ASSIGNMENT COVER SHEET

UNIVERSITY OF SUNDERLAND

MASTER OF BUSINESS ADMINISTRATION (MBA)

Student ID: 139098196

Student Name: T NARISH TAMILARASAN

Module Code: PGBM01

Module Name / Title: Financial Management

Centre / College: SEGI COLLEGE

Due Date: 20th January 2015 Hand in Date: 20th January 2015

Assignment Title:

PGBM01 – Financial Management - Assessment November 2014

Students Signature: (you must sign this declaring that it is all your own work and all sources of
information have been referenced)

 
  

PGBM 01
Financial Management

Student ID: 139098196

Student Name: T NARISH TAMILARASAN

Centre / College: Segi College, Penang

 
  

Table  of  Contents  

No   Contents   Page  Number  

1.   Part  A  –  Ratio  Analysis   1  

2.   Profitibality     1  

4.   Liquidity   1  

5.   Gearing   2  

6.   Efficiency/  Asset  Utilization   2  

7.   Part  B  –  Break  even  point   3  

8   Marigin  of  safety   3  

9.   Key  assumptions  of  break-­‐even  analysis   4  

10.   Restrictions  in  break  even-­‐analysis   4  

  Part  C      

11.   Section  1   5-­‐6  

12.   Section  2   7-­‐9  

13.   Bibliography   10  

14   Appendices   11-­‐16  

 
Part  A  –  Sterling  Plc  

Sterling  Plc’s  company  performance  

Profitability    
In   order   to   know   your   business   performance,   monitoring   and   observing   profitability   is   very  
important.  Attached  is  the  information  on  income  statement  for  the  year  ended  31  December  and  
statement   of   financial   view   of   Sterling   Plc,   this   report   has   discussed   and   calculated   four   relevant  
ratios   of   profitability   performance:   Return   on   capital   employed   (ROCE),   Return   on   equity   (ROE),  
Gross  profit  margin  (GRM)  and  Net  profit  margin  (NPM).  From  the  results  of  these  ratios,  Sterling  
have  a  bad  profitability  performance  in  2013  year,  the  ROCE,  ROE  and  NPM  both  has  the  significant  
decline.   The   ROCE   and   ROE   has   the   big   change,   ROCE   has   decline   13.89%   and   ROE   has   decline  
19.30%.   The   main   reason   is   the   ordinary   shares   in   equity   increase   £700,000   and   net   income  
decrease  by  £850,000.  Although  the  sale  price  and  volumes  can  change  significantly,  but  the  gross  
profit   margin   is   usually   quite   stable,   the   GRM   of   2012   to   2013   looks   quite   stable,   2012   GRM   is  
47.24%,   2013   is   42.50%,   but   due   to   the   increase   of   the   variable   expenses   that   reduce   to   the  
operating   profit   before   interest   and   tax,   the   NPM   also   fall   by   7.87%.   Sterling   Plc   needs   to   think  
about  why  the  sales  revenue  increased  £2,230,000  but  the  net  profits  has  decline  £850,000  at  2013  
years.      
 
Liquidity  

Liquidity   ratios   are   often   used   to   determine   a   company’s   ability   to   meet   its   short-­‐term   debt  
obligations.   The   rations   calculation   of   liquidity   includes   current   ratio,   quick   ration   and   working  
capital   cycle.   From   the   results   of   calculation   that   shows   Sterling   Plc   has   a   relatively   low   level   of  
liquidity,   the   current   &   quick   ratio   both   has   the   minimal   change   between   2012   and   2013.   But   it  
shows  very  low  index.  Current  ratio  has  decrease  by  0.08  times  and  quick  ratio  decrease  0.06  times.  
It   is   worth   nothing   that   the   significant   change   on   working   capital   cycle,   it   is   the   negative   change  
from  -­‐8  days  of  2012  changed  to  25  days  of  2013,  the  trade  receivables  days  from  56  days  increased  
to  65  days  and  the  trade  payable  days  from  94  days  decreased  to  70  days,  it  means  company  get  
back  the  trade  capital  slows  down  but  they  need  to  faster  pay  the  money  for  suppliers.    

  1  
Gearing  

These  ratios  concentrate  on  the  long-­‐term  health  of  a  business.  Particularly  the  effect  of  the  
capital/finance  structure  on  the  business:  gearing  ratio  and  interest  cover  ratio.  According  
to  the  results  can  indicates  Sterling  Plc  have  a  stable  gearing  ratio,  although  have  decline  by  
4.97%,   but   this   is   the   common   change   at   the   company   development,   it   is   due   to   the  
increased  of  equity.  Stable  gearing  ratio  can  shows  that  Sterling  Plc  managers  still  effectively  
to  use  the  shareholder’s  capital,  it  can  help  the  shareholders  a  larger  scale  operation  with  
fewer   funds.   A   problem   can   be   find   in   the   interest   cover   ratio,   company   had   £845,000   bank  
overdraft  at  2013  year,  it  takes  the  increased  of  interest  payable  directly.  The  interest  cover  
ratio  has  decline  by  2.21  times  from  2012  to  2013,  it  reflects  debt-­‐paying  ability  of  Sterling  
Plc  has  changed  weaker.  Of  course,  the  increased  of  variable  expenses  also  contributed  to  
the  change.          

Efficiency  /  Asset  utilization  

The  ratios  calculation  of  efficiency  can  given  an  insight  into  how  efficiently  the  company  is  
employing   those   resources   invested   in   fixed   assets   and   working   capital.   Stock   (inventory)  
turnover  days,  accounts  receivable  collection  period  (ARCP)  and  accounts  payable  payment  
period  (APPP)  has  calculated  in  this  areas.  It  is  similar  same  with  the  working  capital  cycle  
calculation.   From   the   results   of   these   ratios   can   know   Sterling   Plc   have   a   bed   cash   flow.   The  
stock   turnover   days   is   40   days   in   2012   and   35   days   in   2013,   it   can   indicates   a   good   stock  
management  of  company.  However,  the  big  problem  reflects  on  ARCP  and  APPP.  It  takes  the  
negative  change  at  2013  year,  ARCP  times  increased  6  days  and  APPP  times  decreased  24  
days.  The  reason  for  these  changes  are  increased  the  sale  revenue  and  credit  purchase.  

  2  
  

Part  B  –  Grantham  Ltd  

Break-­‐even  point  (BEP)  

Break-­‐even  point  (BEP)  is  a  point  that  neither  profit  nor  loss,  that  is,  the  activity  breaks  even.  Where  
the   volume   of   activity   is   below   BEP,   a   loss   will   be   incurred   because   total   cost   exceeds   total   sales  
revenue.   When   the   volume   of   activity   above   BEP,   there   will   be   a   profit.   (Atrill   and   McLaney,   2011).  
According  to  the  BEP,  the  further  of  activity  is  below  BEP,  it  could  get  the  loss;  the  further  of  activity  
is  above  BEP,  it  could  get  the  profit.  Followed  the  calculated  break-­‐even  point  for  Grantham  Ltd,  it  
can  knows  the  break-­‐even  point  in  units  sold  is  128,571  units  and  the  break-­‐even  point  in  revenue  
£45,000,000  in  2012  year;  the  2013  year  BEP  in  units  is  61,429  units  and  BEP  in  revenue  is  £645,000.  
It  was  a  large  movement  from  2012  to  2013.  At  2013  year,  Freezer  can  more  easy  and  quickly  to  
above  the  BEP  and  get  the  profits.  The  key  movement  reason  is  that  management  has  decided  to  
increase  the  selling  price  by  20%,  the  selling  price  at  2013  is  £420,  it  makes  £70  increased  of  unit  
contribution   margin   than   2012;   at   the   same   time,   the   increased   of   £1,950,000   in   fixed   costs   also   as  
the  important  factors  to  effects  the  BEP.  The  decreased  of  BEP  indicates  Freezer  has  a  strong  anti-­‐
risks  of  business  operation.  
 
Margin  of  safety  

Usually,  manager  can  be  consider  to  uses  the  margin  of  safety  with  the  break-­‐even  point.  Margin  of  
safety  is  often  used  to  ensure  the  safety  of  the  sales  when  knows  the  BEP,  it  can  be  set  to  detect  
whether   company   can   avoid   the   loss   of   profits.   When   Freezer   knows   the   BEP   with   its   sale,   it   can  
easy   to   set   to   the   margin   of   safety.   For   example,   in   2013,   the   calculated   for   the   margin   of   safety   in  
units  is  238,571  units,  in  revenue  is  £125,355,000.  The  set  to  margin  of  safety  can  not  lower  than  
these  data,  it  could  insure  when  the  sale  above  margin  of  safety,  company  can  make  profits.    
 

  3  
Key  assumptions  of  break-­‐even  analysis  

There   are   three   key   assumptions   that   affect   the   applicability   of   break-­‐even   analysis   The  
average   sales   price   per   unit:   Which   takes   into   account   the   sales   discounts   and   special   offers  
Managers  need  to  predict  this  numbers  for  the  unit  price  from  sales,  in  some  company  not  
base   on   the   unit,   it   should   be   a   percentage   to   show   that   the   per   earnings   unit   in   per   unit   of  
cost.  (Lynch,  2005).  This  is  the  most  common  problems  in  the  same  product  sales  market,  so  
managers   need   to   predict   the   BEP   according   to   the   sales   prices.   Variable   unit   cost:   this   is  
based  on  the  production  costs  When  use  to  the  BEP,  managers  need  to  clearly  determine  
which  cost  belongs  to  the  production  cost  It  can  calculate  the  contribution  margin  per  unit,  
it   reflects   the   profit   per   unit   produce   by   one   sales   product.   Monthly   fixed   costs:   Monthly  
fixed   costs   includes   the   machine's   depreciation,   administrative   costs   and   other   fixed   costs  
that  must  paid  by  each  month  Technically,  a  break-­‐even  analysis  defines  fixed  costs  as  costs  
that  would  continue  even  if  it  went  broke.  

Restrictions  in  break-­‐even  analysis  

Used  to  the  break-­‐even  analysis  can  evaluate  the  economic  of  a  project,  it  can  determine  the  
financial   benefit   of   the   merits   for   several   projects,   which   filter   out   the   optimal   solution.  
Although  the  break-­‐even  analysis  is  only  to  discuss  the  impact  of  price  changes  uncertainties,  
yield,  variable  costs,  fixed  costs,  such  as  profit  and  loss  generated  by  the  project,  but  it  can  
not   judge   the   profitability   of   project.   On   the   other   hands,   break-­‐even   analysis   is   a   static  
analysis,   it   is   not   consider   to   the   time   value   of   money,   the   magnitude   of   change   is  
uncertainties  by  artificial,  so  it  has  some  limitations.    
 
(All  the  analysis  data  used  from  Appendix  2,  it  includes  the  relevant  break-­‐even  point  and  
margin  of  safety  calculations  and  a  summary  table  for  both  2012  and  2013  year.)  

  4  
Part  C  

Section  1  

As  the  famous  proverb  says,  “Those  who  fail  to  plan,  plan  to  fail”  is  very  true  when  it  comes  
to   plan   a   business   specifically   on   the   budgeting   aspect.   There   are   many   business   owners  
failed   in   their   business   due   to   a   poor   budget   planning.   Budget   is   the   most   prominent  
element  for  a  successful  business  plan.  In  fact,  budget  shows  a  detailed  analysis  on  how  an  
organisation  should  spend  money  in  future  time  periods.  A  typical  budget  helps  the  business  
to  plan  its  own  strategy  and  to  reach  the  goal  of  the  organisation.  At  the  same  time,  making  
sure  the  earning  income  is  in  control  of  the  cost  related  to  that  income  keeps  the  business  
owner  on  the  right  track  in  achieving  the  business  goal.  (Tracey  Loubser,  2014)  

Control  expenditures    

One  of  the  undeniable  benefits  of  budget  is  the  ability  to  control  or  to  limit  on  the  cash  flow  
spent   on   certain   departments   within   an   organisation.   Since,   an   accurate   budget   accounts  
can   show   the   expenditures   of   the   departments,   the   management   can   plan   a   strategy   to  
control   that   cash   flow   so   it   can   be   channeled   to   some   other   needs   within   a   company.  
Literally,  it  refrain  the  company  from  wasting  its  capital  and  limits  the  economic  resources.    

Creates  financial  roadmap    

When  the  year  passes,  budget  review  is  a  must  for  organisations.  It’s  an  essential  activity  for  
companies   to   know   where   they   spent   the   most   and   where   they   spent   the   least   especially  
when   it   comes   to   their   operations.   At   times   it   makes   them   to   come   up   with   new   budget  
policies  for  the  interest  of  the  company.    

Plan  for  future  growth    

On  the  other  hand,  it  is  very  norm  for  companies  to  plan  for  future  business  development  
and  growth.  Capital  of  the  business  is  really  saved  on  regular  business  expenditures  where  
the   thougt   of   investing   them   into   another   business   or   needing   them   for   business   expansion  
is  a  practice  in  business  provided  the  companies  has  the  budget  plan  .  Budgeting  for  future  
growth  opportunities  ensures  that  companies  have  capital  on  hand  when  needing  to  make  a  

  5  
quick  decisions  for  expanding  business  operations.  This  capital  may  also  be  used  during  slow  
economic  times  as  a  safety  net  for  paying  regular  business  expenses.  

Conclusion  

Budgeting   is   very   essential   and   an   important   activity   for   an   organisation   in   the   sense   of  
stabilsing  the  company’s  financial  strength  and  not  forgetting  that  planned  and  controlled  
budgets   always   helps   the   organisation   during   a   slow   economic   prgression.   In   order   to  
sustain  in  today’s  business  competency  ,  no  matter  what  is  the  business  nature  but  adopting  
budgeting   habit   within   an   organisation   or   business   will   lead   to   a   healthy   financial   growth.  
(Tracey  Loubser,  2014)  

  6  
Section  2  

When  it  comes  to  financing  business  there  are  many  times  of  business  financing.  They  are  
capital  markets,  which  are  more  likely  issuing  the  new  shares.  Stock  market  listing  is  one  of  
how   capital   market   functions.   The   other   financing   methods   are   like,   loan   stock,   retained  
earnings,   bank   borrowing,   government   sources,   and   business   expansion   scheme   funds,  
venture  capital  and  franchising.    (Basic  finance  for  marketers.  2014.  [ONLINE])  

Ordinary  share  

Ordinary  shares  are  issued  to  the  owners  of  a  company.  They  have  a  nominal  or  'face'  value,  
typically  from  a  dollar  to  50  cents.  The  market  value  of  a  priced  company's  shares  bears  no  
liaison  to  their  nominal  value.  A  company  can  obtain  additional  equity  funds  through  stock  
exchange   quotation.   Apart   from   that,   right   issue   provides   a   way   of   floating   new   share  
capital  by  giving  an  offer  to  existing  shareholders  by  inviting  them  to  subscribe  cash  for  new  
shares  in  ratio  to  their  existing  holdings.  On  the  other  hand,  preference  shares  have  a  fixed  
percentage   dividend   where   any   dividend   is   paid   to   the   normal   shareholders.   From   the  
company’s  point  of  view,  preference  shares  dividends  do  not  have  to  be  paid  in  a  ear  where  
the   profits   are   poor   while   this   is   not   the   case   with   interest   payments   on   long   term   debt.  
(Basic  finance  for  marketers.  2014.  [ONLINE])  

Loan  stock  

Loan   stock   is   long-­‐term   debt   capital   extended   by   a   company   for   which   interest   is   paid.  
Holders  of  loan  stock  are  therefore  long-­‐term  creditors  of  the  organisation.  Debentures  are  
a  form  of  loan  stock,  legally  defined  as  the  written  acknowledgement  of  a  debt  incurred  by  a  
company,   normally   enclosing   requirements   about   the   payment   of   interest   and   the   eventual  
repayment  of  capital.  (Basic  finance  for  marketers.  2014.  [ONLINE])  

Retained  earnings  

For  any  company,  the  amount  of  incomes  retained  within  the  business  has  a  direct  effect  on  
the   amount   of   dividends.   Profit   re-­‐invested   as   engaged   earnings   is   profit   that   could   have  
been  paid  as  a  share.  The  main  reasons  for  using  reserved  earnings  to  finance  new  assets,  
rather  than  to  pay  higher  dividends  and  then  raise  new  equity  for  the  new  investments  like  

  7  
the  organisation  of  various  companies  thinks  that  retained  earnings  are  the  finance  which  
do   not   cost   anything   although   this   fact   is   just   a   myth.   But,   it   is   factual   that   the   use   of  
enclosed  earnings  as  a  source  of  funds  which  don’t  lead  to  a  payment  of  cash.  (Basic  finance  
for  marketers.  2014.  [ONLINE])  

Bank  lending  

This  is  a  very  famous  source  of  finance  that  available  for  business.  Borrowings  from  banks  
are  an  important  source  of  finance  for  companies.  Bank  offering  is  still  mainly  short  term,  
although  medium-­‐term  lending  is  quite  usual  these  days.  

Short  term  lending  may  be  in  the  form  of:  

a) An  overdraft,  which  a  company  should  keep  within  a  limit,  set  by  the  bank.  Interest  
is   charged   (at   a   variable   rate)   on   the   amount   by   which   the   company   is   overdrawn  
from  day  to  day;  
 
b)  A  short-­‐term  loan,  for  up  to  several  years  which  is  very  subjective  according  to  the  
banks.  
Leasing  

A   lease   is   an   contract   between   two   parties,   the   "lessor"   and   the   "lessee".   The   lessor   owns   a  
capital  asset,  but  permits  the  lessee  to  use  it.  The  lessee  makes  payments  under  the  terms  
of  the  lease  to  the  lessor,  for  an  indicated  period  of  time.  

Leasing  is,  therefore,  a  form  of  rental.  Leased  assets  have  usually  been  plant  and  machinery,  
cars  and  commercial  vehicles,  but  might  also  be  computers  and  office  equipment.  There  are  
two  basic  forms  of  lease:  "operating  leases"  and  "finance  leases".  

Operating  leases  are  more  to  rental  contract  between  the  lesson  and  the  lessee  where  the  
lesson  supplies  the  equipments  or  instruments  to  the  lessee  and  the  finance  leases  are  lease  
contract   between   the   user   of   the   leased   asset   (the   lessee)   and   a   provider   of   finance   (the  
lessor)  for  the  most.  (Basic  finance  for  marketers.  2014.  [ONLINE])  

  8  
Government  assistance    

The   government   provides   financing   aids   in   the   form   of   loan   with   the   lower   interest  
comparing   to   any   private   loan   financing   agencies   to   companies   in   cash   grants   and   other  
forms  of  direct  assistance,  as  part  of  its  policy  of  helping  to  develop  the  national  economy,  
especially  in  high  technology  industries  and  in  areas  of  high  unemployment.     (Basic  finance  
for  marketers.  2014.  [ONLINE])  

Venture  capital  

Venture  capital  is  the  investment  money  put  into  an  enterprise  which  may  all  be  lost  if  the  
enterprise  fails  to  earn  profit  or  to  reach  its  goal.  Normally,  a  businessman  starting  up  a  new  
business  will  invest  venture  capital  of  his  own,  but  he  will  probably  need  extra  funding  from  
a   source   other   than   his   own   sourcing.   However,   the   term   'venture   capital'   is   more  
specifically  associated  with  putting  money,  usually  in  return  for  an  equity  stake,  into  a  new  
business,  a  management  buy-­‐out  or  a  major  expansion  scheme.  (Basic  finance  for  marketers.  
2014.  [ONLINE])  

Franchising  

Franchising   is   a   method   of   expanding   business   on   less   capital   than   would   otherwise   be  

needed.   For   suitable   businesses,   it   is   an   alternative   to   raising   extra   capital   for   growth.  
Franchisors  include  Budget  Rent-­‐a-­‐Car,  Wimpy,  Nando's  Chicken  and  Mc  Donalds.  Under  a  
franchising   arrangement,   a   franchisee   pays   a   franchisor   for   the   right   to   operate   a   local  
business,  under  the  franchisor's  trade  name.  (Basic  finance  for  marketers.  2014.  [ONLINE])  

  9  
Bibliography  

Atrill,   P,   and   McLaney,   E.   (2011).   “Accounting   and   Finance   for   Non-­‐specialists   with  
Myaccountinglab”.  United  Kingdom:  Prentice  Hall  Financial  Times.  

Lynch,   R.   (2005).   “Corporate   strategy”.   3rd   ed.   United   Kingdom:   Financial   Times   Prentice  
Hall.  

Chron.   2014.   Why   Is   it   Important   for   a   Business   to   Budget?.   [ONLINE]   Available   at:  
http://smallbusiness.chron.com/important-­‐business-­‐budget-­‐385.html.   [Accessed   30  
December  14].  

Basic   finance   for   marketers.   2014.   Sources   of   finance   .   [ONLINE]   Available   at:  
http://www.fao.org/docrep/W4343E/w4343e08.htm.  [Accessed  16  December  14].  

TRACEY  LOUBSER  .  2014.  Why  budgets  in  business  are  a  must  have.  [ONLINE]  Available  at:  
http://www.efinancialmanagement.com.au/accounting/why-­‐budgets-­‐in-­‐business-­‐are-­‐a-­‐
must-­‐have/.  [Accessed  23  December  14].  

  10  
Appendixes  
Appendix  1:  Part  1  -­‐  Sterling  Plc  
 
 
Profitability  
 
Ratios   Formula   2012   2013  
Return  on  capital   Operating  profit  /  Share   5285  /  5900  +   4435  /  6670  +  
employed  (ROCE)   capital  +  Reserves  +  Non-­‐ 1985+5105  *  100%  =   2550+7325*100%  =  
current  liabilities  *  100%   40.70%   26.81%  

Return  on  equity   Profit  after  tax  &  interest   3095  /  5900  +  1985  *   1840  /  6670  +2550  *  
(ROE)     &  preference  dividends  /   100%  =  39.25%   100%  =  19.95%  
  (ordinary  share  capital  +  
reserves)  *  100%    
 
Gross  profit   Gross  profit  /  sales  *  100%     8150  /  17,250  *   8280  /  19,480  *  
margin  (GRM)       100%  =  47.24%   100%  =  42.50%  
 
Net  profit  margin   net  profit  before  interest   5285  /  17250  *  100%   4435  /  19,480  *  
(NPM)     and  tax  /  sales  *  100%     =  30.63%   100%  =  22.76%  
   

 
Liquidity  
 
Ratios   Formula   2012   2013  
Current  ratio     current  assets/current   4105  /  3245  =  1.26   4560  /  3875  =  1.18  
  liabilities     times   times  
 

Quick  ratio     (current  assets  -­‐   3120  /  3245  =  0.96   3495  /  3875  =  0.90  
  inventory)  /  current   times   times  
liabilities    
 
 

  11  
 Gearing  
 
Ratios   Formula   2012   2013  
Gearing  ratio     loan  capital/  share  capital   5105  /  5900  +  1985  +   7325  /  6670  +  2550  
  +  reserves  +  long-­‐term   5105  *  100%  =  39.3%   +7325  *  100%  =  
loans  *     44.27%  
100%    
 
Interest  cover  ratio     operating  profit/interest   5285  /  1110  =  4.76   4435  /  1745  =  2.54  
  payable     times   times  
 
 

Efficiency/  Asset  Utilization  

 
Ratios   Formula   2012   2013  
Stock  (inventory)   Inventory/cost  of  sales  *   985  /  9005  *  365   1065  /  11200  *  365  
turnover  days   365  days     days  =  40  days   days  =  35  days  
   
Accounts   trade  receivables/credit   2650  /  17250  *  365   3495  /  19480  *  365  
receivable   sales  revenue  *  365  days     days  =  56  days   days  =  65  days  
collection  period    
(ARCP)    
 
Accounts  payable   accounts  payable/credit   2260  /  8750  *  365   2165  /  11280  *  365  
payment  period   purchases  *  365  days     days  /  7000  =    94   days  =  70  days  
(APPP)       days  
 
 
 
Investor    
 
Ratios   Formula   2012   2013  
Earnings  per  share   earnings  available  to   3095  /  5900  shares   1840  /  6670  shares  
(EPS)     ordinary  shareholders  /   =  £  0.52   =£  0.28      
  number  of  ordinary  shares  
in  issue    
 
Dividend  yield  ratio     dividend  per  share  /   1220  /  5900  shares   1275  /  6670  shares  *  
  market  value  per  share  *   *  100%  =  0.20  %   100%  =  0.19  %  
100%    
 

  12  
Part  2  -­‐  Sterling  Plc  
 
Working  capital   Average  inventory  holding  period  +  average  settlement  period  for  trade  
cycle   receivables  -­‐  average  settlement  period  for  trade  payables  
Working  for  Part  2      

Ratios   Formula   2012   2013  

Average  inventory   ((Opening  Inventory  +   [(1240  +  985)  /  2]  *   [(985  +  1065)  /  2]  
holding  period   Closing  Inventory)  /  2)  *   365  days  /  9005  =     *365  days  /  11200  =  
365  days  /  Cost  of  Sales     45  days   33.5  days  

Average  settlement   Trade  Receivables  *  365   2650  *  365  days  /   3495  *  365  days  /  
period  for  trade   days  /  Credit  Sales   17,250  =  56  days   19,480  =  65.5  days  
receivables   Revenue    

Average  settlement   Trade  Payables  *  365  days   2260  *  365  days  /   2165  *  365  days  /  
period  for  trade   /  Credit  Purchases     8750  =    94  days   11,280  =  70  days  
payables  

Working  capital   Average  inventory  holding   45  days  +  56  days  -­‐ 33.5  days  +  65.5  
cycle   period  +  Average   94  days  =  7  days   days  -­‐  70  days  =    
settlement  period  for   29  days  
trade  receivables  -­‐  
Average  settlement  
period  for  trade  payables  
 
 

Summary  table  
 
    2012   2013   2012  -­‐  2013  change  
Return  on  capital  employed   40.70%   26.81%   -­‐  13.89%  
(ROCE)  
Return  on  equity  (ROE)     39.25%   19.95%   -­‐  19.30%  
 
Gross  profit  margin  (GRM)     47.24%   42.50%   -­‐  4.74%  
 
Net  profit  margin  (NPM)     30.63%   22.76%   -­‐  7.87%  
 
Current  ratio     1.26  times   1.18  times   -­‐0.08  times  
 
Quick  ratio     0.96  times   0.90  times   -­‐0.06  times  
 

  13  
Gearing  ratio     39.30%   44.27%   -­‐4.97%  
 
Interest  cover  ratio     4.76  times   2.54  times   -­‐2.22  times  
 
Stock  (inventory)  turnover   40  days   35  days   -­‐5  days  
days  
 
Accounts  receivable  collection   56  days   65  days   +9  days  
period  (ARCP)    
 
Accounts  payable  payment   94  days   70  days   -­‐24  days  
period  (APPP)    
 
Earnings  per  share  (EPS)   £  0.52   £  0.28   -­‐£  0.24  

Dividend  yield  ratio     0.20%   0.19%   -­‐  0.01%  

 
Working  capital  cycle   7  days   29  days   +  22  days  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

  14  
Appendix  2:  Part  B  -­‐  Grantham  Ltd  
 
2012:  
Unit  Contribution  margin  =  Sales  revenue  per  unit  -­‐  variable  cost  per  unit  
£225  -­‐  £125  -­‐  £45/3  -­‐  £20  -­‐  £15  -­‐  £10  =  £40  
 
Break-­‐even  point  in  units  sold  =  Fixed  costs  /  unit  contribution  margin  
(£1,100,000  +  £1,450,000  +  £675,000)  /  £40  
=  £3,225,000  /  £40    
=  80,625  units  
 
Contribution  margin  ratio(  CM  ratio)  =  Contribution  margin  /  sale  
£40  /  £225  =  17.8%  
 
Break-­‐even  point  in  revenue  =  Fixed  costs  /  CM  ratio  
(£1,100,000  +  £1,450,000  +  £675,000)  /  10%    
=  £3,225,000  /  10%    
=  £32,250,000  
 
 
Margin  of  safety  in  units  =  total  sales  units  -­‐  Break-­‐even  units  
220,000  units  -­‐  80,625  units  =  139,375  units  
 
Margin  of  safety  in  revenue=  Total  sales  -­‐  Break-­‐even  sales    
£225  *  220,000  units  -­‐  £32,250,000  
=  £49,500,000  -­‐  £32,250,000  
=  £17,250,000  
 
 
2013:  
Unit  Contribution  margin  =  Sales  revenue  per  unit  -­‐  variable  cost  per  unit  
[£225  +  (£225  *  25%)]  -­‐  £125  -­‐  £45/3  -­‐  £20  -­‐  £15  -­‐  £10  
=  £281.25  -­‐  £125  -­‐  £45/3  -­‐  £20  -­‐  £15  -­‐  £10  
=  £96.25  
 
Break-­‐even  point  in  units  sold  =  Fixed  costs  /  unit  contribution  margin  
(£1,100,000  +  £1,450,000  +  £675,000  +  £1,450,000)  /  £96.25  
=  £4,675,000  /  £96.25  
=  48,571  units  
 
Break-­‐even  point  in  revenue  =  Fixed  costs  /  CM  ratio  
(£1,100,000  +  £1,450,000  +  £675,000  +  £1,450,000)  /  10%  
=  £4,675,000  /  10%  
=  £467,500  

  15  
  
Margin  of  safety  in  units  =  total  sales  units  -­‐  Break-­‐even  units  
220,000  units  –  48,571  units  =  171,429  units  
 
Margin  of  safety  in  revenue=  Total  sales  -­‐  Break-­‐even  sales  
£281.25  *  220,000  units  -­‐  £467,500  
=  £61,407,500  
 
Summary  table  
 
  2012   2013  
Break-­‐even  point  in  units  sold   80,625  units   48,571  units  

Break-­‐even  point  in  revenue   £32,250,000   £467,500  

 
Margin  of  safety  in  units   139,375    units   171,429  units  

Margin  of  safety  in  revenue   £17,250,000   £61,407,500  

  16  
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