ِAnalysing and Interpreting financial statements

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Section A: Analysing and interpreting financial statements (20 Marks) Al Saud Plcmanufactures a range of products, which are sold at the same price to all their customers. However the product costs differ as some products use more expensive raw materials. At every management meeting in 2016, the Sales Director had announced that sales were about 20 per cent higher than the previous year. When the results for 2016 were presented to the management, these showed that sales had increased from 100 000 units in 2015 to 120 000 units in 2016. However the managers were surprised to see that the profit after tax had fallen. Another shock was that the cash balance had fallen from OMR42 000 at the end of 2015 to OMR3 000 at the end of the 2016. The managers were surprised at this significant fall in the cash balance as they had increased the long-term borrowings to finance the purchase of a new plant, costing OMR150 000 which had been installed during the year. You have calculated ratios, using the attached formulae, to enable you to analyse the performance and financial position of the company. Year 2015 Year 2016 10.7% 9.0% 4.0% 2.5% Profitability Return on Capital Employed Return on Shareholders Funds (also called Return on Equity) Net Profit Percentage Gross Profit Percentage 7.2% 40.0% 2.4% 36.0% Liquidity Current Ratio Quick Ratio (Acid Test) 3.3 2.0 4.1 1.6 Efficiency Inventory (stock) holding period Receivables (debtors) payment period Payables (creditors) payment period 60 days 30 days 45 days 80 days 30 days 30 days Financial Structure Leverage (Gearing) Interest Cover 28% 12.7 40% 4.4 Additional information from the financial statements Sales OMR 640 000 Profit before deducting interest and tax OMR 76 000 Advertising and promotional expenses OMR 80 000 OMR 720 000 OMR 35 000 OMR120 000 Required (a) Prepare a report that analyze the firm's current financial position and performamnce, breaking your analysis into evaluations of the firm's liquidity, activity, debt, profitability and market. Your report must pay specific attention to the following aspects (b) both a cross-sectional and time-series view in the analysis. (e) identifies the causes of the decrease in profitability and liquidity. (d) Suggest ways to improve the profitability ratios and increase the liquidity of the company. (e) Discuss the level of efficiency in carryin out the business (1) Discuss the effect of the changes in the company's capital structure. (g) Conclusion about the companies overall performance and financial position.
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Financial Analysis assignment

Contents
Introduction .................................................................................................................................................. 2
Analysis & Discussion .................................................................................................................................... 2
Financial Ratio Analysis ................................................................................................................................. 2
Profitability Ratios..................................................................................................................................... 3
B. Cross Sectional Analysis ........................................................................................................................ 6
C. Causes of Decreasing Profitability ........................................................................................................ 9
E. Efficiency Analysis ............................................................................................................................... 12
G. Conclusion & Recommendations ........................................................................................................... 15
References .................................................................................................................................................. 16

Introduction
The main perspective of every organisation is to attain economic significance in the long
run, because it is the only thing that enforces them to retain their position for a long span of time.
It is more than essential for an organisation to execute something extra for the betterment of their
organisation to maximise the utility of their shareholders (Brigham and Houston, 2004).
One of the major lines of actions that associated with the organisations is to increase the
wealth of their shareholders in a productive and effective manner. It is extremely important for
the organisations to analyse their financial structure in a timely manner, because without this
particular analysis, it will become very difficult for the companies to sustain positively and
effectively. One of the major financial methods that used apprise the management and the
analysts about the financial performance of the company, which known as Financial Ratio
Analysis.
The main perspective of this assignment is to examine the financial health of Al-Saad for
five years. Different lines of ratios will be taken into consideration for this particular analysis.
The next section of this report will examine the description related to the company, followed by
the trend analysis and financial ratio analysis.

Analysis & Discussion
Financial Ratio Analysis
Financial Ratio Analysis is one of the most effective and powerful tools that used by
the companies for their betterment in particular. This particular tool has the accolade to analyse
the insight of an organisation (Johnson, 1971). There are certain line of ratios that can be used by

the companies and analysts to assess the financial position of a company, and the lines of ratios
that will be taken into account for the same analysis are as follows


Profitability Ratios



Efficiency Ratios



Liquidity Ratios



Solvency Ratios

Profitability Ratios
Profitability Ratios are the line of ratios that used to assess the values of a company in
terms of generating profitability. It is a powerful line of ratios that gives insight information of a
company in terms of generating profit. The major lines of ratios that can be used in this particular
aspect are Net Profit Margin (NPM) and Gross Profit Margin.
Net Profit Margin (NPM)
...


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