Ecom143 210788697

Question 1.
a) The financial analysis consists of an analysis of the financial statements. The financial
statements are:
i. Income statement
The first analysis of financial statements was started from the income statement.
The income statement helps in determining the revenue generation and net profit
earned by a business. The analysis of income statement is of two types:
Vertical analysis:
The vertical analysis helps in reviewing the income statement up and down for the
line items in comparison to sales percentage.
Horizontal analysis:
The horizontal analysis helps in evaluating the income statement for different
years for each item.
ii. Balance sheet
Balance sheet analysis helps in evaluating the operation efficiency of the
company. The income statement items are compared with the capital assets and
liabilities of the balance sheet. The balance sheet analysis could be done through
liquidity, leverage and operation efficiency. Moreover, it helps in determining
how efficiently the company can generate revenue through the financial matrices.
iii. Cash flow statement
The cash flow statement helps in analyzing the cash inflows and outflows for the
company over the period. It has been divided into three categories:
Cash flow from operations activities
Cash flow from investing activities
Cash flow from financing activities
b) Working capital helps in analyzing a company’s ability to meet it short-term obligations.
Such as inventory, short-term debts payment and other operating expenses. The working
capital functions as computing the difference between current assets and current
liabilities. It is considered as the amount a company would have to pay for its operating
short-term expenses. The functioning of working capital is different for different
businesses. Some the organizations would require less working capital to manage the
operating expenses while some the organizations might require a larger amount to meet
their operating expenses. It is also considered that if an organization is having larger
working capital it would be beneficial for it.
For example, the Retail business requires larger working capital at the time of off-season
while less working capital for the large sales.
Question 2.
a) The decrease in the operating margin would also decrease the NPV. The decreased NPV
states that higher planes would be required to have the minimum positive value for the
NPV. Thus, the breakeven number of planes would increase compared to the assumption
made.
b) The assumption made for operating margin was 18% whereas as per the appendix
computation of operating margin was also 18%. It was analyzed that the assumption was
correctly made. However, the inflation rate was higher compared to the assumptions
made. Thus, the assumption is made for the operating margin slightly higher compared to
the increased inflation rate.
Question 3.
The scissor effect helps in determining the strategic positions of the businesses. The
effects impact when the revenue and costs move in opposite directions. It might account
for the profits. It determing how the company has taken a strategic position in the market.
For this case, the gross margin was decreasing while the sales were increasing faster than
its cost. However, in long term, the income to sales ratio decreased. Later, the company
was not able to manage its expenses.
Question 4.
a) The liquidity helps in determining the company’s ability to pay the short-term obligations
and its capability to covert assets into the cash. For example, short-term debts, and
deferred income tax. While the solvency ratio helps in determining the company’s ability
to pay its long-term debts of the company. For example, debts.
b) The relationship between ROE and ROCE was that the operating leverage would have
the same impact on the ROE as it would have on net income. While the ROCE is
evaluated on operating profit after considering the tax. The ROE and ROCE would be
different due to the financial structure change.

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