Finance Assignment Sample

Question of Finance Assignment

(A) Ratios for Al Ain Productions Plc

Figure 1: Calculations of Ratios 

• Gross Profit Margin: By showing how much profit is left over after deducting the cost of items sold, the gross profit margin evaluates the effectiveness of manufacturing methods (Husain & Sunardi, 2020). Al Ain Productions’ gross profit margin has declined regularly from 35.96% in 2021 to 27.00% in 2023. This decline may indicate declining pricing power or increased manufacturing costs, which would reduce profitability. 
• Net Profit Margin: The percentage of turnover left over as profit after all costs is subtracted is known as the net profit margin (Ningsih & Sari, 2019). It has a declining tendency, falling much below the 24% industry average in 2023, from 25.45% in 2021 to 10.67% in 2023. This dropping margin may indicate issues with cost control or lower revenue, so the organisation has to concentrate on improving profitability by simplifying processes and reducing costs. 
• Current Ratio: The liquidity metric comprehended as the current ratio indicates how agreeably positioned is to complete short-term responsibilities (Fatimah et al. 2019). Al Ain Production’s 2023 current ratio of 3.71 was a continuous advancement from 1.99 in 2021, especially beyond the 1.8 industry standard. This might be a symptom of sufficient working capital administration since it indicates that the company has adequate current assets to encounter its liabilities. 
• Quick Ratio: From 1.50 in 2021 to 2.38 in 2023, the Quick Ratio does not contain inventories in current assets and also demonstrated advancement. This ratio demonstrates the company's capacity to pay short-term debts without turning to sales of inventories (Kamaluddin et al. 2019). The consistent rise implies that Al Ain Productions has fortified its liquidity situation, guaranteeing it can settle debts even if inventory is not promptly turned into cash. 
• Net Asset Turnover: The efficiency with which the business generates income from its assets is reflected in its net asset turnover (Nariswari & Nugraha, 2020). This ratio showed falling efficiency, going from 2.14 in 2021 to 1.82 in 2023. Even if the ratio is over one, the declining tendency may indicate that the business is not making as good use of its asset base as it was in previous years. 
• Receivable Days: Receivable Days illustrates the duration required to obtain payments from clients. (Amanda, 2019) The amount of time it took to collect accounts receivable from Al Ain Productions increased from 73.75 days in 2022 to 66.92 days in 2023, indicating improved credit control; nonetheless, this number still falls short of the ideal level of cash cycle efficiency. 
• Payable Days: Payable Days show how long it takes to pay bills and invoices to its trade creditors (Thomas et al. 2020). Payable days dropped dramatically from 116.99 in 2021 to 42.67 in 2023, indicating that the business is paying supplier bills more quickly, which might have an impact on cash flow. 
• Return on Capital Employed: This might be the result of declining profitability or rising debt, which would imply declining returns on the money put in the company (Sari et al. 2022). The profitability and efficiency of capital usage are shown by Return on Capital Employed (ROCE), which fell sharply from 54.55% in 2021 to 19.46% in 2023 below the industry average of 23%. 
• Capital Gearing: The high gearing ratio suggests an increasing dependency on debt, which may cause one to question one's financial security, especially if profitability keeps dropping (Gezer & Kıngır, 2020). Capital gearing, which measures financial risk, surpassed the industry average of 35% in 2023, rising from 36.36% in 2021 to 57.42%. 

(B) The financial performance of Al Ain Productions Plc

Al Ain Productions Plc's financial performance declined between 2021 and 2023, with numerous important measures pointing to cause for worry. The net profit margin went from 25.45% to 10.67%, much below the industry average, while the gross profit margin dropped from 35.96% to 27.00%, suggesting increased expenses or diminished pricing power. These points to inefficiencies in the control of operating costs have an impact on total profitability (Sakthivelu & Azhagaiah, 2019). Despite these obstacles, the company's quick ratio and current ratio increased dramatically, ending up at 2.38 and 3.71, respectively, by 2023. These measures demonstrate the company's excellent liquidity and its capacity to pay short-term debts without the need for inventory sales.

Figure 2: Graph for Financial Ratios 

The return on capital employed (ROCE), which is currently below the industry average of 23%, dropped precipitously from 54.55% to 19.46%, indicating poorer profitability concerning the capital invested. The rise in capital gearing from 36.36% to 57.42% at the same time indicates a growing reliance on debt, which raises financial risk. As cited by Aldo (2022), the company's days payable have decreased, and its days receivable have increased, potentially tightening cash flow. Overall, even with robust liquidity, deteriorating profitability and rising financial risk point to the necessity for cautious debt management and operational enhancements to ensure long-term stability. 

(C) Evaluate the corporate goal Al Ain Productions should prioritise

Although increasing sales and earnings is a common goal, considering Al Ain Productions' present financial status, it might not be the most important one. The company's net profit margin and gross profit margin both decreased between 2021 and 2023, indicating a decline in profitability. Improving operational effectiveness and profitability need to be the company's top priorities (Jasuja, 2019). These fundamental problems could not be resolved by merely aiming for greater sales, particularly if expenses keep going up and profit margins are thinner. 

Protecting financial stability also requires addressing the company's growing reliance on debt, which is reflected in the rising capital gearing. This comprises reducing expenses, boosting asset utilization (as demonstrated in the lowering net asset turnover), and ensuring the organisation optimises returns on capital invested (Morshed, 2020). Prioritising goals on risk management and long-term sustainability is also advised. Instead of only chasing short-term sales and profit objectives, Al Ain Productions may achieve consistent, sustained success by concentrating on efficiency, lowering financial risk, and maintaining a balanced approach to growth. 

Question 2: Investment Appraisal Techniques 

(A) Emirates Invest Co is appraising

Figure 3: Calculations for Investment Appraisal Techniques 

• PBP: The payback time for the investment is 3.51 years and this indicates that it will take the business about 3.5 years to recoup its £500,000 original investment. A helpful indicator of risk is the payback period, particularly for businesses that are strapped for cash or are seeking rapid returns (Crespo Chacón et al. 2019). However, when evaluating long-term profitability, this technique may be limited as it does not take into account cash flows that occur after the payback period. 
• ARR: The annual rate of return (ARR) is 30.60%, which is competitive with the standard measure that multiple industries desire. ARR analyses the project's profitability by corresponding moderate yearly payments to the initial acquisition. A rate overextending the business’s required return or industriousness standard would recommend an outstanding acquisition (Jordà et al. 2019). According to this statistic, the project constructs a consequential accounting profit regarding its expenditures.
• NPV: With a positive NPV of 96,563.31 at a discount rate of 8%, the investment provides value for the firm. NPV calculates an investment's total value added after deducting the time value of money. When discounted back is to present value, a project with a positive net present value (NPV) has more cash inflows than outflows, making it a worthwhile investment (Ma et al. 2022). Higher net present value (NPV) is a good predictor of long-term profitability since it usually predicts superior returns. 
• IRR: The project is deemed financially feasible and expected to yield returns greater than the company's cost of capital since the internal rate of return (IRR) surpasses the needed return (Sarsour & Sabri, 2020). With an internal rate of return (IRR) of 15%, the project outperforms the 8% discount rate. The project's net present value (NPV) is measured by the internal rate of return (IRR). 

(B) Advantages and disadvantages of each method

• PBP: The payback period illustrates how soon an investment might recoup its original cost, providing simplicity and emphasising liquidity. Businesses with tight cash flow or those seeking quick profits will find this helpful (Malenko, 2019). However, its applicability for assessing long-term profitability is limited since it disregards cash flows that occur beyond the payback period and does not consider the time value of money.
• ARR: Another straightforward technique is the Accounting Rate of Return (ARR), which emphasises the project's accounting profitability concerning its cost (Nurgaliyeva et al. 2022). Although simple to compute and comprehend, it is less accurate for assessing long-term projects since it ignores the time value of money and the fluctuation of cash flows over time. 
• IRR: The Internal Rate of Return (IRR), which indicates the rate at which Net Present worth (NPV) equals zero, provides a clear benchmark and considers time worth of money. For projects with non-standard cash flows, on the other hand, it may be deceptive and result in many or no IRRs. It also makes the somewhat unrealistic assumption that cash inflows be reinvested at the IRR. 
• NPV: Academics favor Net Present value (NPV) because it calculates the additional worth of investment by discounting future cash flows at the cost of capital for the business (Kader & Khan, 2019). NPV, in contrast to other approaches, takes into consideration the project's whole cash flow profile as well as the time value of money.

Question 3: Advantages and Disadvantages of Debt vs. Equity Financing

(A) Preference shares, common shares, debt, and theoretical cost are listed from most expensive to least expensive

There is a distinct hierarchy in the potential cost of funding because ordinary shares are the last to earn returns and dividends are not tax deductible, they are usually the most costly owing to the increased risk for owners. Preference shares follow next, delivering set dividends but bearing less risk than regular shares. Finally, because interest payments are tax deductible and debt holders take precedence over shareholders in the event of liquidation, debt is the least expensive method of financing. The various risk and tax benefits connected to each funding option are reflected in this rating. 

(B) The firm's directors determined that external debt funding is less expensive than equity and should be used for all endeavours

Considering it is less expensive than equity, external debt financing might seem alluring, but using debt to finance every project is neither wise nor practicable. Because interest payments on debt are tax deductible and debt holders are not as exposed to risk as equity investors, debt is less expensive. However, depending only on debt puts the business in danger about its finances. Debt increases the gearing ratio of the business, which increases interest payments and default risk in times of poor cash flow or recession. In addition to raising future borrowing costs, excessive debt can have a detrimental effect on the company's credit rating. 

It could also reduce the company's flexibility since lenders put restrictions on corporate operations in the form of covenants, which make it more difficult to engage in new ventures or go after expansion prospects. Equity financing offers the advantage of risk sharing with investors despite being more costly. Equity, in contrast to debt, has greater flexibility and doesn't demand set payments, especially during hard times financially. A balanced approach that includes both debt and equity is better sustainable and with this outstanding capital construction, the corporation may assume benefit of debt's decreased expenditure while maintaining its monetary equilibrium and decreasing the risks connected to extreme leverage. 

(C) An example of a high-risk company using less leverage and explaining the benefits

One high-risk company that would profit from less leverage is a biotechnology start-up (gearing). Producing fixed loan reimbursements is difficult for these associations since they continually have developed development growth revolutions and irregular income origins. The start-up may decrease the consequences on its finances during periods of insufficient cash flow and decrease its chance of bankruptcy by maintaining its leverage low. Besides, it sustains economic flexibility, releasing the corporation from containing to produce inquisitiveness and promoting it to reinvest in R&D. Additionally, equity investors find the firm more appealing due to its low leverage as they usually look for development possibilities in high-risk industries.

(D) The potential net present value of AED 10 million indicates if funding should be raised

The business should seek funds to undertake a project if its net present value (NPV) is AED 10 million. A project that has a positive net present value (NPV) will create value and may be justified using debt, equity, or hybrid finance. 

Reference list

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