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Task 1:
The task requires analysing the financial information of AA and BB and
producing a report for the directors of CC Holdings showing comparative
financial position of AA and BB.

Calculations:

Calculation AA BB
2004 2005 2004 2005
ROCE = Gross Profit /
19.54% 11.66% 43.33% 6.45%
Capital Employed x 100%
Profit Margin = Net
40% 29.03% 34.28% 5%
profit / Turnover x 100%
Asset Utilisation =
Turnover / Total Assets x 21% 18% 102% 57%
100%
Liquidity = Current Assets 1 1.66 3 3.25
/ Current Liabilities
Risk(Gearing) =
Borrowed Capital/Borrowed 35.07% 28.14% 0% 0%
Capital + Equity x 100
Taking 2004 as our base year figures
Growth (Turnover) 3.30% -42%
Growth (Profit) -17.64% -84.60%
Growth (Capital
37.93% 3.33%
Employed)

Task 2:
Findings:

For AA
 AA’s staff cost has increased by 1. Where as the turnover is also increased
by 1, there is no potential rise in the turnover. That means when it spends on
staff, it does not get appropriate output.

 AA’s assets and liabilities have increased nearly by 30% and 50%
respectively during the year 2005 as compared to that in 2004. But there is
not substantial growth in its turnover which more of assets. As it is clear that
the profits have rather gone down by 25% during the year 2005 as compared
to that during 2004.

 As per the financial statement overall AA is not performing that good. If it

continues to perform in this pattern then there are higher chances of
collapsing in the near future.

Created by – Ali Akbar ST0003605

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 Labour turnover is probable when there is cut throat competition. Lack of

motivation, performance review and appraisal of labours could be the reason
for their turnover.

For BB

 Company BB’s ROCE for the year 2004 was 43.33%, but it tremendously fall
to 6.45% in 2005. This could be perhaps due to lack of skilled labours, which
they were not able to get desired returns on capital employed.

 Assets utilisation of BB during the year 2004 was 102%, which was
diminished to half i.e. 57% during 2005. The good and valid reason for this
sheer fall could be labour turnover or lack of skilled labour. Labour turnover
might be due to competitive market.

 Liquidity ratio for BB was 3 and 3.25 in the year 2004 and 2005 respectively.
There has been marginal variation in this ratio because the current assets
during these two years have also been almost the same.

 As per the company’s balance sheet of BB, there is no fund borrowed, hence
the gearing ratio is zero. This illustrates that this company is less struggling
as compared to AA.

 But BB has to face high degree of competitions, which affects its turnover and
revenue. As there are no borrowed funds (debentures), what ever their
revenue can be largely utilised and re-invested in the business.

 As per the financial statement total assets that of BB are less, this may be
because it might have sold off some of its assets in order to pay off its
debentures.

 There has been a sudden plunge in the turnover and profits of BB. Probably
due to lack of efficient planning and implementation.

 As per the financial statement and the above analysis, it is clear that
management of BB is incompetent in making financial decisions. It seems
that it fails to perform in such a high degree of competition.
A company who performs well is able to attract more investments. But BB
seems to be incompetent.

 Company BB seems to lack technology up gradation hence depends on

skilled labour.

 Turnover and profit growth ratios seem to be negative for BB, due to cut
throat competition. This reveals that the management is not well prepared for
sustaining in such degree of competition.

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Limitations

 There should be more historic financial details provided in order to compare

the performance of the 2 subsidiaries.

 It is very difficult to analyse the financial feasibility of AA and BB on the basis

of merely 2 years balance sheets.

 A reference point is needed. To be meaningful, most ratios must be

compared to historical values of the same firm, the firm's forecasts, or
ratios of similar firms.

 As the two subsidiaries of CC function in two unlike markets, they cannot be

compared and judged as there are not any common grounds.

 For actual performance accountability, it must be compared to the budgeted

one. But there is no budgeted financial statement provided.

 For assessing the financial viability and feasibility, budgeted statement should
be provided as base for making comparison between the planned and actual
financial statement.

 The financial statement does not provide details of number of people

employed. Hence unable to determine the cost incurred by the 2 subsidiaries
on their labour.

 There are only few ratios calculated. The out put and performance of every
labour is not calculated.

 It does not consider the monetary value that is incurred on every labour.

 Ratios are subject to the limitations of accounting methods. Different

accounting choices may result in significantly different ratio values.

 Year-end values may not be representative. Certain account balances that

are used to calculate ratios may increase or decrease at the end of the
accounting period because of seasonal factors. Such changes may distort the
value of the ratio. Average values should be used when they are available.

Recommendations
From the financial statement and calculations of ratios it is clear that both the
subsidiaries of CC Holdings have not performed really good during 2004 and
2005. It can be predicted that if they continue to perform in this method then they
cannot sustain in the long run. However with the limited data we cannot
thoroughly analyse the performance of these 2 companies. However the

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management of AA and BB can take necessary actions for improving their overall
performance.

For AA

 AA needs to motivate and encourage its staff to produce more and enhance
their outputs.

 AA must reduce its assets to raise its liquidity and reinvest the same capital in
its business.

 AA can raise the prices and increase its turnover by proving an acceptable
increase in the costs.

For BB

 BB must do its competitors analysis, in order to be ready for facing

competition and achieve its targeted turnover.

 BB must motivate and train its labour to raise their performance and to
produce more units.

 BB must try reducing its general expenses, in order to reduce the overall cost
to the company.

 BB must utilise its assets efficiently by training its labour for producing more
units from available resources and assets.

Created by – Ali Akbar ST0003605