Study On Cash Flow And Statement Analysis Finance Essay

Cash flow is vitally of import to any running concern either a big or a little administration. Cash flow is the motion of money in and out of the concern. A concern could be profitable but non liquid. Liquid is the ability of a house to run into its duties as they fall due.


The grounds why the house could be profitable but at the same clip have hapless hard currency flows will be discussed below ;

There are a batch of points which are non included in the income statement and so the hard currency flow will demo a hapless public presentation the grounds for these is that there could hold a been a lessenings in hard currency or it could be that most of the hard currency is ‘tied up ‘ in other assets whereby ; –

There would hold been an addition in debitors but have non yet paid us the money but in the P & A ; L history it would be counted as gross revenues.

An addition in stock lists whereby after buying the stock it is difficult to change over it into hard currency.

The Purchase of fixed assets which could take some clip to bring forth hard currency e.g. Land, machinery etc.

It could be refering liabilities whereby increasing liabilities would hold a posed a danger on the liquidness place and the concern spent instant hard currency in paying off creditors at that clip or it paying of involvements of Stock loans

The above jobs frequently develops in quickly turning companies where stocks, fixed assets, debitors are needed to back up increasing gross revenues.


( Wales and Reach 2004 ) said hapless hard currency flow could take to concern failure. Some of the major companies that have suffered from hard currency flow direction include Daimler Chrysler, Lehman. With the latest being Portsmouth FC holding debts worth of ?135million harmonizing to

When gross revenues are increasing and the house has deficient capital these case is called overtrading During High periods of gross revenues what directors can make to avoid being insolvent are ;

Bettering Debtor Management – This could be done by: –

Sing against bad debts although it could be expensive but companies could procure major clients so that if they do face bad debts they could claim it from the Insurance Company.

Cash Discount for early payment could animate purchasers to pay for the goods and services earlier

Debt factorization could assist work out in liquidness in the short -run.

Invoice dismissing a†’sale of certain bills to a 3rd party while keeping entire and full control over the gross revenues leger.

More efficient stock holding- by utilizing methods like

Just- in-Time ( JIT ) which will cut down stock costs e.g. Keeping costs, telling costs, managing costs by understating stock degrees every bit good as extinguish the clip the clip between the bringing and usage of stock.

If the director could utilize the Economic Order Quantity which will assist him to put an optimum ordination measure this will minimise costs.

Increasing Trade Credit- The house could do an understanding with the providers to do the payment of goods and services at a later day of the month than that on which the goods are supplied to the devouring company. This method can assist the director to increase the short term finance and so the company will be working free recognition every bit far as possible. It would be good if the concern would maintain a good relationship with the providers because the house is traveling thru a period of high gross revenues and so they might be necessitating more stocks than usual and if good relation is established it could assist to work out the jobs of acquiring goods when needed every bit good as payment methods whereby they could even negociate the footings of recognition to a ulterior period.

Cash Management-investing of excess short term hard currency can be truly good as go forthing thru hard currency idle around in the concern will non make any good better to put in fixed sedimentations, exchequer measures, sterling certifications of sedimentations, exchequer measures and many more

Long Term Finance- The concern could shoot long term finance which will move as a encouragement to the operational activities which could be done by either nearing stockholders or loan suppliers e.g. a bank or even utilizing a rental either it being a operating or fiscal.

Question 2.A

Gross Profit border % a†’

Since this is a nutrient retailing is industry I ‘m presuming that Company A is selling its merchandises at a lower monetary value and its catering for different market sections since its acquiring a low Gross Profit Margin while Company B is selling with medium monetary values and Company C is selling merchandises with higher monetary values and with good quality because when companies do hold a Gross Net income of more than 33 % it will be given to demo that merchandises are marked up by 50 % . I am besides presuming that all these companies will be utilizing the FIFO ( First-In-First-Out ) method of measuring stocks as it gives a better indicant of the stoping stock list. I am besides presuming that all the houses face return inwards and so the Net Gross saless figure is derived from Sales-Return Inwards.

Harmonizing to this ratio we can state Company C is doing a batch of net income on its gross revenues it could maintain on traveling like this if overheads costs are kept to command. Company B is executing reasonably as in it ‘s in the center and therefore charges monetary values that are low-cost while Company A tends to hold a low gross net income border which will demo that it does non bring forth that much net income on its gross revenues.

Net Net income Margin % a†’

Our chief premise in this is that the Net Net income which is calculated is the Net Net income before Interest and Tax

Based on the Information provided we can see that Company C net border shoot down to 12 % comparing to the Gross border of 40 % these could simple be because it has higher costs in administering and disposal as it may be paying higher wages or even higher rent as it would desire to be stationed in a attractive country. Company A has a good border compared to the remainder it could be that it hires less laborers or that rent is low every bit good it has less advertisement costs and so fall. Company B place is non bad at all since its disbursals sum up to about half of its gross revenues good we could state the costs are traveling proportionately to the merchandising and distribution costs so in overall they are good placed.

Tax return on Capital Employed % a†’

We are traveling to presume that when the assets are being valued the method deprecation for each company could be different so Lashkar-e-Taiba ‘s presume it ‘s the cut downing balance method in usage since its more widely used besides the debitors that are traveling to be included is debitor less proviso for dubious debts and that the current liabilities are purely payments to be made less than one twelvemonth and besides that there are no unsecured bonds. Company A has a high ROCE of 15 % compared to the others since it started off with a hapless gross border and a better net net income border and now it is bring forthing more net incomes with the assets in topographic point. Company B is non making that bad every bit good as it bring forthing 13 % a ground why it could be low is that it could be holding tonss of bad debitors or even stock which could be disused or written off. Company C is presenting the most returns from the finance we could presume since it had a lower net net income border because of disposal we could state that the direction is making a good occupation in footings of investings.

4 ) Tax return on stockholders ‘ financess % a†’

We have to clearly presume that the net income figure is that which is earned by the stockholders after all charges have been met and besides that the stockholders financess are made of portion capital and militias. Out of the three companies the stockholders in company A have received the highest per centum of returns as they got 20 % returns on the investings we can state that the company is surely increasing the stockholder s wealth the grounds why it could hold a high ROCE compared to the others companies because since it had a low net income border compared it would intend that there were the revenue enhancement charges was lower than the sum of revenue enhancement that was charged on Company C. Company B & A ; C could hold a lower ROSF is that it could hold borrowed loans and some per centum is being spent to pay the involvements.

Question 2.B

Stock Days a†’ a‚“ 365

This ratio shows that Company A takes merely 18days before it turns its stocks into gross revenues while at the same clip Company C takes 45 yearss that a long period and Company B 25 yearss the ground could merely be that since Company A is selling goods with lower monetary values it could be that they are fast traveling consumer goods and so it takes them less clip to change over it into gross revenues. We besides assume that since different methods of ciphering stocks are available the companies would hold used the FIFO method.Company C has a higher period is that it could be confronting a few jobs where the goods become perishable like tomatoes if they are non sold early they will die. Company B seems to be in the center as it has 25 yearss which is non bad at all.

Debtor Days a†’ a‚“ 365

The Trade Debtors is traveling to be the entire value of gross revenues invoiced for which money is still owed to the concern and hence no hard currency gross revenues should be included in the computation. Once once more Company A is making better as it receives its payments from the debitors in merely 9 yearss that could be because it deals with FMCG ‘s ( Fast Moving Consumer Goods ) an illustration could be Subway because you will non anticipate the debitors period to be like 65 yearss compared to company C grounds why this could be go oning is that Company C is giving its clients a longer trade recognition period or it passing a batch of clip trailing the debitors to roll up their payments and that could be a ground why the net net income is low because of ineluctable disbursals like this 1. Company B has a period of 32 yearss which is non that bad as excessively compared with Company C.

Creditors yearss a†’ a‚“ 365

Companies B & A ; C are better off than company A in this circumstance as they are taking a longer period to pay their creditors and so both the companies are profiting since they can work free recognition as they take 42 & A ; 55 yearss severally to pay off their debts. While at the same clip Company A takes 9 yearss it could be that there are non many providers and so they will be necessitating the payment earlier and so providers will hold a greater power and it will be the antonym in B & A ; C as there will be many little providers and so heighten on trade recognition Lashkar-e-Taiba ‘s non bury that no hard currency purchases should be included in the computation. We are presuming that creditor yearss were calculated utilizing recognition purchases good at times of when there is no information available on recognition purchases the cost of goods sold should be used in our instance we have assumed that recognition purchases were available.

Question 2.C

Net incomes Per Share a†’ a‚“ 100

Net incomes calculated will postpone since they will hold different accounting policies in this instance we are presuming that accumulations construct has been applied as good. Company C has a higher net incomes per portion of 25p which would intend the net income that is attributable to each portion is higher than the remainder of the companies a ground could be that although net incomes were low but the company might hold non issued a batch of portions so the EPS will be high where as for Company A which has EPD of 15p was a good returns on capital employed etc might hold issued more portions than Company B and C but stockholders in company B and C will be more delighted as their wealth will increase.

Price Net incomes Ratio a†’

Company C has a P.E ratio of 19 which clearly shows that there is traveling to be growing in the hereafter and besides Company A has a good potency as it has a P.E of 16.Well we are presuming that the net incomes of the concern are secure if non it could impact on the P.E ratio and besides the geartrain ratio is to be considered because if the company increases unsecured bonds the pitching ratio will travel up and P.E ratio might fall. Company B has A P.E ratio of 12 although it less as compared to the others but is deserving puting in it.

Market Price Per Share ( mention to appendix A for computations )

Company C has market monetary value of ? 4.75 which is higher than both the other companies as they both have ?2.4.Lets assume that external factors will non impact the monetary value per portion e.g. rising prices, recession and that the company is stable. The ground why Company C has a higher market monetary value is that because it had a high E.P.S & A ; P.E. ratio.

Dividend Yield a†’ a‚“ 100

Stockholders in Company B are having the highest hard currency returns on their returns of 8 % . We are presuming that since they are different stockholders in a company for the inquiry merely ordinary stockholders are being considered Company A besides has a high dividend output because it had a high return on stockholders ‘ financess same as with company B while company C has a low dividend output as it had a low return for stockholders fund we could presume that company C is salvaging so as to put in the hereafter.

Well depending on what sort of investor it is that will depend on what company to put in there are 2 types of investors:

Income Investor- A stockholder who is interested in dividend income merely hence he will look for a company that offers more returns to him and that is Company A as it has a high return on stockholders ‘ financess and a High Dividend Yield, Company B can besides be chosen since it has a dividend output of 8 % illustrations include retired people

Non Income investor -A stockholder who is s interested in the long term of a concern which will depend on the P.E ratio and for Company C is the best to put as it turning


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Market Price Per Share