This is a business report that covers the analysis of the financial position of Bertie Plc and explains the same to Katrina Kaif, CEO of the company. The report covers analysis and interpretation of the company’s profitability, solvency, liquidity and working capital management performance of the company for the years 2014 and 2015. The report also covers the appraisal of the Hill ranch investment project of the company through key investment appraisal methods.
The report uncovers, that profitability, solvency and liquidity performance of the company showed a declining trend from 2014 to 2015. The report also uncovered that the Hill Ranch investment project is viable however, doubts the underlying management assumptions.
Table of Contents
Part 1: Business performance analysis.
Interpretation of the statement of profit and loss.
Market segment analysis.
Statement of cash flows.
Liquidity and working capital
Sources of internal finance.
Part 1: Business performance analysis
Interpretation of the statement of profit and loss
Sales revenue of Bertie Plc increased from £63916 to £64826 from 2014 to 2015 by 1.4%. An increase in revenue is indicative of the fact that the company has done well in the process of improving sales even in extremely unfavorable conditions in the global market. In the UK market, Bertie Plc is struggling due to the reason that the market has become matured and the company is unable to pass price pressures from suppliers to consumers. In the UK market, growth opportunities are very little and most of the companies have started exploring Asian and US markets. Again in the US market, saturation level is up to the rim as 55% of the total revenue is covered by the top six large retailers and 45% by small and medium-sized retailers.
Cost of sales
The cost of sales of Bertie Plc rose from £58519 in 2014 to £60737 in 2015 by 3.8%. Critical analysis reveals that there are two reasons behind the increment in cost of sales, the first reason being an increase in sales revenue and the second reason is an increase in prices of raw materials.
The total overhead cost of the company in the year 2014 was £2256 and that in the year 2015 was £2136 thereby executing a reduction by 5.5%. Bertie Plc witnessed a reduction in the overhead costs mainly because of the reason that the company has incorporated effective supply chain management systems.
The gross profit of Bertie Plc declined from £5397 in 2014 to £4089 in 2015. The gross profit margin ratio has also indicated similar kind of results as it degraded from 8.44% in 2014 to 6.31% in 2015. This is indicative of the fact the performance of the company has degraded from 2014 to 2015 in terms of overall earning capacity, marketing, sales and pricing strategy and operations management. The main reasons behind the decrease in gross profit margin ratio are an increase in prices of raw materials and an increase in property plant and equipment costs. In a similar manner, the operating profit margin of the company degraded from £4317 to £2647 from 2014 to 2015 and the main reason behind this phenomenon is that Bertie has degraded its supply chain efficiency, operating efficiency, cost strategies and marketing strategies. In the context of net profit margin, it has been observed that the same fell from £3164 to £1386 from 2014 to 2015. This again indicates the fact that earning performance of Bertie Plc decreased due to a decrease in quality of operations, organizational strategies, cost structures and pricing strategies. These indications have been further strengthened by the figures of net profit margin ratio indicates that this ratio decreased from 6.75 in 2014 to 4.08 in 2015.
From the analysis and discussions did so far, it is clear that the gross, operating and net profitability performance of Bertie Plc is showing a degrading trend from 2014 to 2015 despite the increase in sales and reduction of overheads. This is mainly because of the fact that there occurred drastic increments in cost of sales and finance costs leading to declining of profitability to a considerable extent.
Market segment analysis
Analysis and comparison of the performance of Bertie Plc’s US segment and the rest of the world for the years 2014 and 2015 reveals that the performance of the US segment has been inferior to that of the rest of the world especially in terms of profitability. It has been observed that the gross profit margin ratio of the company’s US segment was 3.16% and 3.53% in the years 2014 and 2015 respectively. Thus, it is evident that the gross profitability of Bertie’s US segment is considerably inferior to that of the rest of the company. On the other hand, the net profit margin of the US segment was -6.69% and -7.75% in the years 2015 and 2014; and that of the rest of the world are 6.12% and 8.14%. Thus, it is evident that the net profitability performance of the company’s US segment was far more inferior to that of the rest of the company. This inferior gross profitability and net profitability of the company’s US segment compared to the rest of the world can be attributable to three reasons viz. increase in the cost of sales, increase in operating expenses and increase in expenses on property plant and equipment.
In the context of the cost of sales of Bertie, it has been observed that the rate of its increase from 2014 to 2014 in the rest of the world is 1.92% in comparison to a 110.8% increase in the US segment. In the context of the operating expenses of Bertie, it has been observed that the same increased at the rate of 50.84% from 2014 to 2015 in the rest of the world and at the rate of 98% in the US economy. Again, in the context of property, land and equipment-related expenses of Bertie Plc available data reveals that the same increased at the rate of 10.25% from 2014 to 2015 in the rest of the world and at the rate of 456% in the US economy. These high rates of increase in the cost of sales, operating expense, land, equipment and US property in the US market compared to the rest of the world are the main reasons behind the inferior performance of the company in the US market. Another important reason is that supplier relationships are less established in the purchase of US markets or property.
Statement of cash flows
A critical analysis of the cash flow statements of Bertie Plc for the years 2014 and 2015 revealed that there occurred a decrease in cash and cash equivalents from £2305 to £2163 from 2014 to 2015. This decrease can be attributable to two reasons. The first reason is the fact that the company reported a profit before tax of £1960000 in 2015 which was considerably lower than that in the previous year. In the year 2014, the profit before tax figure of the company was £4038000. The decrease in profits has resulted in a decrease in cash and cash equivalents. The second reason is that the company has purchased acquired assets of an established food retail chain in the US, Hill Ranch. Bertie’s investment in Hill Ranch resulted in an increase in its cash outflows by £10m as cost of purchase. This cash outflow has contributed considerably to decreasing the cash and cash equivalents of the company from 2014 to 2015………………………………….