Financial analysis

Contents
Question: 1:......................................................................................................................................2
Question: 2:......................................................................................................................................6
Question: 3:......................................................................................................................................7
Reference:......................................................................................................................................12
Question: 1:

1.1 Calculation of ratios:

1. Gross profit margin:

2020 2021 2022

Turnover 786.00 841.00 900.00
Gross profit 283.00 278.00 270.00

Gross profit margin 36.01% 33.06% 30.00%

2. Net profit margin:

2020 2021 2022

Turnover 786.00 841.00 900.00
Net profit 174.00 156.00 133.00

Net profit margin 22.14% 18.55% 14.78%

3. Net asset turnover:

2020 2021 2022

Net sales 786.00 841.00 900.00
Average assets turnover 926.00 1,151.50 1,190.00

Net asset turnover 0.85 0.73 0.76

5. Receivable days:

2020 2021 2022

Net sales 786.00 841.00 900.00
Average accounts
receivable 271.50 290.50 300.00
Receivable turnover 2.895028 2.895009 3
Days 360 360 360
Receivable days 124.3511 124.352 120

6. Payable days

2020 2021 2022

Accounts payable 154.00 192.00 93.00
Cost of sales 503.00 563.00 630.00
Number of days 360 360 360

Payable days 110.2187 122.7709 53.14286

7. Return on capital employed:

2020 2021 2022

EBIT 174.00 156.00 133.00
Total assets 739.00 1,113.00 1,190.00
Current liabilities 154.00 192.00 93.00
Capital employed 585.00 921.00 1,097.00

Return on capital employed 29.74% 16.94% 12.12%

8. Debt/Equity ratio:

2020 2021 2022

Total debt 254.00 604.00 505.00
Total equity 485.00 609.00 685.00

Debt/Equity ratio 52.37% 99.18% 73.72%

9. Return on equity
 2020 2021 2022
Net income 174.00 156.00 133.00
Equity 485.00 609.00 685.00

Return on equity 35.88% 25.62% 19.42%

1.2 Comment on the financial performance of the company:

From the above calculation, it can be seen that ratio analysis has been used to evaluate the
performance of Shaybah Plc. Different ratios have been calculated such as profitability ratios,
efficiency ratios, debt ratios, and other. As per the analysis, it can be seen that the profitability
ratios of the company have declined in the past three years. For instance, the gross profit ratio of
the company was 36.01% in 2020, and in FY 2022, the ratio declined to 30%. This has
happened irrespective of the fact that sales of the company have increased but, as the gross profit
and net profit of Shaybah Plc have declined, the overall profitability of the company has
increased. In FY 2022, the net profit of Shaybah Plc decreased by 31%.

90.00%

80.00%

70.00%

60.00%
Gross profit margin
50.00% Net profit margin
Net asset turnover
40.00% Return on equity
Return on capital
30.00% employed
20.00%

10.00%

0.00%
2020 2021 2022

However, the efficiency ratios of the company have shown a mixed performance where
receivable days have decreased in comparison to FY 2020. But, the payable days of Shaybah Plc
have also declined, due to which the company will need to make payable quickly. It can be said
the overall performance of the company is not satisfactory because the debt ratio has also
increased which means that the reliance of Shaybah Plc on an outside debt has increased
(Haralayya, 2022).

140.00

120.00

100.00

80.00
Receivable days
60.00 Payable days

40.00

20.00

0.00
2020 2021 2022

1.3 Maximization of shareholder's wealth:

Wealth maximization means that the share price of Shaybah Plc is increasing and the company
wants to increase its market capitalization. The increase in the share price of the company
directly impacts its growth perspective, and position in the market (Haralayya, 2022). When the
company wants to increase the wealth maximization of the company, it means that they are
trying to increase the value, Wealth maximization is also done by companies to attract new
investors because it will help Shaybah Plc to increase the number of employees employed by the
company. This will help the company to perform better in the future.
 Shaybah Share price
21.2
21 21
20.8
20.6
20.4
20.2
20 20
19.8
19.6
19.4
2020 2021

Other goals of the Shaybah plc might be :

 It will have the goal to increase the wealth of the company

 Goodwill of the company will be high and positive to attract the new investors.
 Funding will be easily capture for the new financial opportunity.

Question: 2:

2.1 Investment plan:

Shaybah Plc wants to invest in a new project with 100 billion SAR, they have to identify ways
in which it can generate funds. Such two ways are equity financing and debt financing. Both
methods have their advantages and disadvantages, and some of those are discussed below:

Equity financing Debt financing

Advantages The main advantage is that there is The main advantage is that it helps
no obligation of Shaybah Plc to the company to secure its control and
repay the amount of interest or power and if the credit score of the
principal at regular intervals. company is good, it helps them to get
 loans easily.
If the creditworthiness of the When debt financing is used, the
company is poor, equity can be a chances of conflict decrease in the
preferable option for Shaybah Plc company because the management
to raise finance. style remains the same.
Disadvantages If the number of shareholders Reliance on outside debt is risky for
increases, the profit sharing will the company because the company
also increase which will decrease has to make regular repayments of
the per-share profit of Shaybah interest and principal, and if the
Plc. company fails to repay the loan, it
can become a defaulter and can
become bankrupt as well (Rhodes, &
Walker, 2022).
When the company uses equity If the credit score is poor, the
financing, they lose its control company will not be able to get
over the company and conflicts loans, and the liability of Shaybah Plc
also increase because the number also increases.
of owners increases (Hertina,
2021).
 2.2. Investment appraisal approaches:
Cost of each type of finance:-
 If the company has equity finance then it will not cost on an annual base. It will
only have to pay a dividend to the shared holders if it earned a profit in future
years.
 If the company has debt capital then it will have to pay the financial cost each
year irrespective of the earnings.

Different costs are associated with the financing of projects with debt and equity financing.
Equity capital reflects the ownership of a company, while debt capital reflects the obligation of
Shaybah Plc. In most cases, the cost of equity is more than the cost of debt, because the risk of
shareholders is more than the risk of lenders. After all, lenders get preferential rights in every
case, where repayments are made to them at regular intervals. In return, the return that is
promised to shareholders is not guaranteed, because companies are not under an obligation to
pay dividends at regular intervals (Ma,& Zeng, 2022).

The retained earnings also come with a cost and it is the cost of the earnings that the shareholders
have to forego.

Relative costs of retained earnings:-

If Shaybah Plc uses the retained earnings as its finance source then it will have opportunity costs
of earnings foregone by the shareholders to keep the money in Shaybah Plc instead of investing
it in the business, or investing it outside of the business.

Hence, every source of funds that the company uses comes with costs, and the shareholders
should identify that the return from investment should always be more than the costs associated
with the project, or the costs that the company will incur to complete the project. Hence,
company Shaybah should use the above methods to raise money for their projects.
Question: 3:

1. Calculation of payback period:

Cumulative
Project A inflows Payback

Initial investment (150.00) (150.00)

Year 1 40.00 40.00 (110.00)

Year 2 50.00 90.00 (20.00)

Year 3 60.00 150.00 130.00

Year 4 60.00 210.00 340.00

Year 5 85.00 295.00 635.00

Payback period 2 years

In month 20000/150000
0.133333333
2.133 years

Cumulative
Project A inflows Payback

Initial investment (152.00) (152.00)

Year 1 80.00 80.00 (72.00)

Year 2 60.00 140.00 68.00

Year 3 50.00 190.00 258.00

Year 4 40.00 230.00 488.00

Year 5 30.00 260.00 748.00

Payback period 1 Year

In month 68000/190000
0.357
1.36 years
 2. Net present value:
Project A
Year0 Year1 Year2 Year3 Year4 Year5

Cash outflow (150.00) - - - - -

Cash inflow - 40.00 50.00 60.00 60.00 85.00

0.89285 0.79719 0.7117 0.63551 0.56742
PVIF 1 7 4 8 8 7
PV of cash
inflows (150.00) 35.71 39.86 42.71 38.13 48.23
Total cash
inflows 204.64

NPV 54.64

Project A
Year0 Year1 Year2 Year3 Year4 Year5

Cash outflow (152.00) - - - - -

Cash inflow - 80.00 60.00 50.00 40.00 30.00

0.89285 0.79719 0.7117 0.63551 0.56742
PVIF 1 7 4 8 8 7
PV of cash
inflows (152.00) 71.43 47.83 35.59 25.42 17.02
Total cash
inflows 197.29

NPV 45.29
 3. Internal rate of return:
Project A
Year0 Year1 Year2 Year3 Year4 Year5

Cash outflow (150.00) - - - - -

Cash inflow - 40.00 50.00 60.00 60.00 85.00

0.89285 0.79719 0.7117 0.63551 0.56742
PVIF 1 7 4 8 8 7
PV of cash
inflows (150.00) 35.71 39.86 42.71 38.13 48.23
Total cash
inflows 204.64

NPV 54.64
IRR 11%
Project A
Year0 Year1 Year2 Year3 Year4 Year5

Cash outflow (152.00) - - - - -

Cash inflow - 80.00 60.00 50.00 40.00 30.00

0.89285 0.79719 0.7117 0.63551 0.56742
PVIF 1 7 4 8 8 7
PV of cash
inflows (152.00) 71.43 47.83 35.59 25.42 17.02
Total cash
inflows 197.29

NPV 45.29
IRR 12%
 4. Analysis:

Merits of each investment appraisal technique:-

NPV :
 It helps to consider the time value of money concept.
 It is considered to be more relevant for the evaluation of financial opportunities.

Payback period:
 It is the easiest form of financial appraisal technique.
 It also provides how quickly funds can be recovered.

IRR
 It is using the cash flow and time value concept to generate the information.
 It also provides an indication of the efficiency, and yield of the project (Kipkirui,
& Kimungunyi, 2022).

Discussion over the computation and result find out in the above table

 From the above, it can be said, that there are two projects within which Zebra Toon Plc
has to choose one project, and different investment appraisal analysis techniques have
been used by the company to evaluate the decision (Dobrowolski, & Drozdowski 2022).
 Based on the payback period, Zebra Toon Plc should select project B, because the
payback period of the company is low, and due to this the company will be able to
recover their money fast. However, these criteria will be used by the company if time is
an important consideration for them to decide the viability of the project.
 On the other hand, based on NPV, project A should be used because the NPV of that
project is high, and when the decision is to be taken by Zebra Toon Plc between two or
more projects, the project with a higher NPV is selected, because it means that the
company will be able to earn higher inflows, in the given amount of time (Shou, 2022,
July).
 Also, the IRR of project B is higher and is equal to the cost of the project or the cost of
discounting, and hence, based on IRR also, project B should be chosen by Zebra Toon
Plc.
Suggestion

Hence, based on the payback period, Zebra Toon Plc should invest in project A, and based on
IRR company should invest in project B.
Reference:

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