Financial Analysis Report For Barkes Computers

Financial analysis

The report includes the overall analysis of Barkes Computers who is a wholesaler of computer hardware for the past five years. It highlights the company’s performance during the past years and provides insights to the chairman and other senior managers about the same. The objective of preparing such report is to advice the chairman on company’s position and performance and to recommend about the decision to be taken in respect of senior managers’ demand for big bonus. The report applies financial tools and techniques to evaluate Barkes’ final accounts considering various calculations that facilitates good decision making. At the end, a conclusion has been provided that covers all the findings of the analysis.

It is a procedure of evaluating businesses, budgets, projects, and other finance related organization in order to determine their performance and appropriateness as per the industry standards. Generally, the process is followed by the companies to check their stability, solvency, liquidity and profitability (Warren, Reeve & Duchac, 2011). It helps in deciding that whether the firm is the best option for making monetary investment or not. Many financial analysts use this technique to study the trend followed by a business and evaluate the long term plans made by it.

The analysis is based on the quantitative data presented in the annual report of the company. It includes assessment of the past data so as to make predictions for future. There are several techniques and methodologies applied for conducting financial analysis of a company (Nikolai, Bazley & Jones, 2009). They include horizontal and vertical analysis, ratio analysis, peer analysis, technical and fundamental analysis and many others. The most commonly used tools and techniques are explained in the report which measure Barkes’ performance from every aspect and notice the changes in every line item of its balance sheet and income statement (Helfert & Helfert, 2001). 

It is one of the tools of financial analysis that reflects the changes in the corresponding items of financial statements over a period of time. It is used to measure the past trend followed by the company. The statements taken for the analysis are of more than two years among which one is considered as the base. On the basis of that base year, the variations in other years in the items are calculated and then the results are interpreted. The changes can be reported in both dollar format and percentage format (Sinha, 2012). 

Horizontal analysis

Barkes Computer’s balance sheet and income statement are evaluated by using horizontal analysis and the interpretation regarding its performance has been made. In that case, 2013 has been considered as the base year and the changes over other years have been noticed.

The analysis of income statement states that over the past five years, the company has reported constant increase in its revenue of 66%, 110%, 156% and 250% respectively. Along with this, its gross profit also increased by 54% in 2017 and 36% in 2016 as compare to the base year 2013. However, the firm reported high COGS which make it earn low profits. Despite of increased expenses, Barkes reported an upsurge in the net profit of 86% last year. Also prior to that, its net profit after tax has shown an increase of 55%, 31% and 17% as compare to 2013. Overall, with the strong sales and profits Barkes has improved its financial performance during the period 2013-2017.

Looking at the balance sheet, it can be interpreted that the company has reported a continuous decrease in its total assets as its cash position and non-current assets reduced to a significant extent. In contrast to it, the liability of the firm has shown an upsurge of 43% in 2017 and 22% in 2016 and 2015 as compare to 2013. However, the equity reduced by 38% in the last year. This shows that though company has made profits but its financial position is not so promising at it has increased its debt portion and reduced the assets.

Income statement	2017	Amount	% change	2016	Amount	% change	2015	Amount	% change	2014	Amount	% change	2013 (base year)
	$m			$m			$m			$m			$m
Sales	469	335	250%	343	209	156%	281	147	110%	222	88	66%	134
COGS	344	291	549%	233	180	340%	186	133	251%	134	81	153%	53
Gross Profit	125	44	54%	110	29	36%	95	14	17%	88	7	9%	81
Expenses	48	8	20%	46	6	15%	41	1	3%	40	0	0%	40
EBIT	77	36	88%	64	23	56%	54	13	32%	48	7	17%	41
Tax	23	11	92%	19	7	58%	16	4	33%	14	2	17%	12
Net Profit	54	25	86%	45	16	55%	38	9	31%	34	5	17%	29

Balance sheet	2017	Amount	% change	2016	Amount	% change	2015	Amount	% change	2014	Amount	% change	2013 (base year)
	$m			$m			$m			$m			$m
Current Assets	200	-20	-9%	205	-15	-7%	210	-10	-5%	215	-5	-2%	220
Noncurrent Assets	5600	-400	-7%	5700	-300	-5%	5800	-200	-3%	5900	-100	-2%	6000
Total Assets	5800	-420	-7%	5905	-315	-5%	6010	-210	-3%	6115	-105	-2%	6220
Current Liabilities	450	30	7%	440	20	5%	430	10	2%	420	0	0%	420
Noncurrent Liabilities	3000	1000	50%	2500	500	25%	2500	500	25%	2000	0	0%	2000
Total Liabilities	3450	1040	43%	2940	530	22%	2930	520	22%	2420	10	0%	2410
Owners Equity	2350	-1460	-38%	2965	-845	-22%	3080	-730	-19%	3695	-115	-3%	3810

It is considered as a proportional analysis in which each item of financial statement has been measured as a percentage of another item. Usually, while analysing income statement the amount of sales is taken as a base to find out the percentage of every line item and on the balance sheet, the amount of total assets and total liabilities and equities is considered (Warren & Jones, 2018). 

From the income statement, it has been noticed that though the net profit is increased in terms of dollar but as a percentage it has been decreased from 22% to 12%. Reason being, the significant increase in company’s COGS and expenses. From the balance sheet, it has been reflected that the non-current assets covers 97% of the total assets while the non-current liabilities comprises of 87% of the total liabilities. Also the portion has been increased throughout the years. However, in 2017 the equity reduced from 153% to 68% over the years. The company needs to focus on reducing the content of long term debt as to reduce the financial risk.

	2017	% change	2016	% change	2015	% change	2014	% change	2013	% change
	$m		$m		$m		$m		$m
Sales	469	100%	343	100%	281	100%	222	100%	134	100%
COGS	344	73%	233	68%	186	66%	134	60%	53	40%
Gross Profit	125	27%	110	32%	95	34%	88	40%	81	60%
Expenses	48	10%	46	13%	41	15%	40	18%	40	30%
EBIT	77	16%	64	19%	54	19%	48	22%	41	31%
Tax	23	5%	19	6%	16	6%	14	6%	12	9%
Net Profit	54	12%	45	13%	38	14%	34	15%	29	22%
	2017	% change	2016	% change	2015	% change	2014	% change	2013	% change
	$m		$m		$m		$m		$m
Current Assets	200	3%	205	3%	210	3%	215	4%	220	4%
Noncurrent Assets	5600	97%	5700	97%	5800	97%	5900	96%	6000	96%
Total Assets	5800	100%	5905	100%	6010	100%	6115	100%	6220	100%
Current Liabilities	450	13%	440	15%	430	15%	420	17%	420	17%
Noncurrent Liabilities	3000	87%	2500	85%	2500	85%	2000	83%	2000	83%
Total Liabilities	3450	100%	2940	100%	2930	100%	2420	100%	2410	100%
Owners Equity	2350	68%	2965	101%	3080	105%	3695	153%	3810	158%

Income statement

It is the most used and common technique which is applied by the analyst to measure the performance from all the financial aspects. It covers all the dimensions like liquidity, profitability, efficiency and solvency which help in evaluating the entire position of the company (Gibson, 2011). 

	2017	2016	2015	2014	2013
Net profit ratio	11.51%	13.12%	13.52%	15.32%	21.64%
Gross profit ratio	26.65%	32.07%	33.81%	39.64%	60.45%
Return on equity	2.30%	1.52%	1.23%	0.92%	0.76%
Return on assets	0.93%	0.76%	0.63%	0.56%	0.47%
Asset turnover	0.08	0.06	0.05	0.04	–
Current ratio	0.44	0.47	0.49	0.51	0.52
Debt to equity ratio	1.47	0.99	0.95	0.65	0.63

It is a profitability ratio which represents the amount of profit as a percentage of total sales (Godwin & Alderman, 2012). The trend followed by Barkes reflects that the NPR reduced from 21.64% to 11.51%. This was due to the fact that the company’s expenses increased over the years.

It is another profitability ratio which reflects gross profit as a percentage of total revenue (Higgins, 2012).  The COGS of company increased from 2013 to 2017 which reduces the overall GPR from 60.45% to 26.65%. COGS comprises of major part of total revenue which eventually lowers its gross profit and effect the ratio to a great extent.

It determines the amount of return offered by the company to its shareholders out of the profits retained by it (Jenter & Lewellen, 2015). However, the profit ratio of the company has reduced over the years but it has high ROE in 2017 as compared to other years. It increased from 0.76% to 2.30% due to the overall reduction in its owners’ equity amount.

It shows the return generated by the organization by properly and completely utilizing its total assets and available resources. It is also a measure of company’s overall profitability (Bragg, 2012). The ROA of Barkes has constantly increased from 0.47% to 0.93% due to the increase in its net profit and continuous reduction in its total assets. This anyway boosted up the ROA of the company.

It is one of the efficiency ratios which indicate the competency of the firm in generating more revenue from utilizing its resources effectively and efficiently (Bragg, 2012). The ATR increased from 0.04 times to 0.08 times. The ratio was very low which identifies that company is not that much efficient enough to make more revenue from its assets.

It is a liquidity ratio which measures the financial strength of the company in paying off its short term financial obligations with its current assets. The ideal ratio is 2:1 that is to be maintained by every company (Vogel, 2014). In case of Barkes the ratio has been reduced from 0.52 to 0.44 due to the constant increase in its current liabilities. On the other side, the current assets of the company declines over the past five years. This brings an overall decline in company’s current ratio.  

Balance sheet

It is a gearing or long term solvency ratio which measures the financial risk of a company. It evaluates the debt and equity element of the company against each other and reflects the portion of assets which is financed through debt and the one financed through equity (Lee, Lee & Lee, 2009). The D/E ratio of Barkes increased continuously from 0.63 to 1.47 due to the increased content of its liabilities. It is clearly reflected that the debt of the company rose constantly whereas its equity reported a continuous decline over the years. This increases the ratio and also the level of financial risk taken by the firm.

Conclusion:

From the above report, it can be concluded that though the performance and position of Barkes Computers has increased and improved but the company still need to focus on enhancing its liquidity position and reducing its financial risk before offering bonus to the senior managers. Though the profits have increased but at the same time financial obligations of the firm have also risen during the past five years. Barkes need to increase its current assets in order to pay these obligations before offering any kind of bonuses. So, overall it is concluded and recommended that the company should focus on improving its performance more and should pay bonuses to the executives later on.

References: 

Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New Jersy: John Wiley & Sons.

Bragg, S. M. (2012). Financial analysis: a controller’s guide. New Jersy: John Wiley & Sons.

Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.

Godwin, N., & Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.

Helfert, E. A., & Helfert, E. A. (2001). Financial analysis: tools and techniques: a guide for managers (pp. 221-296). New York: McGraw-Hill.

Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.

Jenter, D. &Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), pp.2813-2852.

Lee, A. C., Lee, J. C., & Lee, C. F. (2009). Financial analysis, planning and forecasting: Theory and application. Singapore: World Scientific Publishing Co Inc.

Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009). Intermediate Accounting. USA: Cengage Learning.

Sinha, G. (2012). Financial statement analysis. New Delhi: PHI Learning Pvt. Ltd.

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge University Press

Warren, C. S., & Jones, J. (2018). Corporate financial accounting. USA: Cengage Learning.

Warren, C. S., Reeve, J. M., &Duchac, J. (2011). Accounting. USA: Nelson Education.