Mullan Ltd Financial Performance And Position Evaluation Report

Mullan Ltd Financial Overview

Evaluate the Mullan Ltd financial performance and position of the business?

This report evaluate Mullan Ltd financial performance and position of the business. The financial status is observed by analysis of income statement, balance sheet and ratio analysis of profitability and liquidity, efficiency, financial gearing and investment. The calculations are generated for each ratio through period of two financial years. The aims of this calculations is to represent information of overall business performance in relation with any further activities from investment, finance or operational perspective.  The report also focused attention on working capital analysis and draw possible activities, which could improve the company financial position. In addition the report analyse and evaluate possible external financial investment from venture capitalist GF PLC. Furthermore the report observe, compare and justify four different external financial resources available as potential options for Mullan Ltd.

Before detailed ratio analysis observation of the statement of financial position is important to indicate issues of company performance.According to (Atrill & McLaney, 2013) overview in categories such assets and revenue, cash balance and debts are useful to identify issues, which ratios may not be able to detect:

Decline the value of non-current assets and huge increasing in sales revenue.

The non-current assets declined about 6% in 2015 (from £9.06m to £8.55m). Sales revenue expand about 67% from £15m (2014) to £25m (2015). Furthermore Mullan Ltd indicate slump in the figure of Land and buildings about 31% (from £6.96m in 2014 to £4.8m in 2015). According to Note 3 company increase their bank loan amount over freehold land and buildings. In this case decreasing the assets levelcould be the reason for refusing further loans and overdrafts.However the company increase investment in equipment and vehicles. This could be in relation with the planning expansion in US and China markets.

Inventories increased more than 4 times (from £700 thousands in 2014 to £3m in 2015). According to the current situationthis could be explained with company interests to invest on toys. Moreover the company aims to reserve this capital in stocks and secure further sales over the positive sales indications. In the other hand trade receivables level alarming that the company sales on credit position, which could be in relation with their interest of increasing the profit. Cash balance increase from £36 thousands in 2014 to £501 thousands and the result is significant comparing the 2years period, but however the amount received in cash over the figure of trade receivables is much lower and indicate weaknessesin the cash flow management.

Profitability

In this segment of the analysis Mullan Ltd indicate negative signs over the positive sales revenue. Three elements warning and tight up the position of the business with further potential investors and lenders investments. Decreasing the level in Land and buildings and assets overall and increasing the amount of loan from £5.7m to £7m (Note3). Additionally also the bank overdraft (£2.5m) used for paying damages during the situation in Indian factory. Usually investors and lenders are highly sensitive in decreasing the level of non-current assets. Many specialists determine non-current assets as highly liquid element, which could be transferred quickly into real value of money.

The level of operating profit increased from £1.95m(2014) to £5.2m (2015)and encourage that company could realise their plans in the toys market. In the other hand the figure of expenses and bad debts written off also increased. The calculation from expenses over the sales revenue detect increasing from 14.3% in 2014 to 20.4% in 2015. Comparing the results of the operating profit is significant, because is achieved without increasing the number of the employees over the period.However the costs vibrating and expand, which indicate weak company control over the expenses elements. However this could be normal in termsof aggressive strategy on sales.

The income statement of Mullan Ltd business indicate weak management and control in costs of sales and specially in expenses and bad debts written off. Company expansion in sales revenue could be explained with the aggressive marketing plan. According to statement of financial position Mullan Ltd indicate alarming increasing in non-current liabilities from £11.67m (2014) to £15.68m (2015).  Non-current assets decreased from £9,06m (2014) to £8.55m (2015). Comparing the results in these elements worrying for the company long-term business position.

The figure in current assets encourage and they increased from £5.07m (2014) to £12.9m (2015). On the other hand current-liabilities increased from £2.46m (2014) to £5.77m (2015). The comparison on these elements indicate that the company reserve capital in current assets position. This is understandable according to expanding level of sales revenue. However to analyse in more details Mullan Ltd business position this report provide information based in ratio analysis calculations. This method is used in relation to detect any issues and provide recommendations in terms of profitability and liquidity, efficiency and financial gearing and investment.

Mullan Ltd achieve significant results in measures of profitability. According to the result of ROSF ratio from 13.6 (2014) increasing to 42.4% (2015) the business utilised thefunds available to the shareholders. This positive result is important and provide opportunities for further larger investment in toys market. The result in average encouraged, but however in 2015 the shareholders inject the business (Note3) with larger investment. Ideally the business growth should be achieved over the same level of investment.(Atrill & McLaney, 2013). ROCE ratio from 14.26% (2014) increasing to 38.03% (2015) andthe figure indicate effective operation with funds deployed in the business. This measure is fundamental in comparing inputs with the outputs and vital in assessing the effectiveness (Atrill & McLaney, 2013).The measures of operating profit and gross profit margin ratios also confirmed the trends of optimistic profitable management activities. Increasing level in operating profit margin from 13% (2014) to 20.8% (2015) consider and present positive result in terms of trading business operations and performance. However management activities could attempt to minimise the figure of selling, distribution and administration expenses if possible and with relation to the business interests and specifications. The arising level of debts written off also disturb and should not be ignored. In gross profit margin ratio Mullan Ltd achieve increasing from 27.33% (2014) to 41.2% (2015), which indicate well management in cost of sales. This mean that the costs of sales are relatively lower comparing 2014/2015 and sales management achieve optimistic results. Moreover the reasons could be prices level movement for both sales or/and purchases and in this situations business utilised their profit figure.

Efficiency

The calculations of efficiency ratios detect weaknesses in management oftrade receivables, where the period increased from 97 days to 125 days. This result indicate that the company sales are achieved over the extension of the settlement period. Moreover in this condition Mullan Ltd allows their clients to hold capital for longer period, which decreased the opportunity to expand with own investment in China and USA market. At the same time the company settlement period for trade payables slightly changed with one day (from 63days to 62 days), which shows well management in relation with suppliers. However it appears that Mullan Ltd could attempt to extend their payables period in relation with interests of the company expansion.

However the capital structure in the assets and especially in trade receivables require management attention in terms of preventing the irrecoverable debts from customers.

Mullan Ltd achieve important increasing of their sales revenue in 2014/2015. The overall observation of their income statement indicate good financial performance and growth. In addition the results are encourage that the company could succeed in their plan for expanding in US and China markets. The accident in their Indian factory and the financial results exposed well management in crisis situation.However is important the company to focus the attention to prevent further similar situations, which could have negative impact in their financial stability and overall position of the business.To explore the company potential in order this report implement analysis on ratio measures, which are used to evaluate Mullan Ltd financial position and results of company operations in 2014/2015:

• Profitability measures
• Liquidity measures
• Efficiency measures
• Financial gearing measures
• Investment measures

Company’s Gross profit increased from 27.33 to in 41.2% suggesting company maintained its inventory costs effectively. Additionally the operating profit margin increased from 13% (2014) to 20.8% (2015) consider and present positive result in terms of trading business operations and performance. (Best, 2000)

There are four key territories that can drive profitability. These are lessening costs, expanding turnover, expanding profitability, and expanding proficiency. Organization can likewise venture into new market segments, or grow new items or administrations. Close administration of organization’s expenses can drive organization’s profitability. Most organizations can discover some wastage to diminish, it’s imperative not to cut expenses to the detriment of the nature of organization’s items and administrations. Utilizing movement based costing is a viable approach to locate the genuine expense of particular business exercises. Movement based costing demonstrates to you the amount it costs you to complete a particular business capacity by ascribing extents of every one of organization’s expenses -, for example, pay rates, premises or crude materials – to particular exercises. (Bragg, 2000)

Financial Gearing and Investment

The starting investigation may take a little time however utilizing activity based costing regularly shows up expenses (and accordingly potential efficiencies) that you would not typically reveal utilizing more customary costing strategies. It’s a smart thought to audit organization’s evaluating routinely. Changes in organization’s commercial center may imply that you can raise organization’s costs without gambling deals. Notwithstanding, it’s savvy to test any value ascends before you make them perpetual. Consider the Pareto guideline (regularly known as the 80/20 principle) and how it could apply to organization’s business. In straightforward terms, applying the Pareto rule proposes that around 80 for every penny of organization’s benefit is picked up from 20 for every penny of organization’s items or administrations. The same rate of benefit is regularly additionally picked up from the same rate of clients. Concentrating on organization’s most beneficial clients – regardless of the possibility that it means releasing the less gainful ones – could help organization’s profitability, insofar as it is taken care of painstakingly. A standout amongst the most clear courses to expanding organization’s profitability is to purchase all the more viably. It bodes well to survey organization’s supplier base routinely and check whether you can purchase the same crude materials all the more economically or proficiently. Notwithstanding, attempt to guarantee that you keep up quality in the meantime. (Helfert, 1987)

Company’s liquidity position is quite currently stable as there was very less movement observed in the liquidity ratios as the current ratio increased from 2.06 times to 2.23 times where as the quick ratio decreased from 1. 77 to 1.71 suggesting that company needs to improve its liquidity position. (Higgins, 1983)

Diminishing overhead is a way the organization can build liquidity. Overhead expenses or working costs incorporate numerous things that don’t create a benefit, or do as such just by implication. Some basic overhead costs incorporate rent, utilities, protection and expert expenses, for example, licenses or required industry affiliation enrollments. Most organizations can decrease some of these costs. For instance, long haul protection policyholders can now and again arrange a superior rate. Programmed indoor regulators that raise or lower the temperature at the end of the business day regularly bring down utility expenses. (Horrigan, 1978)

Organization can shed superfluous advantages for expansion liquidity. Organizations now and again cling to resources after the advantages no more create a benefit. For instance, the organization may possess a little building in which it stores occasional utilized resources, for example, more established hardware. On the off chance that the gear never inspires gives something to do, it ought to be sold or discarded, which clears the building for more gainful finishes. Instead of paying for upkeep on a building to store hardware, the business can lease the building and make another income stream, which enhances liquidity.

External Financial Investment Options

Both accounts receivable and accounts payable effect liquidity. To build liquidity, the organization ought to reliably audit accounts receivable to ensure clients get and pay bills on time. Delays in sending bills, especially in organizations without a settled charging timetable, can seriously hinder income and harm liquidity. Regarding accounts payable, merchants once in a while offer a more drawn out instalment arrangement or portions when managing a business. By bringing down aggregate instalments due or spreading out the instalments with longer interims between bills, the business can enhance its liquidity.

Company’s efficiency ratios suggest that company’s efficiency with regard to operation efficiency is declining as the average inventory turnover period decline from 22 days to 44 days suggesting decreased turnover.  (Muro, 1998)

At the point when the business has wasteful procedures, for example, obsolete telephone frameworks or a drowsy system, representatives can get baffled, on the grounds that they can’t complete their employments the instruments gave. Clients may see that dissatisfaction and lose trust in your business. Much more dreadful, esteemed workers can get to be worn out and choose to proceed onward. Not just have the organization lost a gainful laborer, organization must invest energy and cash enlisting a substitution. To guarantee workers are profitable and fulfilled, your business needs, at any rate, a safe, solid, constantly accessible system. (Palepu, Healy and Bernard, 2000)

Company’s gearing ratio decreased from 48.84% to 44.65% suggesting company is maintaining its capital structure efficiently. However to further control the risk, company would need to reduce the gearing. (Rees, 1995)

There are various strategies accessible for maintaining organization’s gearing ratio, including: The top managerial staff could approve the offer of shares in the organization, which could be utilized to pay down debt. Negotiate with loan specialists to swap existing obligation for shares in the organization. (Rodgers, 2008)

Diminish working capital. Expand the rate of accounts receivable accumulations, diminish stock levels, and/or protract the days required to pay accounts payable, any of which delivers money that can be utilized to pay down obligation. Expansion benefits. Utilize any systems accessible to build benefits, which ought to produce more money with which to pay down obligation.

Company’s dividend payout ratio declined from 33% to 12% suggesting that company decided to reduce the profit to be distributed among the shareholders. Such policy would affect the share holders of the company especially those who are dependent on the regular dividends from their investments.

However the company’s earning per share increased from 0.2 to 0.68 which would enhance the shareholder’s confidence in the company. (Steffy, Zearley and Strunk, 1974)

On the whole it could be said and recommended that company should maintain a stable and sustainable earnings for the shareholders and it should also ensure that a reasonable amount of income shall be distributed among the shareholders to keep them satisfied.

Income statement for the years ended 31st December
	2015	2014
Sales revenue		25,000		15,000
Cost of sales
Opening inventory	700		600
Purchases	17,000		11,000
	17,700		11,600
Closing inventory	(3,000)	(14,700)	(700)	(10,900)
Gross profit		10,300		4,100
Selling and distribution expenses	3,800		1,456
Administration expenses	1,000		544
Bad debts written off	300	(5,100)	150	(2,150)
Operating profit (before interest and taxation)		5,200		1,950
Interest payable		(560)		(456)
Profit before tax		4,640		1,494
Tax		(1,531)		(494)
Profit for the year		3.109		1,000

Statement of Financial Position as at 31st December
	2015	2014
	£’000	£’000
ASSETS Non-current assets (Note 1)
Land and buildings (Note 2)	4,800	6,964
Equipment	2,852	1,600
Motor vehicles	900	500
	8,552	9,064
Current assets
Inventory	3,000	700
Trade receivables	8,570	4,000
Other receivables	829	330
Cash	501	36
Total assets	21,452	14,130
EQUITY & LIABILITIES Equity
Ordinary shares of £1 each	5,000	5,000
Retained profit	3,679	970
	8,679	5,970
Non-current liabilities
Loan notes (Note 3)	7,000	5,700
Current liabilities	15,679	11,670
Trade payables	3,184	1,886
Other payables (inc. Taxation)	89	524
Bank overdraft	2,500	50
Total equity and liabilities	21,452	14,130

	2015	2014
Profitability
Gross profit margin
Gross profit	£      10,300	£        4,100
Sales revenue	£      25,000	£      15,000
	41.20%	27.33%
Operating profit margin
Operating profit margin	£        5,200	£        1,950
Sales revenue	£      25,000	£      15,000
	20.80%	13.00%
Return of capital employed
Operating Profit	£        5,200	£        1,950
Share+Reserves+Non-current liabilities	£      15,679	£      11,670
	33.17%	16.71%
Return of share holders and profits
Profit after tax	£        3,109	£        1,000
Share Capital+Revserve	£        8,679	£        5,970
	35.82%	16.75%

Efficiency
Average inventory turnover period =Average inventory cost of sales
Average inventory cost of sales	£        1,850	£            650
cost of sales	£      14,700	£      10,900
	46 days	22 days
Average settlement period for trade receivables
Trade receivables	£        8,570	£        2,000
Credit sales	£      25,000	£      15,000
	125 days	97 days
Average settlement period for trade payables
Trade payables	£        3,184	£        1,886
Credit Purchase	£      17,000	£      11,000
	62 days	63 days
Sales revenue to capital employed
Sales revenue	£      25,000	£      15,000
Shares capital+Reserve+Non current liabilities	£      15,679	£      11,670
	1.59 times	1.29 times
Sales revenue per employee
Sale revenue	£      25,000	£      15,000
Number of employee	100	100
	£            250	£            150
Liquidity
Current ratio
Current assets	£      12,900	£        5,066
Current liabilities	£        5,773	£        2,460
	2.23 times	2.06 times
Acid test ratio
Current assets – Inventory	£        9,900	£        4,366
Current liabilities	£        5,773	£        2,460
	1.71 times	1.77 times

Gearing
Gearing ratio
Long term non current liabilites	£        7,000	£        5,700
Share+Reserves+Non-current liabilities	£      15,679	£      11,670
	44.65%	48.84%
Interest cover
Operating profits	£        5,200	£        1,950
Interest payables	£            560	£            456
	9.29 times	4.28 times
Investment/Shareholders
Dividend payout ratio
Dividend for the year	£   400,000	£   330,000
Profit after tax	£3,109,000	£1,000,000
	12.87%	33.00%
Earnings Per share
Profit after tax	£        3,109	£        1,000
Original shares	£        5,000	£        5,000
	£          0.62	£          0.20

References

Asx.com.au, (2015). Home – Australian Securities Exchange – ASX. [online] Available at: https://www.asx.com.au/ [Accessed 15 Sep. 2015].

Best, R. (2000). Market-based management. Upper Saddle River, N.J.: Prentice Hall.

Bragg, S. (2000). Financial analysis. New York: Wiley.

Helfert, E. (1987). Techniques of financial analysis. Homewood, Ill.: Irwin.

Higgins, R. (1983). Analysis for financial management. Homewood, Ill.: Dow Jones-Irwin.

Horrigan, J. (1978). Financial ratio analysis. New York: Arno Press.

Muro, V. (1998). Handbook of financial analysis for corporate managers. New York: AMACOM.

Palepu, K., Healy, P. and Bernard, V. (2000). Business analysis & valuation. Cincinnati, Ohio: South-Western College Pub.

Petty, J. and Titman, S. (2015). Financial Management: Principles and Applications. 6th ed. Pearson Australia.

Rees, B. (1995). Financial analysis. London: Prentice Hall.

Rodgers, P. (2008). Financial analysis. Oxford: CIMA.

Steffy, W., Zearley, T. and Strunk, J. (1974). Financial ratio analysis. Ann Arbor: Industrial Development Division, Institute of Science and Technology, University of Michigan.