. Furthermore, from the annual report, it has also been noted that in 2019 the company’s total amount of equity 2019 stood at 49,330 thousand pounds. Though this, business proprietary ratio has been calculated at 0.66 which reduces in both 2020 and 2021. Thus, through the ratio calculation business liquidity, efficiency and portability are shown.
Task 2
Performance of company on the basis of ratio analysis
Business profitability: Profit earning of business is the core objective on which all business existence relies. Based on profitability, business ability in terms of satisfying customers can be measured. Thus, in order to assess profitability of Hotel Chocolat, net profit and gross profit ratio have been calculated. As opened by Nariswari and Nugraha, (2020) current ratio and quick ratio are prime tools through which business profit-earning capacity can be measured. On the analysis of the net profit ratio of Hotel Chocolate it can be seen that in 2021, the company has a net margin of 3.45% and in the year 2019, it has a net margin of 8.24%. The net margin of business is decreased each year and in 2020 it has a negative net margin of -5.471% (Hotelchocolat.com, 2020). Decreased net margin caused due to pandemic as bin 2020 company stopped its activity because of lockdown. On the other hand, analysis of gross margin also reflects that in 2019 it has a profit margin at 61.81 which decrease in 2021 and stands at 52.18%. A decrease in both gross margin and net margin is not good for the financial health of the business. It affected business working capital management as well as other aspects (Jana, 2018). However, the company still has a good percentage of gross margins but it needs to increase the net margin of the product.
Liquidity performance: business liquidity is quite necessary as it increases business effectiveness in managing day to day activities. Effective working capital management can be possible while having strong liquidity performance. Hotel chocolate’s liquidity performance can be measured through calculation of the current ratio and quick ratio. As stated by Sari, (2021), current ratio shows a business ability to meet its short term obligation. On analysis of current ratio, it has been noted that in 2021 Hotel Chocolat current ratio of 1.063 which is good for business prospects (Wsj.com, 2021). However, in comparison of its current ratio with another two consecutive previous years, it has been noted that it reduced in each year. A quick ratio of company has further reduction which is not suitable for the financial health of a business. Therefore, in this situation business needs to increase its liquidity efficiency to come on the market in a better way.
Efficiency of company: business efficiency can be measured through calculation of asset turnover ratio, proprietary ratio and debt-equity ratio. On the analysis of asset turnover ratio, it has been noted that the asset turnover ratio is increased in each financial year. An increase in asset turnover ratio reflects higher business efficiency to generate profit through its assets (Anwar, 2018). Debt equity ratio is also well maintained as it stood in 2021 at 0.425. However, the company’s proprietary ratio decreased from 0.66 to 0.459 which negatively impacted business prospects.
Task 3
Strategies to improve financial performance of a business
On the assessment of various financial ratios of Hotel Chocolat, it has been found that due to pandemic financial performance is affected. Due to the pandemic, various business aspects such as profitability, revenue and cash flow are negatively impacted. In this situation, companies need to focus on digital market platforms. Digital marketing in post-pandemic provides a wide range of scope for business which increases business profitability. Customers during a pandemic and post-pandemic period depend more on social media and digital media. In this situation, Hotel Chocolat through using various digital tools such as Block chain technology, AI technology and Internet of things (IoT) can be used. These tools not only prude scope for businesses to analyze customer behaviour but also reduce cost of products (Moşteanu and Faccia, 2020). Furthermore, Hotel Chocolat can also be able to manage its team globally in a better way. Information can be easily transferred through block chain in real-time which increases management effectiveness.
Furthermore, Hotel Chocolate also needs to provide better services to its stakeholders. Stakeholders are a key aspect of business through which it can be able to attain sustainable success. Decreasing in proprietary ratio negatively impacts the shareholder aspect. In this situation, a company needs to provide regular dividends to its stakeholders (Verga Matos et al. 2020). On the other hand, companies also need to focus on stakeholder engagement. Hotel Chocolat has the principle of prioritizing stakeholders and collecting feedback from them (Hotelchocolat.com, 2020). Thus, the effective implication of this strategy increases stockholder engineering which automatically increases business cash flow.
On the other hand, Hotel Chocolat is also need to manage its working capital in a better way. Liquidity can be increased through implication of effective working capital management. The company needs to increase total current assets and decrease current liability. Through this, liquidity performance business can be enhanced (Manodamrongsat et al. 2021). Various investors can be attracted through maintaining high liquidity performance in the market. Apart from this it also increases brand value of a business. Thus, Hotel Chocolat by increasing liquidity performance can be able to increase sales as well as business cash flow.
Task 4
Operational overview
In the analysis of the latest six-month information annual report of Hotel Chocolat, it has been noted that company brand value positively increased on 17 December 2020. Total revenue of business during the past six months increased by 11% and profit after tax increased by 3% (Hotelchocolat.com, 2020). Increases in revenue boost the financial performance of a business. On the other hand, the brand value of this company also increased in the market. Various other shareholders and investors may be attracted through this performance. On the other hand, in the past six months it has been noticed that 0.60 million new customers have been added to the company database. Based on this it can be said that the company is not only capable of retaining its existing customers but also has the ability to attract new customers. On the other hand, Hotel Chocolat has an aim of using 100% of recyclable packaging and now the company is able to use 93% of its recyclable packaging material. Based on this data it can be concluded that Hotel Chocolat can also be able to perform CSR activity in between way. As stated by Kádeková et al. (2020), effective CSR activity in a better way increases business brand value. On the other hand, analysis of the past six-month performance of business has noted that gross margin of the business declined from 65% to 61%.
Furthermore, operating expenses of ism also grew by 6% in the past six months. In this situation, the company needs to increase its gross margin by using a cost reduction strategy. Apart from this, the cost reduction strategy also added value to the product by eliminating waste and unnecessary costs.
Task 5
Analysis of Risk and potential impact on business
On the analysis of five potentials is provided in the annual report it has been found that company has various risks such as
- Global or regional pandemic
- Impact of brand value due to negative publicity (Hotelchocolat.com, 2021)
- Disruption in production and supply
- Continuous quality confirmation
- International expansion
This risk directly impacts the profitability ratio of a business. Global or regional pandemic negatively impacts the revenue of Hotel Chocolate. Due to the decrease in revenue, the profitability of business was also reduced. On the other hand, disruption in production and supply creates constraints in producing products to its customers. In this situation, business profitability is negatively affected. Moreover, a business needs to increase brand value to boost business profitability and cash flow. However, negative publicity of the product not only affected the performance of the business but also affected customer retention (Shahid et al. 2017). In this situation, companies need to implement an effective strategy that protects the brand value of business products. International expansion of Hotel Chocolate also has a potential risk of mismanagement of a global team. Global expansion of business can create constraints to management to manage its global team in a better way. In this situation, company profitability can be affected if Hotel Chocolate cannot be able to manage its global team in a better way.
Conclusion
On the basis of assessment of various financial aspects and calculation of financial ratios, it can be concluded that Hotel Chocolat currently performed well as compared to its previous years. However, the impact of the pandemic negatively decreased the revenue of the business and its profitability. Due to the pandemic, the business net margin has decreased in two consecutive years which is not beneficial for the financial health of a business. On the other hand, it can also be concluded that various potential risks provided in the annual report can be managed through the effective strategy provided in this study. Furthermore, business in the post-pandemic uses various effective marketing strategies to capture the market and it gets successful to a great extent. On the other hand, analysis of past six-month performance can conclude that Hotel Chocolat is capable of increasing the number of customers through providing better services.
References
Journals
Anwar, M.S., 2018. Analisis Pengaruh Net Profit Margin, Current Ratio, Debt To Equity Ratio, Earning Per Share, Dan Quick Ratio Terhadap Dividend Payout Ratio Pada Perusahaan Manufaktur Yang Terdaftar Di BEI periode 2013-2015. Jurnal Simki-Economic, 2(03), pp.1-19. Available at: http://simki.unpkediri.ac.id/mahasiswa/file_artikel/2018/3e97eb803d7bd2eff968ac37380875ba.pdf
Bartik, A.W., Bertrand, M., Cullen, Z., Glaeser, E.L., Luca, M. and Stanton, C., 2020. The impact of COVID-19 on small business outcomes and expectations. Proceedings of the National Academy of Sciences, 117(30), pp.17656-17666. Available at: https://www.pnas.org/content/pnas/117/30/17656.full.pdf
Jana, D., 2018. Impact of working capital management on profitability of the selected listed FMCG companies in India. International Research Journal of Business Studies, 11(1), pp.21-30. Available at: http://digilib.mercubuana.ac.id/manager/t!@file_artikel_abstrak/Isi_Artikel_376779956511.pdf
Kádeková, Z., Savov, R., Košičiarová, I. and Valaskova, K., 2020. CSR activities and their impact on brand value in food enterprises in Slovakia based on foreign participation. Sustainability, 12(12), p.4856. Available at: https://www.mdpi.com/2071-1050/12/12/4856/pdf
Manodamrongsat, P., Tongkong, S. and Boonyanet, W., 2021. Early Warning Of Problematic Firms Listed In The Stock Exchange Of Thailand: An Investigation Of Financial Ratios. Research Journal Phranakhon Rajabhat: Social Sciences and Humanity, 16(2), pp.34-51. Available at: https://so05.tci-thaijo.org/index.php/PNRU_JHSS/article/download/251145/172402
Moşteanu, N.R. and Faccia, A., 2020. Digital Systems and New Challenges of Financial Management–FinTech, XBRL, Block chain and Cryptocurrencies. Quality-Access to Success Journal, 21(174), pp.159-166. Available at: https://core.ac.uk/download/pdf/326518997.pdf
Nariswari, T.N. and Nugraha, N.M., 2020. Profit Growth: Impact of Net Profit Margin, Gross Profit Margin and Total Assets Turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), pp.87-96. Available at: http://ssbfnet.com/ojs/index.php/ijfbs/article/download/937/712
Putri, I.G.A.P.T. and Rahyuda, H., 2020. Effect of capital structure and sales growth on firm value with profitability as mediation. International Research Journal of Management, IT and Social Sciences, 7(1), pp.145-155. Available at: https://core.ac.uk/download/pdf/287306661.pdf
Sari, W.N., 2021. Pengaruh Current Ratio (CR), Quick Ratio (QR), Debt to Asset Ratio (DAR), dan Debt to Equity Ratio (DER) terhadap Return On Assets (ROA): Studi pada perusahaan Sub Sektor Farmasi yang terdaftar di Bursa Efek Indonesia (BEI) periode 2015-2019 (Doctoral dissertation, UIN Sunan Gunung Djati Bandung). Available at: http://digilib.uinsgd.ac.id/42636/4/4_bab1.pdf
Shahid, Z., Hussain, T. and Zafar, F., 2017. The impact of brand awareness on the consumers’ purchase intention. Journal of Marketing and Consumer Research, 33(3), pp.34-38. Available at: https://core.ac.uk/download/pdf/234694288.pdf
Verga Matos, P., Barros, V. and Miranda Sarmento, J., 2020. Does ESG Affect the Stability of Dividend Policies in Europe?. Sustainability, 12(21), p.8804. Available at: https://www.mdpi.com/2071-1050/12/21/8804/pdf
Websites
Hotelchocolat.com, 2020, financial data, Available at: https://www.hotelchocolat.com/on/demandware.static/-/Sites-HotelChocolat-Library/default/dw181ab2c2/FY2021HOTCInterimRNSfinal020321.pdf [accessed on 17 December 2021]
Hotelchocolat.com, 2021 annual report, Available at: https://www.hotelchocolat.com/on/demandware.static/-/Sites-HotelChocolat-Library/default/dw76e6f8b9/FY21Prelim.pdf [accessed on 17 December 2021]
Wsj.com, 2021, performance of business in market Available at: https://www.wsj.com/market-data/quotes/UK/XLON/HOTC/financials/annual/balance-sheet [accessed on 17 December 2021]
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