Managing and Controlling Finances

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PORTFOLIO 1

(a) Calculation of Different Financial Ratios For Two Years (2017 - 2018):

1. Current ratio = Current assets / Current liabilities

2. Quick ratio = Quick Assets / Current Liabilities

4. Gross Profit Margin = Gross Profit / Net Sales x 100

5. Gearing Ratio = Total Debt / Equity

6. Price Earning Ratio = Market Price Per Share / Earning Per Share

8. Return on Capital Employed = Operating Profit (EBIT) / Capital Employed *100

Working Note:

Capital employed = Total assets - Current liabilities

9. Average Inventory Turn Over Period = Average Stock / Cost of Goods Sold * 365 Days

10. Dividend Payout Ratio = Total Debts / Total Equities

(b) Evaluation of Performance, Financial Position, and Investment Potential.

1. Current Ratio

Interpretation: The current ratio clearly reflects a corporation's short-term liquidation status. Generally, the current ratio of 2 or exceeding 2 is considered the most appropriate. This is the most significant proportion between current assets and short-term liabilities or current liabilities over a specified time period. RBG Plc and GSK Plc stated a current ratio of 0.6 and 0.82 in year 2017, and 0.75 and 0.85 in the year 2018 (About Glaxo Smith Kline plc, 2019). RBG has reported an increase in the current ratio and is also much better than other companies GSK. This shows RBG is effectively more capable of repaying all its current liabilities as compared to GSK.

3. Net Profit Margin Ratio

Interpretation: This ratio indicates how efficiently a company satisfies net profitability criteria. It clearly states a corporation's net profitability status during a particular financial period. In 2017 net profit margins of companies RBG Plc and GSK Plc were respectively 53.61 percent and 5.07 percent while in the year 2018, this level has been changed to 17.15 percent and 11.75 percent respectively (About Reckitt Benckiser Group plc, 2019). Here higher net profit ratio in comparison to RBG Plc but there is also a decrease in net profit. While GSK Plc's ratio has shown an upward trend.

4. Gross Profit Margin Ratio

Interpretation: This more specifically shows the company's profit generation capacity through its core trade operations. Here in gross profitability ratio GSK's ratio is better in comparison to RBG. In the year 2018, GP ratios of RBG and GSK were 60.61 percent and 66.67 percent whereas in 2017, GP ratios of the respective corporations were 59.68 percent and 66.74 percent. In both corporations, the GP ratio has been increased but GSK's GP ratio is higher than other companies which shows that the company has more capability to generate gross profit.

5. Gearing Ratio

Interpretation: This ratio shows how effectively a company is leveraged and the effectiveness of the company's capital structure. It relates the debt level of the company with the equity employed (Gitman, Juchau, and Flanagan, 2015). In RBG and GSK plc gearing ratios are 1.74 and nil (- 803.13) in the year 2017, here negative gearing ratio represents excessive debts in organisation. While in 2018, the Gearing ratios in the year 2018, are 1.55 and 12.32 respectively in both corporations. GSK has improved its gearing ratio in 2018 so the company comparatively has more improved leveraged position.

6. P/E Ratio

Interpretation: In 2017 companies RBG and GSK had PE ratios of 815.77 and 4317.89 respectively, whereas, in the year 2018, the respective companies' PE ratios were 2031.36 and 2000.27 respectively. RBG improved its PE ratio in 2018 which is also higher than the PE ratio of GSK. A lower figure of the PE Ratio is an indicator that shares of corporations are undervalued and have lower earning growth. Thus RBG's shares are overvalued indicating earning growth in shares.

7. Earning Per share:

Interpretation: Increased earnings per share is almost always preferable to just a weaker ratio because that implies the corporation is more sustainable as well as the company has much more income to distribute to its stakeholders. RBG and GSK had EPS in the year 2017 amounting to 8.38 and 0.31 while in 2018, the EPS of respective companies were 2.93 and 0.74 respectively. This points out that RBG is providing more earnings on its share comparatively, however, there is a decline in EPS but the company is more efficient.

8. Return on Capital Employed

Interpretation: This percentage proportion shows how much the company can provide a return on invested funds (Lee and Isa, 2015). In this ratio comparison, GSK with a higher ratio is more capable of generating returns on employed funds while RBG's capital employed has been improved over the period 2017-2018. Also, there is a decline in the ROCE of GSK but overall analysis suggests that in comparison company is more profitable.

9. Average Inventories Turnover Period

Interpretation: It demonstrates that by keeping non-saleable stock, the organization does not overspend by purchasing too much inventory and wasting resources. It also demonstrates the company's ability to successfully market its stock. RBG with a lower ratio is more efficacious in converting stocks into sales. In 2018, RBG and GSK reported Inventories-turnover of 94 days and 196 days respectively. While in the year 2017 in respective organisations there were 93.86 days and 195 days.

10. Dividend Payout Ratio

Interpretation: This is a ratio that shows how much dividend the company is paying on each of its shares. In 2017, RBG reported a dividend payout ratio of 0.18 which increased to 0.55 in year 2018. In another company GSK, the dividend payout ratio in year 2018 was 1.08 and in year 2017 it was 2.55, there is a decline in payout but comparatively company is paying more dividends to its shareholders.

(c) Recommendation in Order to Improve the Poorly Performing Business.

At the end of the above calculation of different significant ratios, it has been identified that the overall financial stability and efficiency of GSK are weak as compared to RGB. The analysis shows that Reckitt Benckiser Group plc has better performance of net profit ratio, current and quick ratio are better as well as the earnings per share and ROCE are also higher (Osterhoff and Kaserer, 2016). It is also observed that after the Brexit deal in 2018, there has been a decrease in the financial strength of RGB but the overall financial status, solvency, and liquidity are far better than other companies. This is because of higher sales and significant control of additional expenses. There are several measures that can be followed by the management to improve the overall capital base of the GSK. Such as:

• In terms of raising cash flow rates, GSK directors can pay careful attention to increasing financial assets, which will facilitate short-term business activity to be carried out productively and reach the desired outcome in much less time.
• Through useful, efficient strategies and tactics like increasing sales and reducing the costs that enhance overall income per unit.
• The average inventory period of the organization is quite high so it is necessary for managers to find ways to cut the time length. Directors should create new strategies such as setting suitable order levels, regular stock audits, etc. to improve their financial results in a year (Van Essen, Otten, and Carberry, 2015).

It is advised that RBG company monitor the practices that are increasing at the current amount of profit and raise it in order to maintain market penetration in specific businesses. In terms of improving their profits, the company must compete throughout the growing market. In general, the liquidity condition needs to be controlled and long-term measures should be taken to meet the short-term debt requirements. It is primarily improvement in the context of the ROCE so that better steps must be taken for equal distribution.

Also Read:- Stock Market Behaviour in the Short-Term vs Long-Term

(d) Limitation of Financial Ratios.

Ratio analysis is a useful technique, particularly for an external credit analyst lender or stock analyst in order to make favorable decisions (Xiang and Worthington, 2015). It mainly shows the scale of a company's financial consequences and condition from the annual financial reports. Nonetheless, a variety of ratio analysis drawbacks are recognized which are discussed below:

• Historical Information: The evidence used in the study was based on the findings from the history that the organization reports. Ratio analyses do not accurately reflect potential business performance.
• Changes in accounting policies: The financial statements can have a major impact if the organization has modified its financial policies and practices. All the changes are basically recorded in the notes section of the financial statement. In this situation, the major financial parameters used in the ratios study will be changed as well and the financial results obtained after the adjustment will not be equivalent to those reported before the adjustment. Until the end of the fiscal current period, adjustments in the actual accounting reports are made in all companies and no clear accurate information is needed for investors on these figures.
• Manipulation of financial statements: The information in the balance sheet can be manipulated by the person preparing reports in order to make better outcomes. Therefore, the ratio calculation can not properly portray a company's real nature, since a basic analysis does not detect a false representation of facts (Throsby, 2016).
• Aggregations: It is observed that the information in financial statements has been aggregated in the past to make calculation easy for Audit. Thus, the ratio analysis does not include the specific information within the whole trend period which can impact the results.
• Point in time: It is observed that ratios take information from the balance sheet which is prepared at the last of the reporting year. In case there is an unseen decline or increase in the balance of the last time then the results are going to be different which impacts the overall analysis (Uchide and Imanishi, 2016).

PORTFOLIO 2

(a). Calculation of financial ratios for two years (2017 - 2018):

It is observed that to make a better and worthy investment manager uses various kinds of investment appraisal techniques so that higher returns are received (Alkaraan, 2015). These methods are NPV, Payback period which consider accounting rate of return in order to determine the most suitable funding option. In the present report, Harris Pvt Ltd. Is planning to buy a new machine in order to make the best possible outcome that supports growth and overall profitability. Companies have two different options for investment, thus manager uses different techniques to determine the most appropriate.

Provided information:

• Initial investment = 110 (For both the projects)
• Salvage value = Project A (0), Project B (8)

Payback Period:

Formula: Completed years + [(Initial investment - CCA of completed year) / Cash inflow of next year]

Working note:

Payback period for Project A = 2 + (110 - 90) /45

= 2 + (20 / 45)

= 2 + 0.44

= 2.44

Payback period for Project B = 4 + (110 - 105) / 65

= 4 + (5 / 65)

= 4 + 0.07

= 4.07

In the above calculation, it has been determined that the payback time of machine A is less than machine B, so Harris Pvt Ltd must choose option A for future use and stability.

Net Present value:

Formula: Discounted cash inflow - Initial investment

Working note:

NPV for Project A = 147.31 - 110

= 37.31

NPV for project B = 120.92 - 110

= 10.92

From the above computation, it is determined that Machine B has a lower NPV in comparison to option A which means that the company must select the higher NPV machine to make profitable results.

From the above computation, it is observed that ARR for Machine A is slightly higher than other machines and it would be more advantageous to Harris Pvt Ltd.

Recommendation: It has been recommended that the respective company invest in purchasing machine A as it will be a better option resulting in a higher profitable outcome in the specific time period. The total investment would be recovered in 2.44 year with 36.4% ARR and the net present value of machine A is 37.32 which is higher than other options.

(b) Limitation of Using Investment Appraisal Technique.

There have been various types of methods applicable to analyze the usefulness of every proposal or project by an organization (Yarram and Dollery, 2015). There are some major disadvantages of these techniques which are elaborated underneath:

• The time value of money is among the major drawbacks of this technique. Projects obtained prematurely in comparison with subsequent cash flow obtained by the end of years have value. There are two programs of the same time that offer off span, but it has been found that one plan produces additional cash flows in the preceding year.
• This comprises various applications depending on the cost of estimation and analysis, which decreases cash flow. Depending on theories, the work is performed on premises, which challenge consequences and use this method to make successful decisions.
• This approach is not implemented in conjunction with the circumstance where expenditure on a specific project is needed and the results of business operations are at greater risk (Harris, 2017).

CONCLUSION

In conclusion, it is founded that the process of managing and controlling different kinds of management and financing activity within an organisation is known as managerial finance. There are different types of ratios that are analysed for determining the actual profitability of a company in an accounting year. Investment appraisal techniques are very effective in identifying the most beneficial proposal that gives higher results. There are certain limitations of ratio analysis that must be considered by investors while obtaining the actual financial status of the company. Similarly, each investment technique has some disadvantages, and due to this results can be negative in many situations.

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