Financial Analysis, Appraisal and Decision Making

Interpreting financial information has never been easy as much expertise is required, especially when dealing with large companies running errands in various nations. However, the learning schedule of this unit has played a critical role in equipping students with the necessary skills required to interpret any financial information. All the lessons were informative, with each week introducing new concepts that helped students achieve their goals with ease. Each week’s objectives were critical as they formed the basis of the assessment criteria. The weekly reading was crucial as it equipped students with the necessary skills to interpret financial information of any organization.

In week 1, one was introduced to critical skills in accessing financial statements of a public or limited company. The access was crucial as one could tell how companies present their financial information in their annual report (Weetman, 2016). Other relevant aspects of this week include understanding how to prepare various financial statements using the acceptable standard and the correct information fit for the purpose. The issues of Corporate Governance were introduced in week 1 to explain why companies ought to comply with the principles involved. From the reading and the discussion posted, it was easier to analyze the financial information of any organization and determine its worth (Atrill and McLaney, 2015). The skills gained through the week’s reading and discussion allowed one to identify why Samsung is the most prominent company among the analyzed organizations.

In week 2, the aspects that relate to stakeholders were discussed in detail, and one was able to identify various stakeholders in an organization and appreciate their role in any organization. Through the reading and week two discussion, it was easier to recognize the limitation of financial statements and, in the long run, consider the implications of these limitations in economic analysis (Weetman, 2016). In week 2, students were introduced to various financial ratios, including profitability ratios, liquid rations, and investor ratios. The financial ratios were used to compare the performance of organizations. The percentages were also used to identify the non-performing organizations.

Week three was critical as issues such as uncertainty and risks in financial decision-making were explored in detail. Through the discussions and the week’s readings, one could easily differentiate between management accounting and financial accounting. Some of the other aspects discussed in week 3 include the economic concepts of uncertainty and risks, and the discussion helped evaluate the organization’s performance in various projects (Drury, 2018). The week’s discussion on the board was critical as one could easily identify non-financial aspects of accounting such as corporate flexibility, market orientation, service quality, and resource usage that help determine an organization’s success in specific areas such as marketing.

In week 4, it was mandatory to read Atrill and McLaney’s book on accounting and finance for non-specialists, among other books. The readings were critical as one understood the value of using accounting skills in appraising capital investment decisions (Gowthorpe, 2018). Furthermore, other issues discussed include the appraisal methods such as payback periods, accounting rate of return, net present worth, and internal rate of return. Through the discussions and the assessments of the week, it was easy to differentiate the appraisal methods used in financial accounting. The accumulated knowledge eased the aspect of analyzing a project of any organization, let alone estimating its possible outcomes. Calculating net profit value and comparing it with the internal rate of return were lessened as these are some ratios used to compare and contrast the results of different projects. All the week’s activities enhanced the identification of all these aspects, more so by the discussions and the assessments submitted.

In week 5, all the students were tasked with reading McLaney’s book on Business finance theory and practice. With the other recommended reading, one gathered the necessary skills to analyze the economic rationale for acquisitions and mergers (Ștefănescu et al., 2019). In addition, the art of evaluating different forums of purchase such as shares, cash, and loan capita was discussed in detail. Through the discussions, it was possible to assess the potential effects of a merger in boosting the shareholders’ wealth in each business enterprise. Other aspects discussed throughout the week include the main methods used in resisting any acquisition of a proposed merger. Another aspect that was of value to explore was cyber security and its importance in accounting. With the recent advancement in technology, grasping cyber security knowledge is vital as this has been one of the aspects affecting the confidentiality of many organizations (Bouveret, 2018). In the very end, it was possible to identify and analyze the model embraced by McDonald’s to sustain its growth in a competitive market. It was easier to identify the merits of McDonald’s collaborating and acquiring the smaller green brands.

Week six was critical, and each student had to read McLaney’s book on Business Finance Theory and practice more so the chapters that focused on the management of the working capital. At the end of the week, one explained the importance of working capital and evaluated its need in an organization (Weetman, 2016). In addition, week six assessments and discussions included the art of creating and interpreting cash budgets. Such moves were critical in analyzing a financial statement of an organization. Based on the financial report and the week’s activities, one could quickly identify an organization’s problems and interpret its data based on its performance in various aspects. Some of the elements included in the week’s discussions and posts include the approaches used in analyzing an organization’s financial statement to identify the working capital problems, such as cash flow statement and risk provisions.

In week seven, issues related to stock markets were explored in detail. The week’s discussions and assessments majored in identifying the functions of stock markets and other financial forms that different organizations embrace (Atrill and McLaney, 2015). Through the week’s activities, it was possible to calculate the gearing of an organization and evaluate its effects on return risks. Other aspects explored in detail include the subject of the appraisal structure adopted by different organizations.

BGC Ltd Financial Report

For the last two years, the organization has been working under constant pressure to try and recover from the economic shock associated with COVID -19. Tremendous growth was experienced over the last five years; however, since the pandemic’s emergency, most organization activities were haltered, and a considerable profit margin experienced a significant drop. The following rations will enhance a comprehensive analysis of the organization’s performance for the last two years.

Gross Profit

Gross profit margin is the percentage of your periodic revenue that you convert to gross profit. Gross profit is simply revenue minus costs of goods sold. While observing at the gross profit margin ratio margin for BGC Limited, the company faces a consecutive decline recording a ratio from 6.81% to 3.94% in 2020 and 2021 respectively. The decline is as a result of faster growth of equity than the cash flow between the two years and higher cost of goods sold (Nariswari and Nugraha, 2020). To a stakeholder, this means that there is an increasing amount of potentially useable capital locked up in the asset and that the return on that capital is falling.

Net Profit Margin

The net margin represents a company’s capacity to convert revenue into profit after deducting all operating expenditures, such as taxes and debt payments. BGC Ltd net profits margin increased tremendously from 0.86% in 2020 to 1.91% in 2021. The low ratio in 2020 signifies a narrow margin of safety: a reduction in sales is more likely to wipe out profits and result in a net loss.The low margin might also be an indication that the organization migt have took a lng term loan to increase its services and production being a new company (Nariswari and Nugraha, 2020). The high ratio recorded in 2021 signifies that theorganisation is becoming successful in controlling its operating expenses

Return on Capital Employed

Return on capital employed (ROCE) is a fiscal measure used to analyze the profitability and capital effectiveness of an organization. The results of computation revelas that the company experienced a decline in its ROCE from 13.80% in 2020 to 2.33% in 2021. To BGC Ltd, the decline may indicate that the firm has reached a point where more capital expenditure would be counterproductive. This might be because it has developed a labor-capital imbalance, or because it has reached a point where economies of scale no longer apply(Ayuba et al., 2019). This may be the moment at which the capital employed must be increased in a lump sum rather than gradually.

Current Ratio

It is used to determine a business’s capacity to repay short-term debt, or debt that matures within a year and that a business can pay off its current obligations by converting assets to cash (Nuryani and Sunarsi, 2020). The outcome can then be used by lenders and creditors on whether or not to give credits.

From the figures, it a be ascertained that BGC Ltd current ratio increased over the year recording a current ratio of 1.00 and 2.00 in the year 2020 and 2021 respectively. It is also worth noting that the current ratios for both years are above one which theoretically is quite impressive. This is beneficial for BGC Ltd since it implies that it has considerably more assets to take care of its short term liability and that it presently runs in steady fiscal solvency.

Gearing

A gearing ratio is a type of financial ratio that compares a liabilities to financial indicators like assets. BGC Limited gearing ratio significantly increased by 0.6624 in 2021 from -0.0024 in 2020. A higher gearing ratio indicates that a BGC has more economic power and is hence more subject to business cycle declines (Nieszporek et al., 2017). This is due to the fact that it has more debt than shareholders’ equity.

Woking Capital Cycle

Acloser examination of BGC Ltd working capital cycle reveals something worth noting. The limited recored a negative working capital cyle of -7 in 2020 ans compared to the positive cycle of 1247 in 2021. This negative ratio exists when the current assets are less than the current obligations. This might be the case of BGC Ltd in 2020. Because the firm was expanding, this was the most beneficial working capital situation since it actually “coins” money for the organization. The positive cycle in 2021 suggests that the chance of not being able to pay short-term loans is minimal. The organization has sufficient current assets to fulfill its debts.

Interest Coverage Ratio

The defines how willingly a company can pay interest on its unpaid liability. Same as the ROCE ratio, BGC Ltd recorded a significant drop in its interest coverage ratio dropping from 22.75 in 2020 to 2.04 in 2021. The lower ratio in 2021is an indication the BGC Ltd is burdened by debt expenses and the less capital it has to use in other ways. Furthermore, it could mean that the company has a smaller amount earnings to cover its interest payments and that the company is more susceptible to interest rates increase.

Cash Budget Analysis

As per the cash budget presented, the organization is doing well to increase its customer base. The organization received £ 960000 and £ 1205000 from customers between July and October. However, the organization closed with a negative balance in October from £ 218,000 in September. The aspect indicates that the organization’s net outflow has increased compared to the net’s inflow.

From the cash budget presented, it is clear that the organization’s major source of funds is the customer’s receipts. However, there are other sources of income, with the highest earning being £6000 in October. From the presentation, it is clear that the organization has been expanding its customer base following an increase of more than £245000 within four months. This is a good indication that the organization is doing well in maintaining its customers as well as working on inviting more customers to benefit from its services. However, the organization needs to diversify its income sources (DeFranco and Schmidgall, 2017). For instance, the organization can invest in share capital and, in the long run, earn more funds to compensate for the ever-increasing expenses.

Some of the expenses incurred during the four months include purchases, wages, taxation, office refurbishment, and payment of dividends. The increment in cash receipts from customers has invited more salaries as per the budget. Incurring more wages and other expenses reduced the operating balance, with October being the month that was highly affected. Operating under such a trend is risky as it places the organization on the verge of incurring more costs of taking loans or running on credit. The situation can be solved by first diversifying the source of income and distributing the expressed incurred over several months (Von and Fritz, 2017). For instance, the organization paid tax in September. In the same month, their offices were refurbished. However, if the expense incurred this month was distributed among the four months, the organization could have struck a balance in the operating cash balance.

The wages of the organization have been rising from £ 578000 to £894000 in four months. The aspect indicates a high level of inconsistency noted within the organization. The organization needs to work on striking a balance in the wages that have to be paid each month. The aspect can be achieved by avoiding training the employees in the organization to be more efficient and productive and, in the long run, reduce the need and urgency of hiring external service providers that accounts for the increase in wages.

Based on the information, the retail sector had been lowered from 8955 in 2018 to 2765 in 2021. This is a huge decline. Although COVID-19 can be accounted for the recent decline, the retailing department suffered a huge blow (Michie, 2020). As pointed out by Bev, the high streets are not productive as they used to be. The retail market is not successful as it used to be before the pandemic hence the need to consider the domestic market. The gross profit from the retail department was lowered with the recent fall, closing at £89000 in 2021 from £ 489000 in 2018. A recent drop of more than 82% in four years indicates that the organization needs to shift from retail and consider the domestic market.

Despite the recent economic distraction by COVID-19, the organization has not suffered a huge loss in terms of making office sales. From the current report, office sales have been thriving well compared to retail sales. The office sales have been increasing as retail sales reduce. Although the organization has experienced a slight fall in office sales since 2018, the good thing about it is that there is slight consistency, with a fall of less than 4% between 2019 and 2021.

The profits earned within an organization are key in determining whether the premises will be in a good position to pay for its debt. The organization’s profit margin has been reducing progressively from the information available. In 2018, the organization closed with a total profit of £1207000; however, in 2021, the profit reduced to £363000. This is a huge fall of more than 69%. However, the downfall is related to the changes experienced in the retail sector. The usability of the organization’s services has shifted where more of its customers prefer domestic services to retail services.

The pandemic has affected the organization’s retail rate of goods and services. However, the severity of the pandemic has reduced, and the economy is booming progressively (Michie, 2020). Therefore, the organization should at least wait for three years for the retail sector to boom. However, if more losses are recorded, the organization can shift to domestic marketing.

The organization predicts that by the end of 2022, a lot of progress will have been made, and the office sales are expected to shoot to £800000 and the domestic sales to close at £110000. However, there are also expectations that the retail sales will increase and close at around £500000. With such predictions, it is clear that the organization will still earn from its retail sales. Therefore, the organization should not close the retail sales without taking more time and observing its progress. Although a huge loss has been recorded since the onset of the pandemic, more changes are expected now that the pandemic’s severity has ceased and the world’s economy is slowly regaining its moment. Although most customers have shifted to the domestic market, retail sales are predicted to boom once the economy recovers its full momentum.

Executive Summary

For the last five years, BGC Ltd has been experiencing tremendous growth in expanding its customer base. However, the pandemic affected its progress, and the organization has been experiencing some difficulties maintaining its operation. Although the organization has been operating under a deficit, it has maintained its market share capital. As per its current ratio, the organization can still pay for its operating costs. After the onset of the pandemic, the retail sector was affected by a shift from retail to domestic marketing. Therefore, the organization should adjust its operation as it maintains the retail sector and prioritizes increasing its domestic market coverage. Such moves will be critical in maintaining its significance in the industry.

Reference List

Atrill, P. and McLaney, E.J. (2015) Accounting and Finance for Non-specialists. Pearson Education.

Ayuba, H., Bambale, A.J.A., Ibrahim, M.A. and Sulaiman, S.A., 2019. Effects of Financial Performance, Capital Structure and Firm Size on Firms’ Value of Insurance Companies in Nigeria. Journal of Finance, Accounting & Management, 10(1).

Bouveret, A. (2018) ‘Cyber risk for the financial sector: a framework for quantitative assessment’, International Monetary Fund.

DeFranco, A.L. and Schmidgall, R.S., 2017. Cash Budgets, Controls, and Management in Clubs. The Journal of Hospitality Financial Management, 25(2), pp.112-122.

Drury, C. (2018) Cost and management accounting. Cengage Learning.

Gowthorpe, C. (2018) Business Accounting, and Finance. Cengage.

Michie, J. (2020) The COVID-19 crisis–and the future of the economy and economics. International review of applied economics, 34(3), pp. 301-303.

Nieszporek, T., Boral, P. and Gołębski, R., 2017. An analysis of gearing. In MATEC Web of Conferences (Vol. 94, p. 07006). EDP Sciences.

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.

Nuryani, Y. and Sunarsi, D. (2020) The effect of current ratio and debt to equity ratio on dividing growth. JASa (Journal Akuntansi, Audit dan Sistem Informasi Akuntansi), 4(2), pp. 304-312.

Ștefănescu, C., Comănescu, L.E., Buhuși, C. and Bilcan, G.A. (2019) Cyber security for cyber accounting-tool for the digital enterprise. Academic Journal of Economic Studies, 5(3), pp. 138-143.

Von Schnurbein, G. and Fritz, T.M., 2017. Benefits and drivers of nonprofit revenue concentration. Nonprofit and Voluntary Sector Quarterly, 46(5), pp.922-943.

Weetman, P. (2016) ‘Financial and management accounting: an introduction’, Pearson.

Appendix

Gross profit margin

Item/Year 2021 2020
Gross Profit margin 363/9216 = 3.94% 989/14523= 6.81%
Formula Gross profit/revenue

Current Ratio

Item/Year 2021 2020
Current ratio 2496/1249 = 2.00 2121/2128 = 1.00
Formula Current assets/current liabilities

Working capital cycle

Item/Year 2021 2020
Working capital cycle 2496 – 1249 = 1247 2121-2128 = -7
Formula Current assets-current liabilities

Net Profit

Item/Year 2021 2020
Net profit ratio (79/9216) *100=0.86% (278/14,523)*100 = 1.91%
Formula Net income/Revenue

Return on capital employed

Item/Year 2021 2020
Return on capital employed ratio (57/2449)*100= 2.33% (455/3297)*100= 13.80%
Formula EBIT/Capital employed

Gearing

Item/Year 2021 2020
Gearing ratio 1247/1892 =0.66 -7/2897 = -0.0024
Formula Equityt/Assets

Interest cover

Item/Year 2021 2020
Interest cover 57/28= 2.04 455/20= 22.75
Formula EBIT/interest Expense

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