Analysis-of-Financial-statements

ANALYSIS OF FINANCIAL STATEMENTS Name Jiacheng Cao Past and likely future of financial performance and financial position To analyze the past present and future of Pulsins financial performance and position we have to use their financial statements and the financial ratios The first ratios in consideration are the profitability ratios The company s gross profit margin GPM stands at 54 and the net profit margin NPM stands at 25 as at 2013 The GPM has been kept between the ranges of 50 to 60 of the year 2008 It is due to the high levels of cost of sales arising from the use of high and new technology which results in high quality products and thus higher sales levels Subramanyam et al 2009 34 The NPM however has been rising from 5 to 25 in 2008 due to the company s ability to control its expenditure The profitability ratios are expected to remain in the same trend because the company had a five times administration and selling expenses in 2013 as that of 2012 Expansion of business and exportation of products to Germany explains the increased costs Robinson 2012 86 The accepted liquidity ratios for businesses are always 1 1 or 2 1 The following table shows the liquidity ratios of the company over the period between 2006 and 2013 DATE2006200720082009201020112012 VALUE0 700 601 780 951 250 950 92 The ratios have been on the rise from 2006 to 2008 In 2009 they fell and rose again in 2010 In 2011 it fell to 2012 The forecast indicates that the organization will maintain a favorable liquidity ratio above one by ensuring that it reduces the value of its trade creditors thus raising the ability of the company to meet its short term obligations The current ratio of the company Date20052006200720082009201020112012 Values0 350 951 032 241 281 641 411 41 The current ratios are part of the liquidity ratios It has been on the rise since 2005 to a peak in 2008 However after that it has been fluctuating but maintained at a rate above 1 and above the industry average The trend is expected to be maintained across the period The management efficiency ratios the inventory turnover period and debtor days have constantly been increasing by one month since 2008 The result is a long operating cash cycle OCC The longer the OCC the greater the financial risks a company encounters The forecast for the 2014 financial years will have to be raised to 71days because of the trend of increase in the turnover periods The gearing ratios of the company were high at the start as shown in the table below They later reduced due to the ability of the company to finance itself and reduce the debt financing from loans taken from banks Peterson et al 2012 98 Apart from the highest interest covers in 2011 of 92 times due to no loan cover that year The company s ability to pay its interests has remained at above 20 times over the period and the forecast holds that the trend to continue to the next financial period DATE20052006200720082009201020112012 VALUES 153 11 314 27 534 1477 82313 80146 89228 57218 95 The company s earnings per share ratios EPS have also been increasing from 6 in 2008 to 2500 in 2014 The trend is expected to be continuing to the next period because the value per share will be rising as the result of increased confidence in the management of the owners of the company Working capital analysis 200720082009201020112012 Trade debtors70 945161 719271 539510 306608 5881 035 955 Stock50 58964 680101 231168 065326 070633 329 Trade creditors117 833140 092303 537427 991715 7771 307 765 Working Capital3 701173 35186 068273 924291 040531 994 The working capital has indicated a rise in the value of the trade creditors and debtors The 2010 to 2012 values are indicating a strong ability of the company to retain more of their customers The trade creditors are more than the trade debtors because of increased demand and sales for the product The trend is forecasted to remain the same due to expansion and the company exporting its products to Germany Benchmarks The best benchmark for the company is Innocent Smoothies Inc because they have a similar nature of products and history Innocent is growing through coordination while Pulsin through direction It has given Pulsin a chance to look ahead and learn from the mistakes and achievements of Innocent because Innocent is standing more established growth process Wahlen et al 2010 56 Pulsin has done well in maintaining a better profitability than Innocent in the beginning The NPM of Innocent ranged between negatives and zero while that of Pulsin was between 20 and 25 It was because Innocent did not exercise control over their expenses while pulsing did It was also because innocent s shares were bought by Coca Cola while Pulsin kept it shares between its three directors After Coca Cola took over the business in 2009 there was slow decision making unlike Pulsin where the directors have control of the business and make fast decisions The gearing ratios was above 100 until when 2009 because the business had encountered problems inability to pay their debts Pulsin experienced the same problems but used the options to re invest rather than borrowings from banks They also made use of crowd borrowings whose interest rates were lower than those of the bank by about 3 to 5 Pulsin however has been experiencing lower performance in terms of the OCC Innocent has a higher OCC and lower inventory days as well as debtor days Pulsin should avoid using more cash frequently by ensuring it improves its OCC level by ensuring the debtor and inventory days are below 30 days Kopczynski 1996 37 Other factors like image protection and corporate responsibility have helped Innocent gain more sales than Innocent It is because it allocates some part of the profits to enhance the company s reputation thus increasing the customer confidence Pulsin should learn from innocent s strategy of using about 10 to 20 of their profit for donations to charities and adverts thus maintaining a healthy and ethical image Lecturer s presentation The sales of Pulsin Ltd have performed well In figure 1 the sales value has been increasing over the period from 2011 to 2013 Also it is notable the effect of innovation and introduction of new products as the protein powders which were new products in 2011 their sales volume has been increasing almost to that of the size of their top selling product Last 3 years sales results 1 6m bars 64 000kg of protein powder in 2013 Figure1 Source Pulsin guest lecture slide 2014 As the company is travelling towards growth through direction in the second phase of the Greiner curve it is important to consider the sales direction Fridson et al 2011 28 The company should focus on developing sales in the U K internet and wholesale customers as they account for 70 of the total sales In figure 2 the sales of products to the internet are highest at 1 59 per unit followed by wholesalers at 0 75 per unit and finally distributors at 0 7 per unit The company should therefore focus more on the customers who will give them more sales and better profit margins Moreover in figure 3 it shows the problem of cash flow cycle could be solved because there are usually shorter payment periods with selling goods to wholesalers and on the UK internet Therefore the debtor days and OCC would be correspondingly declined Feldman et al 2007 79 Moreover in figure 3 it shows the problem of cash flow cycle could be solved because there are usually shorter payment periods with selling goods to wholesalers and on the UK internet Bernstein et al 2000 56 Therefore the debtor days and OCC would be correspondingly declined Figure2 Source Pulsin guest lecture slide 2014 Figure three provides a solution to the problem of cash flow cycle The debtor days in the OCC can be reduced by increasing the sales to wholesalers and the U K internet because there are shorter payment periods Figure3Source Pulsin guest lecture slide 2014 Recommendations and conclusions Pulsin has encountered many advantages due to its involvement in Research and Development R D It is due to the policy of the U K government that any investment in R D attracts a corporation tax relief of about 225 of the R D The company should therefore have structured research methods such as using Data Monitoring system and employing research companies to control the quality of the research It will assist because the company will have reduced taxes thus more profits The company keeps a favorable amount of cash in their financial statements because majority of transactions are carried out through cash The holding of more cash can lead to sustainable growth in the future Keeping a low gearing ratio which declines every year enables the company to expand as it increases its reduces its reliance on debts Atrill 2013 30 References Atrill P 2013 Fin