FIN7040 Financial Decision Making

• Operating Profit Ratio: Operating profit of a firm presents company's net revenue minus operating costs of production. Under this all the operating costs such as administration cost, selling and distribution cost and other cost associated with production are deducted from the net sales of firm. Another name of operating profit is earning before interest and tax where interest and tax amounts are not considered. In the financial year 2014 and 2015, the healthcare holding company is generating good operating profit which is 14.15% and 15.43% respectively. The operating ratio is increases due to properly manage and reduce the operating cost of the services in the company.From this it can be interpreted that the firm is performing well in comparison to previous year which indicates that the firm manage operating cost effectively to produce goods and services.
• Net Profit Ratio: Net profit indicates company's final outcome where all the production cost as well as tax and interest amounts are deducted from net revenue (Dalal-Clayton and Sadler, 2014). Here all the costs and expenses are covered and then net profit of the firm is derived. It shows actual profit of business entity. In the year 2014 and 2015, the company is performing well because it able to generate better net profit from business. In can be interpreted that the firm's tax and interest amounts are decreases from last year that means debt is also reduced from year 2014 to 2015. The net profit ratio is 6.43% in the year 2014 and in the accounting year 2015 ratio is 6.79%, it means the firm takes more debt and paying high interest and tax amount.Hence, company's performance is better compare to previous year.
• Interest Coverage Ratio: The ratios also shows profitability of the firm which computed on the basis of income statement. It shows company ability to meet interest amount with operating profit (Hershey and Austin 2015). It considers two values to for calculating the ratio such as earning before interest and tax and interest expense of the firm. The interest coverage ratio is 2.99 in the year 2014 while in the financial year 2015 the ratio is 2.83.In present company the ratio is decreases from previous year which indicates that company's ability is decreases to cover interest amount in comparison to the year 2014. So, the company is performing poor than previous year.
• Return on Sales Ratio: Another ratio to interpreting the statement of profit or loss is return on sales ratio which indicates company ability to cover sales in order to operating profit.It shows that how much percentage of sales is cover by operating ratio of the firm. In the accounting year 2014 and 2015, the ratio is increases from 0.14 to 0.15 in the year 2014 to 2015. It indicates that company is able to cover more amount of sales with operating profit. From this it can be concluded that firm is generating more operating profit which lead to increase financial performance in market.
• Return on Equity: Return on equity is another ratio of profitability ratio which measures that company is how much able to generate profit from its shareholder's equity or shareholder's investment (Carvalho, Meier and Wang, 2016). In present case the company is generating more return on equity in the year 2015 in comparison to the financial year 2014. Return on equity ratio is 0.55 in the year 2014 and in the year 2015 the return on equity ratio is 0.59. It indicates that the firm is utilizes investment of shareholders in business to generate sales and revenue which lead to increase profit of the firm.So, it can be said that firm is able to use investments effectively to generating sales.

Hence, from the above analysis it can be concluded that the healthcare company's financial performance is better in the year 2015 in comparison to accounting year 2014. The profitability level is increases from previous year.

Interpretation of Statement of Financial Position

Statement of financial position can be introduced as a balance sheet as well. It is another important financial statement which is used to analyse financial position of the firm. Under this financial statement major three headings are presented such as assets, liabilities and shareholder's equity. The statement give information about the assets and liabilities the firm have in its business and information about shareholder's equities as well (Gamble and Boyle 2014). Statement of financial position shows that the firm is how much able to meet with its long term and short term obligations, it measures company's ability to use assets effectively, it shows ratio of debt and equity of the firm and it gives information about company's efficiency that up to which extent it efficient to generate sales from different avenues of the firm it has. There are liquidity ratios, gearing ratios and efficiency ratios are used to interpret financial position of the mentioned company. Interpretation of the statement of financial position is as follows:

1. Current Ratio: Current ratio is a type of liquidity ratio which gives information about the firm that it is how to able to meet short term debt or obligations with its current assets. The ratio shows proportion of current assets and current liabilities which company have in its business. In the healthcare company the current ratio is increases from last year that means company is more able to fulfil short term loan. Ideal ratio of current ratio is 2:1 and the company have less than ideal ratio. The current ratio in 2014 is 1.38 and in the year 2015 current ratio is 1.46, that means the current assets and current liabilities are fluctuated in positive manner in the business of healthcare services. The company is performing poor when it compares with the standard ratio but from last year it covers more amount of debt that means profit level is also increases.

• Quick Ratio: The ratio is also another type of liquidity ratio which helps in interpreting financial position of the firm. Under this the ratio indicates company's ability to fulfil short term obligations (Lakew and Rao, 2015). Here stock and prepaid expenses are not included because this are not easy to convert into liquid form. The standard ratio of quick ratio is 1:1. From below mentioned table of ratio calculation it can be identified that the firm is performing well in the industry as per the ideal ratio. Here the ratio of mentioned firm is 1.14 and 1.2 in the year 2014 and 2015 respectively. It shows that the company's ability is increases to cover short term debts which indicates that profitability is also increases from last year.
• Debt to Equity Ratio: The ratio measures proportion of debt and equity the company have. The ratio measures that the firm is how aggressive in order to fulfil long term debt. The ratio shows that company is how much able to cover long term debt in proportion to total shareholder's equity. Ideal ratio is 0.5:1 that means company have to double equity of debt. In present case the firm is had high debt ratio that means company takes high amount of debt and loan for long term period. Debt to equity ratio is 2.66 in the year 2014 and in the financial year 2015 the debt to equity ratio is 2.92. It indicates that the debt is increases in comparison to equity. It shows company's performance is poor in industry.
• Asset Turnover Ratio: The ratio measures company's efficiency that firm is how efficient to generate sales with help of total assets of the firm (Suen and et.al., 2014). It shows that company is in which order total assets are utilizing to generate revenue and sales. From the financial year 2014, the asset turnover ratio is decreasing in next year. The asset turnover ratio is 1.45 and 1.31 in the accounting year 2014 and 2015 respectively. It shows that company is not able to utilize its total assets properly and efficiently to generate sales.It means company's financial management is not strong which affects to increase turnover.

Interpretation of Statement of Cash Flows

Another financial statement is cash flow statement which helps to determine financial position of the firm. The cash flow statement shows that company's is how much able to cover its expenses within period. The statement discloses that how it spends its funds in business as well as how it raises the fund within given period (Liesen and Figge 2013). It shows company's cash flow such as cash inflow and cash outflow. The statement of cash flow divided into three parts such as cash flows from operating activities, cash flows from investment activities and cash flows from financing activities. In the present report the cash flow statement of healthcare holding plc is interpreted with the help of operating cash cycle. The calculation and interpretation of operating cash cycle as follows:

Operating cash cycle is measures company's operating efficiency as well as working capital management of the organization. It indicates time to taken sell inventories and recover the fund within a given time (Richards, 2016). Operating cash cycle is equals to the time which taken for selling the inventories and time taken in recover the cash from its trade receivables. In financial year 2014 and 2015, the operating cash cycle is 33.19 days and 36.47 days. It indicates that the company taken less time to sell inventories as well as to recover cash from trade receivables in comparison to previous years that means company bis performing well from previous year.

Limitations of the calculation are that the data are always not available which are used to calculate the operating cash cycle. Sometimes data might be different and sometimes analyser have to use another relevant data in absence of proper informations. Due to using relevant data the calculation might be different which lead to provide wrong information of the firm. Hence, the data is main limitation of operating cash cycle.

Interpretation of Market Segment Analysis

Market segment is a process where analysis is to be done on the basis of geographical areas which gives information about the financial performance according to the geographical area wise (Seshan and Yang, 2014). According to given market segment analysis it can be interpreted that the US market gives better profit in comparison to another market segment. The US market segment's performance might be inferior in comparison to other segment in the mentioned company. There are major two reasons by which the US segment might be inferior from other segments, the reasons are as follows:

The US segment might be inferior in the company due to cost of the healthcare services in the present market segment. The US is a developed country as well as very expensive country in the world. The country charges high cost and high prices of the healthcare and medicine which is not necessary that all patient afford that price. So, it is the main reason which might be inferior and different compare to other market segments.

Another reason by which the US segment might be inferior from other market segment is that weak relations and terms with the suppliers (Tosun, 2013). In the healthcare business the medical equipments and medicines are to be used, so the company have to make better relations with pharma companies and equipment suppliers. So, due to weak relations with the suppliers the US segment might be inferior.

In the segmental analysis the UK country is having the highest gross margin in comparison to other all countries. The gross margin of UK country is 60.05% and 61.07% in the financial year 2014 and financial year 2015 respectively. On the other hand the net margin of the country UK is 15.00% in the accounting year 2014 and 16.75% net margin in the accounting year 2015.

PART 2

Investment Appraisal Techniques

Investment appraisal is an integral part of capital budgeting and helps to evaluate the attractiveness of the project through various techniques such as Net Present Value, ARR and Payback period(Grant, 2016). To interpret the results of various outcomes on defined parameters are as follows:

• Payback Period: Payback period is the time period in which the initial cash outflow of the project is expected to be recovered from the resulting cash inflows in the following years. A project with payback period lower than the target payback period assessed by the company should be accepted (Lin Chang And Chung, 2015). Since Healthcare Plc has payback period of 4.3 years which is reasonably good as the project life is around 8 years therefore looking at the payback period it can be concluded that project should be accepted and is beneficial and will bring profitability to the company after 4.3 years. The major limitations of Payback period analysis is that it ignores the time value of money invested and cash flows therefore it is not that accurate also it ignores the cash inflows generated after the payback period which may be misleading in certain cases. However, the inherent advantage is, it is very simple to calculate and no analytical knowledge is required and also if Healthcare Plc is facing problem of liquidity it is an efficient tool to calculate the project with early returns in terms of inflows.
• Accounting Rate of Return: Accounting rate of return takes into account the returns generated on the proposed investment. Higher ARR is desired by the company to maximise its profits after recovering the initial investment (Li, 2015). It is calculated by dividing the Average cash flows by the initial investment. If the ARR is less than the expected the project must be rejected.In case of Healthcare Plc since the ARR is 99% it should be definitely accepted. It implies that average profits from the project every year over the period of 10 years would be 99% of the average initial investment of 8 Million. Therefore, Healthcare Plc is generating excellent returns and project sounds beneficial in terms of profitability. However, it is simple to calculate but ignores the cash flows and focus only on the profits reaped by the entity in addition to ignoring the time value of money which is really important for project evaluation. Also, ARR does not consider the final or terminal value of the investment.
• Net Present Value: Net Present Value method helps in comparing the initial investment made today and the future cash inflows generated in coming years and discounting them by irate of return and get the cash flows in terms of present value. It is a tool to determine the net profitability of the project (Keča, Keča and Pantić, 2012). NPV of the project undertaken by Healthcare Plc is estimated to be 128% of the initial investment that is outstanding and project be accepted. It implies that every £1 invested initially will return £1.28 in present value terms resulting into profitability. The most crucial advantage of NPV is that it considers the fact that value of £1 is much more than what it will be in future because of various factors such as inflation or increasing interest rate. It also evaluates that whether the investment will add value to the organisation or not (Accounting Management, 2016). There is major drawback that NPV involves estimations as cost of capital is a guess work and also all the cash inflows for future are also expected and not exact. The size of output by NPV is determined by the size of input.

Non-Financial Factors considered regarding the expansion in US

Although the financial factors plays a vital role in expansion of business, non financial factors are equally important for major decision making. Non financial factors which cannot be measured in terms of monetary value such as meeting the existing and future legislations of US. Such as Healthcare Plc cannot import machinery which is prohibited in US. To strive through the competition and stand out among competitors company should focus and obey the industry best practices maintaining the quality(Hoffmann and Fieseler, 2012). Expansion can be made smooth by motivating employees and improving their morale and this way even new recruitments and trainings can be supported in a positive manner. Improving the relationships and renegotiating certain contracts can make the entity stand into comfortable position and reduce the expenses budgeted on expansion. Dealing proactively with the potential threats to intellectual property rights should be assessed and dealt with appropriately. Healthcare Plc can focus on building innovative skills and knowledge for overall development and generation of competent personnel and strengthen the management systems. Energy savings methods should be adopted to contribute towards green office and also gain the confidence of customers in the company. Various political, technical and social factors affect the company in an influential manner therefore emphasis should be laid thereon and focussed for successful expansion of the Healthcare Plc.

Sources Of Internal Finance

Sources of Finance refers to different methods form which funds can be raised for Business expansion whether internally or externally. External finance can be raised from bank loans, issue of debentures or bonds and raising capital by issue of shares into market. Bank lending being one of the major source of external finance but has many conditions and risk attached to it such as sufficient security has to be offered against loans. Also, loan comes with scheduled repayment instalments which affects the liquidity. Bank will accept and approve the loan only if the purpose mentioned in application is accurate and loan amount is utilised for the same purpose. Various sources of internal finance are utilising retained earnings, sale of current or fixed assets or collection of debt or effective utilisation of working capital (What Are Internal Sources of Finance?, 2016). However, Healthcare Plc can extract the funds internally from various sources such as:

• Retained Earnings :Retained earnings are those part of earnings or profits which are not distributed as dividends and are ploughed back into the business. Retained earnings adds value to the shareholder's wealth and therefore give financial stability to the business which ultimately increase the market price per share of the company (Farag, Harland, and Nixon, 2013). For expansion of Healthcare Plc retained earnings is bet source of raising funds as it have no costs to the company. Retained earnings does not involve any acquiring costs and no future obligation to pay anything in respect of retained earnings. However retaining the earnings into business generates dissatisfaction among the shareholders as they are paid less amount of dividends (Hermes and Lensink, 2013). Also, if expansion does not turn out to be successful it will add to the costs of the company and shareholders will lose faith. The company has a cash to do investment is the some profit margin or some percentage of the profit value. The company can use the profit to make the investment.
• Sale of Fixed Assets: Fixed assets are those assets which are not easily convertible into cash. Disposing the fixed assets for expansion of further business is a very good option . However, sale should be only of assets which are not in use or have become obsolete and do not generate benefits for the company. However, company can sell the investments and deploy the amount recovered towards expansion(Minsky, 2015.)As sale of business assets does not involve any cash outflow to business and no future obligation therefore it should be considered and discussed by management. Also, sale of fixed assets does not add to the cost and is feasible solution for Healthcare Plc. Board should consider and conduct physical verification of fixed assets to evaluate their performance and selection of fixed assets to be disposed off. It is the best alternative among all other sources of internal finance and carries no liquidity issues. The healthcare holding plc company is using the portion of fixed assets. The company has a scope to sell assets in the plant or equipment. The firm is getting finance from selling the plant and equipments which are not used in the production process.

CONCLUSION

From the above analysis it can be summarized that for taking financial decision in company it is necessary to analyse about the financial statements of the firm which gives information regarding to the financial performance of the business in market and industry. It can be concluded about the financial performance of the Healthcare Holding Plc is that the company is performing good in the year 2015 in comparison to the financial year 2014. The company's financial ratios such as profitability, liquidity are increases from previous year. It can be concluded that on the basis of investment appraisal technique the projects are analysed.

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