Measuring and enhancing

financial performance
Task1 and 2
 Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Financial ratios to analyse the company’s position................................................................3
Task 2 Evaluation of investment opportunity..................................................................................6
(a).................................................................................................................................................6
(b).................................................................................................................................................6
(c).................................................................................................................................................7
(d).................................................................................................................................................7
(e).................................................................................................................................................7
Recommendation.........................................................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................1
Appendix..........................................................................................................................................2
Task-1..........................................................................................................................................2
Task-2..........................................................................................................................................3
INTRODUCTION
Financial statement records all the financial activity which are occurred in the business,
and represents the financial position of the company. All the transaction which can be measured
in terms of money are to be recorded in the books of accounts. This report is based on the case
study of electro serve plc. This report will cover financial ratios and their comparison with the
industry average. This report will also analyse link between two ratios and how company can
improve their performance. Moreover, this report will also include the evaluation of the
investment opportunity. In addition to this, the report will also analyse the two non-financial
consideration and assumption.

MAIN BODY
Financial ratios to analyse the company’s position
Return on capital employed

S.NO Ratio Formula calculation

1 ROCE EBIT/ CAPITAL EMPLOYED 3.11%
EBIT 126
CAPITAL EMPLOYED Total assets- current liability 4044
Return on capital employed is calculated to analyse the profitability and efficiency of the
company by evaluating deployment and procurement of fund (Byaruhanga and Evdorides, 2021).
It measures how much company is generating profit on its invested capital. Return on capital
employed of Electro serve plc. is 3.11% which quite low as compare to the industry ratio
(Amalia, Fadjriah and Nugraha, 2020). Industry average ratio in the year 2033 is 19.1%. It is
representing that company has earned low profit on invested amount. ROCE gets affected due to
the changes occurred in operating profit margin and also with the helps of sales revenue.

Gearing ratio
3 Gearing ratio Total debt/ total equity 155.00%
Total debt 4725
Total equity 3044
It is the financial ratio which compare the owner's equity to the debt fund. As here
company has taken the loan more than the equity fund. Therefore, it has high gearing ratio as
compare to the industry average. It is because company is using high amount of debt fund than
equity. In addition to this, company has 155% gearing ratio and on the other side, industry is
reflecting 37.5%. Moreover, high gearing ratio is not good for the company's health that is why
company need to take actions such as redeem loan amount to improve the gearing ratio.

Acid test ratio

Liquid assets / current

4 Acid test ratio liabilities 0.5033557047
Current assets –
Liquid assets inventory 1875
Current liabilities 3725

Acid ratio is showing that how fast company can convert their current assets into cash or bank.
As here, company has 0.50 acid ratio which is quite lower than the industry average that is 1.31
times. It is representing that company has lower current assets than the current liability.
Moreover, it is also reflecting that company does not have sufficient working capital to meet day
to day expenses. In addition to this, it can be improved by investing in the short-term marketable
security which can easily converted into cash. A sufficient current asset determines the efficiency
of the company.

Operating profit margin

Operating profit * 100 / net

2 Operating profit margin sales 1.66%
Operating profit 126
Net sales 7604

Operating profit margin is showing that how much company has generated profit after paying the
variable cost and direct expenses (Nugraha, Puspitasari and Amalia, 2020). Moreover, it
determines the core value of business that how efficiently all the resources have been used to
earn high profit from its main operation. As here, company has earned 1.66% operating profit
margin which is quite low as compare to the industry ratio that is 10.4%. It is required to
improve by reducing the cost and expenses, adopting different techniques to improve the
operation efficiency.

Inventory days ratio

Average inventory *
5 Inventory days ratio 365/ cost of goods sold 169.8486055777
Cost of goods sold 5020
Average inventory 2336
Inventory days is representing that how long company keep their inventory in the business (as a
finished goods) to convert it into the sales. Moreover, company takes 170 days to get converted
into sales (Rodrigues and Rodrigues, 2018). If their ratio is compared with the industry than it
can be concluded that company's inventory days are higher than the industry's ratio. Electro serve
and industry's inventory days ratios are 170 and 102 respectively. Moreover, company need to
improve their inventory days ratio by adopting marketing strategies such as discounts and offers.
It is because the higher inventory days create negative impact on the shareholders.
Account receivable days

Average account
receivable * 365/ total
6 Accounts receivable days sales 90.001972646
Annual sales 7604
Average accounts receivable 1875

Account receivable days is showing that how many days’ customer take to return their money to
the company (Ogunbayo and et.al., 2019). Moreover, company takes 90 days to recover their
amount of credit sales. In addition to this, if company' account receivable days are compared
with the industry average than it is reflecting that business take almost double time to recover
amount. Industries and electro serve accounts receivable days are 45 and 90 receptively.
Company needs to take actions to reduce the account receivable days. It is because if company
has blocked high amount of capital, then this will lead to reduce the opportunity to grab the
market opportunity. Moreover, it can be improved by offering some early payment scheme to
their customer so that company can get their payment in advance or on time without further
delay.

Task 2 Evaluation of investment opportunity

(a)
Investment appraisal is to be done keeping in the mind about the profitability of the project and
also how long does it take to recover the initial amount. Moreover, before investing in any
project it is requited to apply different techniques to make sure the future return. These
techniques are NPV, payback period, accounting rate of return which are to be adopted for the
analysing the profitability of the project. In addition to this, NPV is stands for net present value
which is computed by taking the present value of all the cash inflow and then subtract the cash
out flow of the initial investment (Baum, Crosby and Devaney, 2021). Moreover, payback period
is stated that how long it will take to return the initial investment of the project. In addition to
this, accounting rate of return is the percentage of rate of return which expected from the
investment or assets which is compared to the initial cost of project. Discounted payback period
is the also same as the payback period their only one difference which is, it is calculated by
taking the base of discounting cost that is 11% in the analysis. Further, it will evaluate the
discounting cash inflow to know the exact time duration which is required to get beck the initial
amount. In the above question, discounted value has been computed by taking the base of
discounted value factor.
(b)

Present value factor has been calculated by taking the base of overall cost of the company.
Moreover, it has been provided that cost of capital is 11% for computing the net present value.
The general form of calculation net present value is cash inflow- cash outflow. Moreover, after
adding all the cost then it gets discounted with the 11% and then calculated net present value. In
addition to this, 20000 expenses which has already done on the market research are to be added
without taking the net discounted value (Okolelova, Shibaeva, and Trukhina, 2018). Moreover,
except the market research expenses, all the others are to be computed at the present value. In
addition to this, as assumption will be taken here is that there is no sales price is given that is
why cash out flow is calculated on the basis total cost which has been incurred by company.
Moreover, capital expenditure is the long-term expenses which is done by the company to gets
long term benefit. In addition to this, due to the high-cost company reduces its profit. There are
some fixed and variable overhead which in fixed over head
(c)
There are many non-financial factors which create an impact on the project selection decision.
These factors are industry standard, relationship with supplier and customer, business reputation.
Supplier and customer relationship create an impact on the sales price and the cost of the
company which may reduce the profit. It is because in future, if supplier will increase their prices
of the material, then this will create an impact on the company’s performance (Li and
Trutnevyte, 2017). Moreover, capabilities of the business also create impact on the decision like
how fast company is able to recover its amount by applying skills and knowledge. As if company
has higher skilled and knowledgeable team who is ready to adopt the changes which are occurred
in the market.
(d)
It is required to select that project which is giving high return in less period. It is because the
profitability of the project is depended on its financial and non-financial factor. the company
should not adopt this project because it has high cost and less profit. In addition to this, the
project will take 5 years to recover the initial amount.
(e)
Here, assumption related to sales of the company has been taken in to the consideration.
Moreover, assumption related to the labour cost as not mentioned has been taken into the
consideration. As fixed cost has been given for the one year so that it is presumed that the
constant cost will be occurred in the future.
Recommendation
 Company should reduce the cost so that it will automatically increase the profit.
Moreover, it also required to analyse financial and non-financial factor to determine the
exact value.
 Organization should adopt different types of techniques which will helps to reduces the
payback period of the project.
 Management should also evaluate their project by applying different methods which
include discounting payback period, ARR, NPV to know the exact value of the project.
CONCLUSION
Financial ratios are important to analyse the performance of the company. Electro serve
need to improve their performance by reducing cost, long term debt etc. this report has analysed
the investment appraisal to take right decision. Company has different methods through which
important decision can be taken. NPV and payback period are the important to analyse the
feasibility of the project.
REFERENCES
Books and journals
Amalia, S., Fadjriah, N.E. and Nugraha, N.M., 2020. The Influence of the Financial Ratio to the
Prevention of Bankruptcy in Cigarette Manufacturing Companies Sub Sector. Solid
State Technology. 63(3). pp.4173-4182.
Baum, A.E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley &
Sons.
Byaruhanga, C.B. and Evdorides, H., 2021. A systematic review of road safety investment
appraisal models. Cogent Engineering. 8(1). p.1993521.
Li, F.G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal
pathways for the UK electricity sector transition to 2050. Applied energy. 189. pp.89-
109.
Nugraha, N.M., Puspitasari, D.M. and Amalia, S., 2020. The Effect of Financial Ratio Factors on
the Percentage of Income Increasing of Automotive Companies in
Indonesia. International Journal of Psychosocial Rehabilitation. 24(1). pp.2539-2545.
Ogunbayo, O.T. and et.al., 2019. The significance of real estate development process analysis to
residential property investment appraisal in Abuja, Nigeria. International Journal of
Construction Management. 19(3). pp.270-279.
Okolelova, E., Shibaeva, M. and Trukhina, N., 2018. Model of investment appraisal of high-rise
construction with account of cost of land resources. In E3S Web of Conferences (Vol.
33, p. 03014). EDP Sciences.
Rodrigues, L. and Rodrigues, L., 2018. Economic-financial performance of the Brazilian
sugarcane energy industry: An empirical evaluation using financial ratio, cluster and
discriminant analysis. Biomass and bioenergy. 108. pp.289-296.

Online references
Investment appraisal definition, 2021. [Online]. Available through <
https://www.ig.com/uk/glossary-trading-terms/investment-appraisal-definition#:~:text=What
%20is%20investment%20appraisal%3F%20Investment%20appraisal%20is%20a,of%20several
%20different%20capital%20budgeting%20and%20financing%20techniques.>

1
Appendix
Task-1
S.NO. Ratio Formula  
1 ROCE EBIT / capital employed 3%
  EBIT   126
  Capital employed total assets - current liabilities 4044
2 Operating profit margin ratio operating profit *100 /net sales 2%
  Operating profit   126
  net sales   7604
3 gross profit margin ratio gross profit * 100 / sales 34%
  gross profit   2584
  net sales   7604
operating expenses to sales
4 ratio operating expenses *100 / net sales 32%

2
   operating expenses   2458
  sales ratio   7604
sales revenue on capital
5 employed operating profit*100 /capital employed 3.115727
  operating profit   126
  Capital employed   4044
6 inventory holding period inventory *365/cost of goods sold 169.8486
  inventory   2336
  cost of goods sold   5020
7 Receivable’s days average receivable *365 / sales 90.00197
  average receivable   1875
  sales   7604
8 payable days trade payable *365 / cost of goods sold 114.5169
  trade payable   1575
  cost of goods sold   5020
9 current ratio current assets/ current liabilities 1.13047
  current assets   4211
  current liabilities   3725
10 acid test ratio current assets- inventory /current liabilities 0.503356
  quick assets   1875
  current liabilities   3725
11 gearing ratio total debts / total equity 155%
  total debt   4725
  total equity   3044
12 interest cover EBIT / Interest expenses 0.597156
  EBIT   126
  interest expenses   211

Task-2
(b)
Present value factor (11%) Present value of total
Total cost (fixed and variable) (1/1.11)^t cost
1 2667000 0.9009009009 2402702.7027027
2 2677000 0.8116224332 2172713.25379433
3 2687000 0.7311913813 1964711.24155565
4 2697000 0.6587309741 1776597.43726907
5 2707000 0.5934513281 1606472.74505452
Total 9923197.38037627
(9923197.38 + 20000 NPV=
market research) 9943197.38037627

3
 Item Relevant Rationale for Treatment as Relevant or
Cash Flow? Otherwise
(Yes or No)
1 Cost of R & D Project of W$2m yes It will decide the feasibility of the
project.
2 Amortisation of R&D Project Costs yes It is a business expense which
determine the investment growth.
3 Capital expenditure of W$600,000 yes It will give the long-term benefit to the
company
4 Depreciation of capital expenditure No It is the way of charging the cost on
assets. It does not affect the growth of
the investment project. It is represented
as non cash item.
5 Cost of employing 5 extra yes It is a variable cost which need to
production staff deduct to get the contribution for
evaluating profit or cash flow.
6 Cost of market research study of yes This cost is necessary to ensure success
W$20,000 and failer of the project.
7 Cost of technical feasibility study yes It is required to invest for analysing the
of W$10,000 technical aspect of the project.
8 Factory rental income of W$25,000 No As this is an opportunity cost which
per annum company can earn if not invested in
current project.
9 Increase in fixed overheads of yes The fixed overhead is the constant
W$15,000 per annum amount in whole project duration.
10 Allowance for general fixed costs yes It becomes a part of the project as a
of 8% of revenue per annum fixed cost.