Determine firm sales revenue, Financial Management

Assignment Help:

a) Gross profit shows the difference between a firm's sales revenues and its direct cost of sales (COGS). Net profit, however, is calculated after deducting overheads (expenses) from the gross profit figure, i.e. it considers both indirect and direct costs in the calculation of profit. Gross profits will, therefore, always be greater than Net profits.

b) Note: SL students are not expected to use the Earnings Per Share ratio in this question.

Ratio

Firm

Commentary

GPM

Pia

Gross profit has fallen by 20% (from GPM of 50% to 40%).

Hayman

Gross profit has fallen by just 10% (from GPM of 50% to 45%); therefore Hayman has performed better in terms of its ability to control COGS.

NPM

Pia

NPM is stable at 20% but this means with a reduced GPM that overhead control is improving; overhead accounted for a 30% differential (comparing GPM and NPM) but only 20% by the Year 3.

Hayman

NPM has improved by 5.2% and is quite stable. Hayman's ability to control overheads has also improved but Pia performed better.

ROCE

Pia

Fall in ROCE of 6.7% but the rate is still quite attractive at 14% return.

Hayman

Improved by 25% thereby seems very attractive if performance can be maintained. Hayman's ROCE overtakes that of Pia in 3rd year and seems attractive at 15% return.

Quick ratio

Pia

High acid test ratio in Years 1 and 2; seems to have improved with the ratio falling to 1.5 (although we have no information about the type of industry that Pia operates in).

Hayman

Fluctuating acid test ratio that is close to the minimum recommended of 1:1 so liquidity issues at Hayman could be a concern for some investors.

EPS (HL)

Pia

Improving EPS ratio will tend to attract investors (Pia's EPS has increased by 40% in the given time period).

Hayman

Declining EPS ratio may drive away investors in the long term, especially since the EPS has fallen by 33%.





 

  • Award a maximum of 4 marks for the analysis of up to two of the given economical ratios.
  • For SL candidates, at least 3 ratios should be analysed (at least 4 ratios for HL candidates) for 5-7 marks.
  • For 8-9 marks, there should be a justified conclusion as to which firm is the better investment based on the given analysis.

c) It is important for potential investors to consider non-financial factors when making investment decisions because not all options are made on quantitative grounds. For example:

  • There is no information concerning the type of industries in which Pia and Hayman operate; indeed the two firms might not even operate in the same industry!
  • Factors and Labour turnover such as the level of staff motivation can affect the firm's long term profitability and costs.
  • Past financial performance is not essentially indicative of future performance so caution should be taken when making investment decisions
  • Financial/quantitative analysis may not be consistent due to window dressing of historical data and accounts being used, i.e. the current situation for both firms is likely to have changed.
  • Consumer confidence levels will also affect investment decisions, irrespective of what financial ratios might disclose, e.g. a looming recession might be sufficient to put off investors
  • The state of the economy - investment decisions tend to be additionaly reserved during a period of recession or when the level of consumer and business confidence is declining
  • The reputation of the two firms is likely to have an persuade on investors' decisions since corporate ethics and social responsibility are increasingly factors that affect the customer's perception (and hence sales) of a firm
  • objectives and Aims of the two firms are likely to be considered, e.g. Pia might be expanding which accounts for its failing quick ratio.

Related Discussions:- Determine firm sales revenue

Define arbitrage process, Q. Define Arbitrage Process ? The basic theor...

Q. Define Arbitrage Process ? The basic theory of the MM approach if we ignore the taxes is that the total value of a firm should be constant irrespective of the degree of leve

Operating cyle, discuss the applicabilty of the operating cycle in a vegeta...

discuss the applicabilty of the operating cycle in a vegetable growing business

Types of working capital, TYPES OF WORKING CAPITAL Working capital can ...

TYPES OF WORKING CAPITAL Working capital can be split up into two categories on the basis of time. They are Permanent Working Capital and Temporary or Variable Working capital

Statement of total comprehensive income for the year, At 31 July 2010 this ...

At 31 July 2010 this instrument meets the definition of a derivative: Small or no initial investment. Its value is dependent on an underlying economic item; exchange ra

Fund raising and investment, Fund Raising and Investment: Fund commitme...

Fund Raising and Investment: Fund commitment requirement in Hedge Funds sometimes exceeds millions of dollars. In addition, high minimum investments are sometimes closed to new

Syntax of accounting procedure, Syntax of Accounting Procedure The gen...

Syntax of Accounting Procedure The general accounting practices are: (a)  Do not consider any income or gain till the similar is realised in cash; (b)  Create or make pr

Participants in secondary market, PARTICIPANTS IN THE SECONDARY MARKET ...

PARTICIPANTS IN THE SECONDARY MARKET The players in the secondary capital market include: Individual Investors (Public). Companies. Mutual funds. Financial Insti

13 basic ratios, What its the net income? Total current assets, plant and e...

What its the net income? Total current assets, plant and equipment, net plant and equipment, our net account receivable?

CASELET, Prepare your recommendation on Agarwal Cast Company

Prepare your recommendation on Agarwal Cast Company

Accept-reject rule, Accept-Reject Rule: The decision rule is to accept ...

Accept-Reject Rule: The decision rule is to accept the project if the computed payback period is less than the standard.  If not, reject it.  While ranking the projects, projec

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd