Sample Essay:Financial Analysis and Control System

Ratios

(Figures in 000)

Q1.

Ans1) Total sales have significantly increased in the year of 2008 by 19.3% compared to last year 2007. The major reason for this is that Alphameric  Corporation has strictly tighten its credit policy and have given their customers a credit period (payment period) of 45 days.

Receivable turnover 08 = sales/Avg Rec

= 35915/4422 =8.12

Receivable turnover 07 = 30104/52327

= 0.57

Average Collection period 08 =365/Rec turnover

= 365/8.15 =45days

Average Collection period 07 =365/.52 =634 days

Previously sales were not converting into cash as there were no strict credit policies.

Q2.

Ans2)

Operating Profit 08 = Gross profit - other expenses

=2905-5314-180 = -2589

Operating Profit 07 = (4113) +(427) + (180) = -4720

Q3.

Ans3)

Gross Profit Margin 08 = Gross Profit/Sales

=2905/35915 = 8.08%

Gross Profit Margin 07 = (4113)/30104 = -13.6%

Q4.

Ans4)

Operating Profit Margin 08 = Operating Income/ Sales

= (2589)/35915 = -7.2%

Operating Profit Margin 07 = (4720)/30104 = -15.6%

Q5.

Ans5) Sales have turned into cash in 2008 with help of strict credit policy and reduced the operating loss by 53 % in 2008. If this policy continues Alphameric  Corporation will soon have positive operating profit.

Q6.

Ans6) The business is on the way to improvement, which is quite obvious from the gross profit figures. Gross profit margin is positive 8.08% as compared to negative -15.6%. The business has made a improvement of almost 160% in 2008 which clearly signifies it that the business is going in the right direction.

Other ratios that can be included to monitor the operations are gross profit margin, pretax margin.

Pretax Margin 08 = EBT/Sales

= (2184)/35915 = - 6.08%

Pretax Margin 07 = (5106)/30104 = -16.96 %

Q7.

Ans7) Assets have significant dropped compared to last year. Fixed assets have dropped by 6384000 to             4139000 pounds. Overall in 2008, assets are better utilized and enhancing the performance of the business. Business fixed assets and current assets have decreased but the company’s trade receivable have significantly dropped causing a massive increase in cash in 2008.

Current Ratio 08 = CA/CL

= 33422/(18819) = -1.77

Current Ratio 07 =20702/(18450) = -1.12

Current ratio is still very bad

Quick Ratio 08 = 31382/(18819) = -1.67

Quick Ratio 07 = 16646/(18548) = -0.89

Working Capital 08 = CA - CL =33422 -18818 = -14603

Working Capital 07 = 20702 - 18450 = -2252

WC Margin 08 = WC/Sale=  -14603/35915= -0.406

WC Margin 07=  -2252/30104 = -0.075

Asset have been badly affect in the year 2008 as there  is a significant in increase in the current and long term liabilities over a year. This has also affected the retain earning. Assets have been sold off in 2008 to meet the current liabilities as Alphameric corporation was liquidity crisis which can be seen above. In terms of assets, the overall position is worse off but liquidation of assets were the only option for the Alphameric corporation survival.

Return on Assets 08 = Net income/total assets = (2127)/45664 = -4.65%

ROA 07 = (3909)/63669 = -6.01%

Q8.

Ans8) Alphameric corporation handled the assets inefficiently specially in year 2007, where these assets were inefficiently used to generate sale and then cash. In order to pay off the liabilities and meet the cash shortages liquidation of assets  were the only option.

There has been pertinent decrease in the intangible assets, which suggests that the company has sold off its intangible assets such as patents, copyrights, franchise or even Goodwill.

Fixed asset margin 08 = 12242/35915 = 0.34

Fixed asset margin 07 = 42967/30104 = 1.42

The company is significantly worse off because of the liquidation of assets.

Q9.

Ans9)

Working capital 08 = Inventories + receivables -payables

= 2040 + 12182 - 16265 = -2045

Working capital 07 =4056 + 16646 -  11722 =8980

This ratio suggests that the Alphameric corporation  had no liquidity crisis of cash flow problems in 2007, which has become the major problem  in 2008.

Q10.

Ans10)

Working Capital 08 = CA - CL =33422 -18818 = -14603

Working Capital 07 = 20702 - 18450 = -2252

WC Margin 08 = WC/Sale=  -14603/35915= -0.406

WC Margin 07=  -2252/30104 = -0.075

Working capital was never managed properly, though the situation got worse in 2008 which was the affect of inefficient handling of assets in 2007. This lead to further liquidation of assets.

Q11.

Ans11)

The company had no cash available in 2007 because of poor credit policies but the corporation generated good amount of cash in 2008 of 19202 pounds.

Q12.

Ans12)

Investing cash flow has been mostly affected from the sale /liquidation of fixed assed  which has caused the increase in cash by  19202.

Q13.

Ans13)