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Financial Report Assignment Sample

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This is the report of the well known and a public Listed Company named Reckitt Benckiser. The whole report will consist of the comparative study among the figures in the last four years. The data has been critically analysed by evaluating the various profitability ratios, leverage ratios and more. The primary motive is to properly analyse and the ratios and provide valid conclusions, suggestions and recommendations later in the report. Various methods are also evaluated and seen whether the company should use the own equity or the retained earnings. By using the ratio analysis the problems are also tried to figure out so that there is no problem for the company in future. So, this report mainly comprises everything related to future perspective.    1) Performance Evaluation

Income Statement It has been clearly observed that the income depends upon the various factors and the Net income for the year ended 2020 is m 1203 which is clearly double than the previous year. The statement also reveals the sales amount for the year which is nearly m 14000 when compared to the previous financial year m 13000. This clearly states that the company has increased its sales by delivering mode goods to the consumers and is working efficiently. Last financial year th4 company was not earning the adequate profit but now it is earning good amount of profit. It also comprises also various expenses which are incurred by the company during this period which are m5290 and m4616 in the previous year. It also shows that the company has also tried to reduce these operating expenses which have indirectly affected the amount of revenue. This increase in the profit will leads to sustainability for the company in the future (Appendix 1).

Balance Sheet It is another financial report that is prepared by the company to predict the final amount of assets and liabilities. Here, in the company the total value of the assets is m 31292 which is less than the last financial year 2019 where the amount was m 32139. Here the amount of total liabilities in the current year is m22133 and m 22723 in the last financial year. The amount of debt has decreased in this year which is a good indicator for the company to grow. The total amount of equity is m 9159 in the current year and m 9407 in the last previous year. Also it has been clearly observed that the company is trying to reduce its debt and concentrate on the profit earning for the growth and sustainability. The Balance sheet also helps in analyzing the position of the company which is very good in the market as per the study (Appendix 2).   

Cash Flow Statement The cash flow statement gives us the idea what are the inflows and the outflows of the cash because the net cash flow comes from the three activities. Here, while analyzing the statement it has been clearly observed that the amount from the operating activities is very high when compared to the previous year which is approximately double when compared. The cash flow from investing activities in the current year is m512 and m 442 in the previous year which shows that despite reducing the liabilities the company is trying to increase the value of the assets and the amount of investments only increase the value which attracts the investors to invest in the company The amount of Financing activities here is m2857 which is way more than the previous financial year that is 2019.The cash and cash equivalents also plays a vital role in it because it is the one which determines the net cash at the end of the financial year which is m1644 in the year 2020 and m1547 in the previous year (Appendix 3).

Profitability Ratio-There is some major ratios that determine the profit of the company and are the foremost in the calculation of ratio analysis. Some major profitability ratios which are calculated here as, Gross profit Ratio-



2017-2018

2018-2019

2019-2020

2020-2021



in m

in m


in m

in m

Gross profit

6,823

7,635

7,778

8,435

Sales

11,449

12,597

12,846

13,993

Ratio

59.59472443

60.60966897

60.54803052

60.2801401


The ratio which is calculated here determines the gross profit earned by the company before it pays some taxes. It also determines how efficiently it is managing the business operations. Here, in this analysis also it is clearly seen that the gross profit during the year 2017 is somewhat less than the forward years which also states that the company is taking initiates and measures to increase the profit in the nearby future. Although the profit has not increased from a profit to the next financial year but afterwards it has not risen but is stable throughout. So, the company should maintain the net profit and also try to increase the profit in the future ahead because although sales has been increasing but when it is compared to the gross profit. So, by this it is clearly seen as Gross profit ratio is one of the important factor determining profit of the company.

Net Profit Ratio-





2017-2018

2018-2019


2019-2020


2020-2021


in m

in m

in m

in m

Net Profit

6,189

2,181

1,873

2107

Sales

11,449

12,597

12,846

13,993

Ratio

54.05712289

17.31364611


14.58041414


15.05752876

It is another most important ratio which is always calculated in determining the financial viability. It also gives a fair idea about how much money is left after all these expenses are being paid out. The company really need to take care about its expenses because it is incurring a great amount of expenditure as compared to the amount of sales. Here, it is also observed that the net profit has been consistently decreasing over the years which are a negative sign for a company (Rutkowska , 2015).

Efficiency Ratios-
These ratios who efficiently the company has been using the assets and how much sales it is being able to generate from these assets. It is the most important when it comes to the analysis part of the company (Lam, 2010 ).

Fixed Asset Turnover Ratio-



2017-2018


2018-2019

2019-2020


2020-2021


in m

in m

in m

in m

Sales

11,449

12,597

12,846

13,993

Fixed Asset

31,589

32,698

25,978

27,106

Fixed Asset Turnover Ratio

0.362436291

0.385252921

0.494495342

0.516232568


It is another most important ratio which states that how much money the company has been able to utilise from its fixed asset. Here also it has been seen that the company has been using and increasing the efficiency when compared to the last previous years. The company is efficiently utilising the fixed asset and also trying to make use of the fixed asset in the best possible way in the future ahead. The company always try to increases the amount of fixed asset always because that will lead to increased profitability.
Total Asset Turnover Ratio-



2017-2018

2018-2019

2019-2020

2020-2021


in m

in m

in m

in m

Sales

11,449

12,597

12,846

13,993

Total Asset

37,013

37,650

31,292

32,139

Total Asset Turnover Ratio

0.309323751


0.334581673

0.410520261

0.435390025

Another most important efficiency ratio is Total Asset Turnover Ratio which is calculated to show much finance it has used to manage its assets. Here also this ratio has been increasing which means the company has been using more of this year by year. But the asset value has been decreased over all the financial year and the company should take care of it. It is always recommended to have a high or good asset turnover ratio. Current asset and fixed asset both compute to become fixed asset and that is the reason they are of utmost importance while analysing any financial performance.

Short term solvency ratio- It states that how much the company is able to meet its short term requirements and liabilities. It also defines the obligation of the company. It mainly consists of these ratios which are discussed below;
Current Ratio:


2017-2018

2018-2019

2019-2020

2020-2021




in m

in m

Current Assets

5,424

4,952

5,033

5,314

Current Liabilities

6576

7614

8,931

6,938

Current Ratio

0.824817518

0.650380877

0.650380877

0.76592678

The reduction in the value of the current and the long term liability is the sole purpose of the organization to earn the maximum profit. It is always ideal to increase its Current assets and decrease its current liabilities which are done by this company ideally. Though the company has not increased its assets to that much level but it has been closely monitoring the environment and the works to increase. This increase has been very good for the company as the company should try to increase it more in the nearby future (Saleem and Rehman,2011)
Quick Ratio:



2017-2018

2018-2019

2019-2020

2020-2021



in m

in m

in m

Quick Assets

4223

3676

3,719

3722

Current Liabilities

6576

7614

8,931

6,938

Quick Assets

0.642183698

0.482794852

0.416414735

0.53646584

It is also used by the investors to show the market perceptions of the stock value. Another part which is to be considered is that through this more of the investors are attracted. Market to Book Ratio is already calculated in the annual report which is approximately same in the all years. These ratio have tell that the company has a good market share in the sector running and it has a good market cap too which is very good for some investment projects.
Market Based Ratios:
It states that the liquidity of the company is increasing which could be also said as the company now has more liquid funds to carry its daily operations. Apart from this the ratio first has decreased and then it has increased over time which is good for the company. In the year 2018 and 2019 the ratio has been decreased as compared to the previous year but the company managed to increase the liquidity in the year 2020.


2.)Recommendations

For improving the company business based of the report and research are somewhat described and discussed below, which are:

  • The Main purpose of the company to increase the sales value to a great extent by various measures be it some decrease in a profit margin or so.
  • Another thing we should increase is the amount of the contingent reserves because there could be many unforeseen situations.
  • Next, the amount of debt, is it short term liabilities or long term liabilities both should be decreased. Because by that only the liabilities will be decreased.
  • The amount of Gross Profit should also be increased as this will directly have impact over the net profit.
  • The amount of interest rates should also be kept in mind because by that only the expenses can be reduced to the much extent and we can focus more on sales and future perspective.
  • It is also recommended to have more amounts of liquid funds so that the transactions carried on the daily basis can be run smoothly and there are no obstacles for the liquid asset when needed.
  • The interest distributed in the groups which are termed as group interest should also be decreased so that there is more dividends left with us and we can invest somewhere else rather than distributing (Zeng & Taylor, 2017 ) .
  • The company has been doing a lot of charity work, so it can be also reduced to some extent so that the money can be used for some other investment purpose.
  • The internal matters which are seen not closely should be closely analysed and looked upon because these are those matters which indirectly hamper all the functioning of the company and lead to major effects.
  • The competition in the era is of due importance and should be prioritised rather than any other matter and be taken due care of when compared to other matters.
  • The external environment which is the macro environment factors is of the utmost importance and they are the one which are directly impacting the company and its functionality because these factors are taken care by all the competitors.
  • The working capital should also be optimised as it has been clearly seen that this is that capital which is needed by all the enterprises for smooth functioning and proper functioning of daily routine work and future work, because if the company is not able to manage the working capital it can do nothing in future.
  • The amount that has been invested in the fixed asset should be reduced and by that it should try increase the production by which the sales will automatically increase and which will lead to the increase in the profit level of the company (Sedlmair et al , 2011).
  • All the extra expenses incurred should be reduced so that we can increase the profit value and dont go on increasing the expenses only.
  • It should closely monitor all the internal activities going in the organisation because the activities do have impact on the functionality.
  • Most importantly the company should give some fringe benefits to the employees to bring out the commitment level of the employees and so that they can feel some type of belongingness.
  • By analysing all the factors it has also come into notice that the amount of Current Asset has also been decreased in spite of the fact that there is decrease in the value of fixed asset.
  • The value of market capitalisation has also increased and the company should try to maintain it as it is maintaining over the years by various ways.
  • It is also suggested or recommended that the company should try to increase the equity level rather than switching or increasing the amount of debt because that will only increase the amount of dividend and not the debt.
  • The company should also analyse the amount of investors and dividend amount that need to be distributed when the company needs to invest in a new project.
  • The company should think about the employees and the candidates and then try to take decisions, because this will create a sense of belongingness between the employees and the company( Pierozan et al).
  • Lastly, it can also hire some up to date employees with major skill set to increase the productivity level in the enterprise generating more revenue in spite of the fact some cost will be increased by the company.
  • The company should try to analyse all the various forms of investment and then try t reduce the capital and dividend distributed. So, this will lead to the best decision that the company will take and not creating dissatisfaction among the shareholders and the investors.

3.)Investment Proposal

Net Present Value refers to the method that is somewhat similar to the method of discounted cash flow and it indicated the value of all costs and benefits. It refers to the determination of the profit in the particular investment project.
NPV=Rt/(1+i)t
Here,
I=Required rate or discounted rate
T= number of time period

Weighted Average Cost of Capital refers to the weight of cost of equity, preference and debts and weights are percentage of capital.
WACC= (VE?Re)+(VD?Rd(1?Tc))
Where:
E=Market value of the firms equity
D=Market value of the firms debt
V=E+D
Re=Cost of equity
Rd=Cost of debt
Tc=Corporate tax rate?


It has been seen that the company wants to expand its existing business and one investment proposal is needed for it. So, here it is assumed that the company wants to use 40% of its capital and rest 60%is arranged by the means of debt. So it is explained below by taking some assumed values and they are being discussed.(Cigola and Peccati,2005). A capital structure of 40% equity and 60% debt (at market weights) and the following costs is assumed as:

Dc
=
6%
t
=
40%
Ec
=
18%


Using the above inputs, the companys WACC is calculated as follows:
WACC = [6% x (1 40%) x 60%] + [18% x 40%]
WACC = 9.36 %
It has been clearly observed that many companies try to use their own capital and try to avoid the long term debt because here also the company is avoiding the debt because of the interest rates. The cost of equity is generally lower than the cost of debt. The reduced WACC is far better than the increased WACC because here also the company will grow much faster than the increased one. This is because lower WACC will help the company to earn more and increase the profit and not pay the interest more in the future. However, adding debt to the capital structure to reduce the WACC only works to a certain point, since too much debt can actually increase risk and constrain the companys ability to generate net cash flow (Kumar et al , 2013 )
. When determining the optimum level of debt for a private company, good proxies to consider are the capital structures of similar public companies. The cost of equity also reflects the reflects the risk associated with generating future net cash flow, lowering the companys risk characteristics will also lower this cost. If the company depends upon a small number of customers for a significant percentage of its revenues, better diversification of the customer base would lower that risk factor. Likewise, if the company is highly dependent upon one or a few key employees, transferring responsibilities to additional qualified personnel will help reduce that risk. It is seen here that the WACC is more preferred than the Net Present Value and it is also recommend that the company should go by this method only and not go by any other(Amold and Crack,2004).

Retained earnings is part of total earnings which are being used as capital when in need by the company. It is clearly seen here that the company should go by its retained earnings only and should not deviate from this and not focus on any other options. Apart from this it has also been seen as that the company should pay out the retained earnings here and try to focus on the investment project. Also the earnings which have been kept aside can also be taken into consideration because by that now the company can focus on the investment and not the debt and payouts. Its preferable for the company to have and opt retained earnings because these are free of cost and if they take debt they have to pay the great amount of interest on that so it is also advisable for a company to go for retained earnings in case of investment opportunity. And it also observed that the investors also prefer the company which has less of liabilities to pay in future and thinking about expansion on its own funds rather than going for the debt type. There are many exemptions to this too because the company is using its own capital for expansion and not the markets money, but yes this is valid in this only where the company is trying to do investment in some other project or option. Investment is done in many ways and it depends on various things such as mode, Cost of capital, etc. So, by analysing all the factors it has been analysed that the company has been doing exceeding well in his sector and has been looking for a long term perspective. The only part which was to be discussed here was the option that was available here and the best option suited here came to be WACC (Ball et al, 2020).

4.)Analysis

A detailed discussion and analysis has been made above and by that it has been clearly seen that there is a contradiction view whether the company should bay retained earnings or not. And here it is highly recommended to pay dividends as dividends are someway the earnings of the shareholders which need to be paid to the shareholders as their right. This will also give a sense of trustworthiness to share holders and motivate more investors to invest in the company. The dividend is usually paid on a per share basis, so the investors having good amount of shares in the company will be affecting much by this decision of the company and the investors having less number of shares will somewhat manage in these cases but yes definitely they will not invest more into this It also increases the financial performance and value of the company in the future and also most importantly it is a maturized company so it can manage with the payout of the dividends. It can reduce the value of the dividend payout but cannot solely stop the payout in the case of investing in the project or others. It is another way to foster goodwill among the minds of the share value to create a sense of belongingness among them. Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. A greater demand for a company's stock will increase its price. It can also go for quarterly payout of dividends because by that it can invest the amount for some time and then utilize the amount and after wards when it is earning good amount of amount it can distribute a part of it to the shareholders. The company can pay out the retained earnings or dividends to create demand for the stocks in the company and also to attract more no of investors. It has also been observed by this financial analysis that the company is trying to use a percentage of capital and the remaining with the help of debt and trying to analyze the options. So, to evaluate and make things happen in the correct way there should be a proper management system by which the company should arrange the resources and manage or plan things accordingly which doesnt only affect the business but also the investors.
Every investor wants a stable dividend so that he doesnt have a risk of fluctuating dividend and this could only happen when the company is maturised like in this case .It can also have a impact on the income policy of the investors which can lead to dissatisfaction among the shareholders and then this will ultimately lead to the less of investment in the company. It has also been known that the non qualified dividends are more taxable so that should also been kept in mind because the company will be distributing the dividends to the investors or the shareholders. The company should keep in mind about the various outcomes if it does not distribute the dividend to the shareholders. Because every investor wants a proper return of the amount he/she might have invested in the company or the business. The sole aim of the company right now should be a investment project while distributing a good amount of profit in terms of dividend to the shareholders and the investors which will automatically lead to the attraction of many new investors in the company. Sometimes it also happen that investors might compare the return among the various companies in the same sector and then make the decisions of investing, so here the amount of dividend comes into play. And hereby the investors will invest more and then the company can use more of capital and take less of debt here. This also will help the business to reinvest in further opportunities in the future ahead (Divecha and Morse,1983).

Conclusion

The whole report consisted of a detailed discussion on various financial concepts of the company. It has been clearly seen in the report about that the company is earning good amount of profit and can also increase the profit margin by taking various corrective measures. A new investment project has also been recommended above in the report above and seen whether it would be a proper fit or not. Some investment options are also being considered later in the report also and then the best option is known out of them. A proper analysis of the ratio has also been drawn in this report to carry out a proper understanding how all this works and what all measures does company take in the unforeseen situation. This report also consists of the brief of the Reckitt Benckiser.

References:

Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2020). Earnings, retained earnings, and book-to-market in the cross section of expected returns. Journal of Financial Economics, 135(1), 231-254.
Cigola, M., & Peccati, L. (2005). On the comparison between the APV and the NPV computed via the WACC. European Journal of Operational Research, 161(2), 377-385Arnold, T., & Crack, T. F. (2004). Using the WACC to value real options. Financial Analysts Journal, 60(6), 78-82.
Divecha, A., & Morse, D. (1983). Market responses to dividend increases and changes in payout ratios. Journal of Financial and Quantitative Analysis, 163-173.
Kumar, R., Srinivas, K., & Sivaramane, N. (2013). Assessment of the maize situation, outlook and investment opportunities in India. Country ReportRegional Assessment Asia (MAIZE-CRP), National Academy of Agricultural Research Management, Hyderabad, India, 133.
Lam, K. F. (2010). In the determination of weight sets to compute cross-efficiency ratios in DEA. Journal of the Operational Research Society, 61(1), 134-143.
Pierozan, C. R., Agostini, P. D. S., Gasa, J., Novais, A. K., Dias, C. P., Santos, R. S. K., ... & Silva, C. A. (2016). Factors affecting the daily feed intake and feed conversion ratio of pigs in grow-finishing units: the case of a company. Porcine Health Management, 2(1), 1-8.
Rutkowska-Ziarko, A. (2015). The Influence of profitability Ratios and company size on profitability and investment risk in the capital market. Folia Oeconomica Stetinensia, 15(1), 151-161.
Saleem, Q., & Rehman, R. U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary journal of research in business, 1(7), 95-98.
Sedlmair, M., Isenberg, P., Baur, D., & Butz, A. (2011). Information visualization evaluation in large companies: Challenges, experiences and recommendations. Information Visualization, 10(3), 248-266.
Zeng, S., & Taylor, B. (2017). Looking at creative and innovative ways in which a small company could grow.


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