Financial Management Assignment_ Monitor Plc (GC01371)
1.0 Introduction
Financial management with particular principles, techniques and processes is a significant issue for a business organization in the way of its success (Attril and McLaney, 2011). This report conducts a study on various financial factors of an organization namely Monitor Plc. Monitor Plc is a manufacturer of electronic components. This is business quoted on the stock exchange. The products of Monitor Plc are sold to audio/visual industry such as Samsung, Sony, Panasonic, etc.
The report, first, examines different financial processes and techniques that enable the management of an organization to analyze, evaluate and make strategic business decisions in terms of competitive international environments. Secondly, the report focuses on financial performance assessment for Monitor Plc. Thirdly, the report concentrates on capital project appraisal for Monitor Plc analyzing and evaluating different investment methods such as Net Present Value (NPV), Payback Period (PP), ARR and IRR. Finally, the report concludes the finding of the study conducted.
2.0 Financial Performance of Monitor Plc
According to Attril and McLaney (2011) notes, to analyze the financial performance of an organization like Monitor Plc, it is essential to cover five key areas: profitability, liquidity, efficiency, investment, and gearing. In consequence, these issues are critically analyzed and evaluated in terms of Monitor Plc for making financial decisions by its Board of Directors (BoD).
2.1 Profitability
As Attril and McLaney (2011) note, ratios that can be used to analyze and evaluate the profitability of Monitor Plc are: net/operating profit margin, gross profit margin, return on capital employed (ROCE), and return on ordinary shareholder’s funds (ROSF).
Gross profit margin
According to Attril and McLaney (2011), the gross profit margin ratio disclose the percentage of gross profit of the business against the total sales revenue generated for the same period of time. It reveals the differences between the cost of sales and sales revenue. Gross profit ratio is calculated by the following formula:
Gross profit
Gross Profit Margin = × 100
Sales revenue
In Monitor Plc, gross profit in 2010, 2011, 2012, and 2013 is respectively 30%, 27%, 25%, and 24%, which indicates that gross profit has decreased by the last three years showing poor business performance.
Net profit
As Attril and McLaney (2011), Net profit/operating profit margin ratio shows the percentage of net/operating profit to the sales revenue generated for the same period of time. This ratio is calculated by the following formula:
Operating profit
Net Profit Margin = × 100
Sales Revenue
In the case of Monitor Plc, Net profit improved by 1.4 % in 2013 from 2.0% in 2010 to 3.4% in 2013, which shows a good performance in its current profitability.
Return on Capital Employed (ROCE)
According to Attril and McLaney (2011), ROCE relates to the operating profit generated during a specific period of time and long-term capital invested in the business. This ratio is calculated by the following ratio:
Operating profit
ROCE= × 100
Long term capital employed
In terms of Monitor Plc, ROCE has decreased by the last three years. It was 3.4% in 2010, where it was declined by 0.7% in 2013 with 2.7%. Thus, based on ROCE Monitor Plc is not performing well at this moment.
Return on Shareholders’ Funds (ROSF)
As Attril and McLaney (2011) description, ROSF compares the total profit generated for a period available to the owners or shareholders with an average stake in the business within the same period of time. This ratio is calculated by the following ratio:
Net profit-preference dividend
ROSF= × 100
Ordinary share capital + Reserve
In Monitor Plc, the ROSF was 3.0%, 4.2%, 4.5% and 5.0% respectively in 2010, 2011, 2012, and 2013. The ROSF percentage shows that the company’s performance is in a good position now.
Analysis and evaluate the profitability of Monitor Plc
Although the gross profit Monitor Plc has reduced by 6% from 30% in 2010 to 24% in 2013, the net profit has increased by 1.4% from 2.0% in 2010 to 3.4% in 2013. On the other hand, return on capital employed (ROCE) has decreased by 0.7% from 2010 to 2013 but the return on shareholder funds (ROSF) has grown up by 2% from 3.0% in 2010 to 5.0% in 2013. As company net profit and return on equity are higher in 2013 than in previous years, it is recommended that the overall present profitability position of Monitor Plc is better than previous. However, if it is compared with similar-sized competitors and business sector norm, Monitor Plc did not do a good job in 2013 because in terms of all gross profit, net profit, ROCE and ROSF its performance was poor. Thus, Monitor Plc is less profitable in a completive market in the current situation.
2.2 Liquidity
The liquidity ratio is associated with the ability of a business to fill the target of its short-term financial obligations. Current Ratio and Acid Test Ratio are used widely as liquidity ratios.
Current ratios
According to Attril and McLaney (2011), the current ratio compares the liquid assets with present liabilities. This ratio is calculated by the following formula:
Current asset
Current ration =
Current liabilities
As the current ratio increased by 0.3 from 3.4 in 2010 to 3.7 in 2013, Monitor Plc is performing well.
Acid test ratio
As Attril and McLaney (2011) note, the acid test ratio is similar to the current ratio but it shows a stringent test of liquidity. This ration is a variation of the current ration, without inventories. It is calculated with the following formula:
Current assets (excluding inventories)
Acid test ratio =
Current liabilities
According to the percentage of acid test ratio, Monitor Plc is working is not working well because the acid test ratio has decreased from 2.30 in 2010 to 1.40 in 2013.
Analysis and evaluate the Liquidity of Monitor Plc
Although the current ratio increases by 0.3 in the last three years, the quick test ratio was down by 0.9 in the same period of time. It proves that the overall performance is not good. On the other hand, if it is compared with similar-sized competitors and business sector norm, as current ration Monitor Plc is doing better performance but as acid test ratio, the competitors are better passion than Monitor Plc. Thus, it is considered that Monitor Plc has less liquidity at present showing poor performance…………..
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