Financial Analysis Report: Carr’s Group Plc

Computation of ratio analysis

In this report an adamantine study has been prepared to make financial analysis for making investment decision. In the starting of this report, financial ratio has been calculated which provides company’s efficiency and it has been running its business. Ideally, there are five ratios which could be used to analysis the performance of company in effective manner such as profitability ratio, solvency ratio, efficiency ratio, liquidity ratio and investing ratio. In addition to this, Cost volume analysis and cash budget provides how company could manage its resources in efficient manner. Net present value of company has also been calculated with a view to identify the profitability of project selected by organization for investment appraisal. There are several financial tools which would be used by organizations for better management of organization (Gibson, 2012).

In this question Carr’s group plc has been taken into consideration for computing financial ratio. All the information has been taken from the annual report of Carr’s group plc. There are several financial ratio has been computed as below. This given ratio reflects how well company is performing its business functioning (Geddes, 2011).

Liquidity ratio- This ratio reflects Carr’s group plc’s ability to pay off its short term and long term debts with its current assets.

Current ratio- It provides the relation between current assets and current liabilities of Carr’s group plc. In 2015 company was having 1.63 current ratios which increased to 2.01 in 2016. It reflects that company has increased blockage in its current assets for smooth running of its operating activities (Kumbirai & Webb, 2010).

Quick ratio

This ratio provides company’s ability to pay off its short term liabilities with the help of its quick assets. Carr’s group plc in 2015 was having 1.15 current ratios which increased to 1.53 in 2016. However, there is very less amount of increment in current assets. Company has indulged in investing money in its quick assets (Fridson & Alvarez, 2011).

Computation of ratio analysis
Liquidity ratio	2016	2015
Current ratio	2.016924081	1.632651401
Quick ratio	1.532216663	1.157725627
Working capital	70,122.0	46,665.0

This ratio provides earning capacity of company from its value chain activities.

Operating profit margin- Carr’s group plc was having .036 operating profit from its business functioning in 2015 which increased to .040 in 2016. It has aroused due to decrease in variable cost   and cost of goods sold (Brigham & Ehrhardt, 2016).

Net profit margin- It is the net profit earned by company from its business functioning. Carr’s group plc was having .041 net profit margin which increased by .003% in 2016.

Recommention to investors

Return on capital employed- In order to create value on Carr’s group plc’ investment return on capital employed should be more than its cost of capital. Nonetheless, company has maintained same return on capital employed in both years.

Return on equity- It is the amount of return available for the investors. It is analyzed that company has increased its net profit and providing return on equity .12 to its shareholders (Lawrence, 2013).

Return on total assets- Company has increased its investment in total assets. However, return on total assets has decreased by .03 points as compare to last years. This has occurred due to less earning of company with regard to its investment (Brigham & Ehrhardt, 2016).

Profitability Ratios	2016	2015
Operating Profit Margin	0.040551655	0.036494257
Net Profit Margin	0.044419464	0.041332991
Return on Capital Employed	0.1	0.1
Return on Equity	0.127061987	0.138364843
Return on Total assets	0.069195115	0.066165101

This ratio is imperative for determining financial risk of Carr’s group plc. It is observed that there are two ratios which provide complete details about the financial structure and financial leverage (Platon, Frone & Constantinescu, 2014).

Debt to equity ratio- It establish relation between debt and equity of company. It is observed that in 2015 Carr’s group plc’ was having 1.09 debts to equity ratio which has gone down to .83. it is good indicator  for the company. Carr’s group plc’ has decreased its total liabilities as compare to its total equity in the business (Mumba, 2013).

Gearing ratio- This ratio divulges company’s ability to pay off its financial cost. Carr’s group plc’ was having 11.56 interest coverage ratios in 2015 which have been increased to 12.65 (Nirajini & Priya, 2013). However, company is having very less interest coverage ratios in both years which is not a good indicators for its financial leverage (Routledge, 2014).

Debt equity ratio
Capital structure ratio	2016	2015
Debt- equity	0.836285517	1.091205804
Interest coverage ratio	12.65609514	11.56937799

Financial performance of Carr’s group plc could be determined by evaluating profitability ratio of company (Johal, Vickerstaff,  & McAuliffe, 2014).  It is observed that company has increased its net profit by 4 % in 2016 as compared to last year. In addition to this investment in current assets have also been increased which reflects that smooth running of operating business activities of Carr’s group plc without any liquidity position. By evaluating financial performance of Carr’s group plc it could be inferred that investors should invest their money for long run. Company has increased its profit since last two years and it is estimated by trend analysis that in the future time period company would increase its net profit by very high amount. Therefore, investors who are ready to invest their money for long run would be advised to invest their money in Carr’s group plc. However, short term investors should look for some other investment options to create value on their capital (Brigham and Ehrhardt, 2016).

Assumption in CVP analysis

It is computed to determine how changes in cost and volume of goods and services offered in market affects a company’s operating and net income. At the time of performing this analysis, there are several assumption is made such as sales price, variable price and fixed cost would be constant at all the time (Cholakova & Clarysse, 2015).

Cost volume profit is the analysis used to determine changes in cost and volume which affects operating income and net income.

CVP (Cost volume profit) analysis is made of some basic assumptions and these are as follows.

• In CVP analysis cost can be easily measurable in variable cost and fixed cost i.e. cost can be divided in two parts one is variable cost and another one is fixed cost. These costs play a very important part in total cost of business.
• Variable cost of company is completely based on the total sales of company. On the other hand fixed cost is kept same in all the years unless otherwise provided.
• There will be no closing stock at the end of stock i.e. in CVP analysis we will be able to sell entire unit of production (Drake & Fabozzi,  (2012). In CVP analysis only opening stock is considered and closing stock will be assumed to be zero at the end of the year.
• In an organization where more than one product are being produced and sold then there will be constant product mix of all the products.
• While performing CVP analysis we always assume that selling price of the product will be same & along with selling price cost (both variable as well as fixed) will also be remain same (Needles & Powers, 2010).
• In CVP analysis total cost is consisted with variable and fixed cost which could be used for determining the profit and sales of company. 

The difference between markup and margin is difference of position or standing to compare both these things i.e. it is completely angle to view which creates difference between markup and margin. It can be explained as under:

Markup is basically based upon cost and margin is based upon sales. In different word when mark up on cost is added then sales is computed and when we deduct margin from sales then cost is computed.

This graph represents that margin is the amount of profit if it is increased then it would add on the value of sales and vice- versa. Markup is basically based upon cost and margin is based upon sales. However, these both are the difference between sales and cost but computed differently (Collier, 2012).

Cost volume analysis can be used in financial decision making as it provides information regarding cost and volume of goods and services offered in the market based on which organization could easily make financial decision such as determining economic order quantity, working capital and amount of money required for certain level of turnover (Platon, Frone,  & Constantinescu, 2014).

CVP analysis provides us PV ratio which is contribution (Sales-variable cost)/sales. With the help of this ratio, organizations could analyze the profit from the particular product itself. At that time, organizations ignore fixed cost portion because it is irrelevant in its decision making due to its CVP analysis method. It can be understood with the help of this example (Roth, 2017).

If organization wants to know whether to produce product X along with product Y which is already in production process of factory, then it is irrelevant to consider the factory rent cost which is fixed irrespective of no. of product is to be produced. Therefore, organizations need to consider revenue form product X and cost associated to product X only. If this result in positive then organizations will produce product X.

Difference between markup and margin

CVP analysis also provides us a tool to arrive at breakeven point, i.e. a point where there is no loss and no profit. Breakeven point can be calculated by dividing contribution by fixed cost per unit.  Therefore a point is where no. of unit is computed at which there will be no profit and no loss. Then this analysis helps in financial decision making. Therefore, it could be said that CVP analysis helps organization to determine the amount of funds blockage and capital budgeting decision based on its possible cash inflow and amount of earning throughout the business time (Brigham and Ehrhardt,  2016).

It is the budget which is prepared to estimate the amount of cash inflow and outflow from the business functioning of organization. It is used by organization to determine how much cash would be needed for smooth running of business. This budget provides all the required details of company cash expenses and cash receipt for a particular period of time (Nirajini & Priya, 2013).

			Jan.	Feb.	March
Opening bal.			18000	59500	31800
Add-	Sales	0.7	105000	35000	56000
		0.3	15000	24000	18000
		A	138000	118500	105800
Less-	Purchase	0.1	8000	6000	7000
		0.5	35000	40000	30000
		0.4	24000	28000	32000
	Sales Exp.		1500	1500	1500
	Commission		2000	3200	2400
	Labor Exp.		4000	4000	4000
	Operating Exp.		4000	4000	4000
		B	78500	86700	80900
	Closing Bal.	(A-B)	£ 59500	£ 31800	£ 24900

 By evaluating the cash budget of company it is determined that company has to invest its money. In this case, Clive International Ltd has good amount of cash inflow in all three months. In January, Clive International Ltd has £ 59500 closing balance then £ 31800 in February and then £ 24900. Therefore, in all three months, company should invest its money in other business ( Minnis & Sutherland, 2017).

Clive International Ltd do not have any deficiency of funds in its business functioning. Therefore, there is no need to go for short term loans (Ehrhardt & Brigham, 2013).

If Clive International Ltd were to have shortage of funds then it could go for short term loans such as going for overdraft facility from banks and financial institutions, taking advance from its customers, forcing debtors to pay their credit amount and could also invest its own funds in operating activities (Roth, 2017).

Role of budgeting- Budgeting is the tool which is used by Clive International Ltd for estimating amount of money required in business (Kiran and Singh,2014). It helps organizations to make arrangement of require amount of funds and how company could reduce its cost of capital. Ideally budgeting gives indication for amount of money required to be invested in operating and capital expenditure (Nizam & Hoshino, 2016).

Net present value- It Is the amount of differences between present value of cash inflow and present value of cash outflow. it is observed that when a company select project through its capital budgeting decision then higher NPV project is selected.

Calculation of Net Present Value

	Years	0	1	2	3	4	5
	Cash Outflow	£ -600000
	Cash inflow		£ 190000	£ 285000	£ 315000	£ 270000	£ 187000
Less-	Expenses		215000	245000	253000	188200	163000
Add-	Depreciation		120000	96000	76800	61440	49152
	Net Cash inflow		£  95000	£ 136000	£ 138800	£ 143240	£  73152
	Dist. Factor @8%		0.926	0.857	0.794	0.735	0.681
	Present value of cash inflows	£ 469827	£  87970	£  116552	£  110207	£ 105281	£ 49816.5
		£ -130173
Add- PV of salvage value		£ 133890
	Net Present Value	£ 3717

In this project, company is having positive net present value of £ 3717. It provides that company is having positive cash inflow during the project life. Therefore, company should adopt this project.

Company should proceed with the project as the project provides positive Net Present Value of £ 3717. This project seems to be viable for the company on the basis of above NPV calculation. In addition to this, if company is having other options which is more beneficial for the company as compare to this investment proposal then it should invest its money in that project. Therefore, it could be inferred that company should invest its money in business where it has more earning or cash inflow (Frank and Shen, T., 2016). It is also further observed that company has to evaluate which capital budgeting tool could be used by organization for selection of projects (Jiang & Kim, 2013).

Net Present Value is the amount of difference between cash inflow and cash outflow of business. It is evaluated that organizations should invest its money in the project which gives higher Net present value (Hornstein, 2013). NPV method can be used for evaluation of investment as with the help of this method organizations will be able to find whether it is favorable or adverse in terms of Cash inflows.  While evaluating a proposal or investment project we consider PV of Cash outflow and PV of Cash inflow and compare both of them and arrive at a conclusion whether or not proposal should be accepted or not (Brazel, et al. 2015). In addition to this, Net present value considers time value of money by including discounting rate. It provides the value of future cash inflow in context with present value factors.  However, NPV method should not be taken in case if users have two investment proposals with same life cycle. In this profitability index would be the best suitable course of action (Madura, 2014).

The NPV approach correctly accounts for the time value of money and adjusts for the project’s risk by taking cost of capital to evaluate present value of investment (Gotze, Northcott, and Schuster, 2015). In addition to this, capital budgeting decision for selecting a particular project is completely based on its net present value. However, users could also make other analysis to identify its true cash inflow such as scenarios analysis, project escalation analysis and CAPM model (Brigham and Ehrhardt, 2016).

Conclusion 

There are several factors and terms which have been used in this assignment such as CVP analysis, capital budgeting tools and other financial analysis. These tools have assisted in selecting effective projects out the give options. All these four questions have provided important learning outcomes which assist in developing analytical skills.  In the end of this report, it would be inferred that all the investors should use financial analytical tools in determined approach before investing their money. Now in the end, it would be inferred that company should effectively use capital budgeting tools for better return from its investments.

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