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FINANCIAL MANAGEMENT AND CONTROL

Financial Management and Control

Sidra Sajid
Student ID 229714933
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Financial Management and Control

Part A
Performance evaluation of Greenspace Supplies Limited

Ratio analysis: This approach to analysis looks at every aspect of a proposed project or inves
tment. It investigates any organization's tendencies, including its historical and contemporar
y performance patterns (Bloomenthal, 2022). Profitability ratios are a great tool for assessin
g historical profitability since they determine how profitable a firm was in the past and how
that has changed subsequently.

Types of Ratios:
Liquidity Ratios:
Liquidity ratios are ratios that assess the company's liquidity position and help determine w
hether to seek short- or long-term funding. The ability of the corporation to return both sho
rt-term and long-term debts is determined by these ratios. The computation of the several r
atio kinds may be seen below.
Gearing ratios:
The company's level of leverage is assessed using those ratios. Increased debt utilization is r
eferred to as leverage. Therefore, gearing ratios may be used to assess how heavily a firm re
lies on debt funding. Debt to equity, as well as debt to fixed assets ratios, is computed.
Profitability Ratios:
Profitability ratios are metrics that monitor changes in gross profit, net profit, and other ope
rational profits. These ratios' main objective is to assess changes by contrasting the overall p
rofits of the present with both the earnings of the past. Evaluation of the profit-to-net sales
ratio is the second objective.
Asset utilisation ratios:
The corporation uses investment in its operations to help it make money. Examining the con
tribution of current, fixed, and total assets to sales, etc., is the main goal of these ratios. It es
tablishes how much more efficiently the resources have been put to use (Bloomenthal, 202
2). A better ratio is used, and better utilization is achieved.
Investor's potential:
These ratios are used to assess an investor's potential for future investments as well as their
return on investment. Whether this time companies have better EPS and return, they will be
better able to make investments in the future, and the opposite is also true.

Ratios 2020 2021

Liquidity Ratios
Current Ratio=(Current A 2465/1121=2.19 1792/922=1.94
ssets/Current Liabilities)
Quick Assets ratio=(Quic (1792-847)/922=1.02
k Assets/Current Liabiliti (2465-780)/1121=1.50
es)
Quick Assets=Current As
sets-Stock-Preliminary Ex
penses

Gearing Ratios
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Financial Management and Control
Debt to Equity Ratio=(De (4421/4186)=1.05 3680/4559=0.80
bt/Equity)
Debt Ratio=(Total Debt/ 4421/4186=1.05 3680/4559=0.80
Total Assets)
Equity Ratio=(Equity/Ass 4186/8607=0.48 4559/8239=0.55
ets)

Profitability Ratios
Gross Profit Ratio=(G.P./ (2389/18920)*100=12% (2064/16243)*100= 12.7%
Net Sales)*100
Net Profit Ratio=(N.p./N (713/18920)*100=3.76% (184/18920)*100=0.97%
et Sales)*100
Operating Ratio={(Cost o [(11539+4900)/18920]*100=8 [(10519+4043)/16444]*100=8
f goods sold + Operating 6.88% 8.55%
Expenses)/(Net Sales)}*1
00
Operating Profit Ratio= (1189/18921)*100=6.28% (543/16244)*100=3.34%
(Operating Profit/Net Sal
es)*100

Asset Utilization Ratios

Fixed Asset Turnover Ra (18920/6142)=3.08 (16244/6447)=2.52
tio=(Net Sales/Fixed Ass
ets)
Current Assets Turnover 18920/2465=7.67 16244/1792=9.16
Ratio=(Net sales/Current
Assets)
Assets turnover Ratio=(N 18920/8607=2.19 16244/8239=1.97
et Sales/Total Assets)
Inventory Turnover Ratio (12780)/[(1232+1234)/2]=6.2 (11277)/[(1322+865)/2]=10.3
=(Cost of Goods sold/Av 2 Times 1 Times
erage Stock)
Inventory Conversion Pe 365/6.22=58 Days 365/10.31=35 Days
riod=365/Inventory Turn
over Ratio

Inventory Potential Rati

os
Return on Investment=(E (474.84/12511)*100=3.79% (70.17/13210)*100=0.53%
AT/Equity)*100
Earning per Share=(EAT/ (474.84/12511)=0.037 70.17/12511=0.0056
No. of Equity Shares)

a. Compared to 2020, the Greenspace Supplies Limited's liquidity position has significantly i
mproved in 2021. The typical current ratio must be 2:1, but in 2020 it was just 1.38:1. But in
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2021, this increased and reached a satisfying 2.9:1. The growth in current assets and concurr
ent decline in current liabilities are the causes of these changes in the current ratio. The typi
cal quick ratio will always be 1:1 in this context. In 2020, it was 1.05:1, which was fine, but in
2021, it improved to 2.35:1. Once more, the rise in fast assets and decline in current liabilitie
s are both factors in the quick ratio's improvement. This demonstrates a significant improve
ment in the Greenspace Supplies Limited's liquidity situation.
b. The modest leverage condition of Greenspace Supplies Limited is seen in the gearing ratio
s. The organization depends more on equity capital than it does on fixed capital. The debt eq
uity ratio is typically or ideally a ratio of 2:1. However, it is only 0.57 in 2020, and it dropped
to 0.42 in 2021. The ratio of debt to assets is also lower. It was 0.25 in 2020 and dropped ev
en more to 0.21 in 2021. Less borrowing is the cause of the reduced debt-to-equity and debt
ratios. The decline in each of these ratios indicates that Greenspace's debt was lower in 202
1 than it was in 2020. In both years, the equity to total asset ratio is higher than the debt to
assets ratio. The equity to Assets Ratio in 2020 was 0.48, while in 2021 it was 0.55. The fact t
hat Greenspace Supplies Limited is more dependent on equity than debt is demonstrated by
all three measures. This is a sign that the organization's leverage situation is lower in 2021 t
han it was in 2020.

c. Greenspace's profitability position declined in 2021 as seen by the trend. From 39% to 35
% and 2.53% to 1.72%, respectively, the gross profit and net profit ratios have declined. The
decline in gross profit and net profit is the major cause of this. And the organization's reven
ues decreased in 2021 which is why the net and gross profits decreased. The organization's c
ost of goods sold and operating expenditures have decreased, but because revenues have al
so decreased, the operating ratio has increased from around 86% to 89%. However, a rise in
operating profit for the year 2021 has been noted. However, the organization's overall effici
ent and useful have declined.

d. The percentage contribution of fixed assets toward sales has grown. Both the fixed assets
as well as the sales have declined, but the assets have decreased more rapidly than the sales,
which is why the ratio has slightly risen. Although current assets have increased in 2021, thi
s hasn't contributed to higher sales. Despite a rise, the sales have decreased as existing asset
s have grown. As a result, existing assets' contribution to sales in 2021 is much lower than it
was in 2020. The overall asset input to sales has fallen from 0.68 to 0.65 based on both actu
al and fixed asset contributions, with the decline in sales being the primary cause. It's excelle
nt to see that the turnover rate of inventory has risen from 9.17 to 10.36. The conversion du
ration of the inventory has now extended from 31 days to 35 days, which is the worst aspect.
In contrast to 2020, the organization's overall utilization is poor 2021.

e. The organization's return on investment and EPS have declined solely as a result of the
decline in EAT and interest. In 2020, the return on investment was 3.81%; in 2021, it is 0.56
%. The EPS also declines, from 0.038 in 2020 to 0.0056 in 2021, in a similar manner. As a res
ult, investors' investment potential is now lower in 2021 than it was in 2020.

Limitations of the ratio analysis

a. Incorrect findings: If the ratios analysis is performed with inaccurate data, improper result
s will follow. For instance, if indeed the asset's overstated or depreciated valuation is not inc
luded in the financial statements, misleading results will ensue. Results that are undervalue
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d will undoubtedly arise from undervaluing the assets. Therefore, the actual outcomes cann
ot be guaranteed.

b. No thought is given to the likely outcomes: The historical data is examined in ratio analysi
s. However, the unknowns of the long term are totally disregarded. As previously stated, ass
et value inflation is disregarded in calculations, giving us some notion of what will occur in th
e near future based on historical data. But the path of that happening will also shift accordin
g to changes in asset values.

c. Different accounting techniques: If a comparison is made over a period of years whether,

between a number of businesses when the accounting procedures used for those years or f
or all companies were different, the findings may change and a genuine comparison might b
e feasible. There may be a little variance in the size of the measurement, for example, if one
business uses one way to calculate the organization's income while the other uses a differen
t one.

d. Price change: In the industry, if the price point varies, the value of the assets, etc., also wo
uld change. So the outcomes might not be accurate. Ratio analysis disregards variations in t
he price level. Unnoticed price increases will undervalue assets, etc., whereas unnoticed pric
e decreases will overvalue the same items.

e. Only fractional information: When making judgments, ratio analysis should be combined
with other ways of analysis because it only provides partial information. There are several ra
tios that do deliver findings in percentages, but additional techniques must still be utilized.

f. Ignorance regarding quality factors: Quantitative data is employed in the ratios. But the co
mpany's or business' qualitative information is disregarded. As a result, it doesn't offer accur
ate information for making decisions. Similar to how goodwill is valued, there is no allowanc
e made for it in the ratio analysis, and it is not taken into account.

Part(B)
(1) Payback period
This time frame is when investments will start to pay off with revenue (Kagan, 2023). The
payback period is calculated to contrast two additional investment possibilities. The risk incr
eases with increasing PBP & vice versa.

The formula for PBP:

Payback period=(cost of investment)/(Annual net cash flows)

= 2,000,000/(1,230,000-340,000)
= 2,000,000/890,000
= 2.298 Years
= 2 years and 109 days
Although the asset would depreciate completely over the next six years, its return would be
provided by it within just two years and more than 100 days. So, based on the PBP techniqu
e, the investment choice appears cost-effective.
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Financial Management and Control

Investment appraisal techniques:

Benefits: This is a straightforward technique to use. Additionally, it bases its solution on a ra
pid analysis. Since the formula is universal, anybody and any firm may utilize it.

Limitations: It does not take into account the worth of time, and it solely considers monetar
y returns. The disadvantage is this. Time should be taken into account since it's possible that
changes in price levels or other factors will arise over time and won't be taken into account
when valuing an asset.

(2) Net present value

The change in the investor's wealth value is the NPV of every investment (Fernando, 202
2). The net cash inflows that are smaller than that of the initial investment are equalized by t
he NPV technique.
NPV= {R * {[1-(1+i)-n]/i}}-Initial Investment

NPV= {1,230,000 * {[1-(1+0.12)-6]/0.12}} – 2,000,000

= {1,230,000 * {[0.97]/0.12}}-2,000,000
= {1,230,000 * {8.08}}-2,000,000
= {9,851,676.66}-2,000,000
= 7,851,676.66
Cash inflows revealed by the technique's NPV have a very good level of satisfaction. This de
monstrates the project's economic viability for the organization. so that the suggested investin
g strategy may be put into practice.

Investment appraisal techniques:

Benefits: This approach predicts whether or not a company's value will improve. All cash flo
ws and the time value of money are taken into account. When all cash flows are taken into ac
count, we have a genuine net cash flow, which aids in producing outcomes that are practical.
However, the biggest drawback is that it necessitates an assessment of the capital cost.
The statement is also expressed in dollars rather than percentages. Therefore, it may provide
different outcomes if the management finds it difficult or impossible to make the proper asses
sment. The results that have been given may also be incorrect.

References

Bloomenthal, A. (2022, September 08). Financial Ratio Analysis: Definition, types,

examples, and how to use. Retrieved January 30, 2023, from
https://www.investopedia.com/terms/r/ratioanalysis.asp

Ratio analysis types: Definition, formulas & examples. (2022, August 09). Retrieved January
30, 2023, from https://www.educba.com/ratio-analysis-types/
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Kagan, J. (2023, January 13). Payback period explained, with the formula and how to
calculate it. Retrieved January 30, 2023, from
https://www.investopedia.com/terms/p/paybackperiod.asp

Fernando, J. (2022, November 16). Net present value (NPV): What it means and steps to
calculate it. Retrieved January 30, 2023, from
https://www.investopedia.com/terms/n/npv.asp