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Hbk Furniture Equipment Manufacturing Company Case Study

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CARDIFF METROPOLITAN UNIVERSITY  LEVEL 6 BA (HONS) BUSINESS AND MANAGEMENT STUDIES

BAC 6004-FINANCIAL MANAGEMENT FOR MANAGERS

AVISHKA NETHSARA

KG/CBABM/02/11

STUDENT ID - ST20118173

SUBMITTED TO: MR. VINU

DATE OF SUBMISSION: 21/05/17


Acknowledgement

First of all I would like to thank my lecturer Mr. Vinu for his extensive guidance and support throughout the financial management module. Without his support this assignment would not have been possible. Then I would like to thank my parents and friends who supported and motivated me to complete this module. And finally I would like to thank ICBT Kurunegala campus for providing me this opportunity.


Executive summary

HBK is a furniture equipment manufacturing company in the US. This is a report written to identify financial status HBK organization according to the provided information. Here different types of financial ratios are calculated, interpret and carefully analyzed to take managerial decisions to overcome weaknesses.

However the goal of this document is to identify the immediate and long term risk mitigation strategies. Through understanding these ratios, by going through a financial statement of an organization will help to manage a business in an efficient way.


Table of Contents

Acknowledgement        1

Executive summary        2

Introduction        4

1. Profitability Ratios        5

1.1 Return on assets        5

1.2 Net profit        5

2. Liquidity Ratios        6

2.1Current ratio        6

2.2Quick Asset Ratio        7

3. Gearing Ratios        8

3.1Debt to equity ratio        8

3.2Debt to total asset ratio        9

4. Efficiency Ratio        10

4.1Debtor turnover and collection days ratios        10

4.2Payable turnover and payable payment day ratios        12

4.3Inventory turnover and inventory collection days        13

4.4Assets Turnover Ratio        14

5. Investors Ratios        15

6. Conclusion        16

Works Cited        17

Introduction

Many organizations at different industries perform well through their marketing, technology or through sales but they perform much less on the financial matters when compared to the other sectors in the organization. The financial health of the organization can be measured using most powerful and widely used tools financial ratios.

According to the scenario HBK is furniture equipment manufacturing company whose financial statements for last year and forecast year provided respectively. Here the performance of the company is been asked to measure by the directors through only the financial statements provided.

To analyze the financial statement different types to ratios are need to be calculated and interpret to measure the performance of the company. Financial ratios analysis can help to identify the problems that are need to be fixed and also it helps to take proactive decisions for the potential problems which can occur in the near future.


1. Profitability Ratios

By analyzing profitability ratios management can see how good company at running its business? Does its performing well and how profitable is it comparing with competitors these every question can be answered by analyzing profitability ratios.

1.1 Return on assets

ROA = (Net profit before interest and tax / Total Assets) * 100

Last year

Forecast year

=  (4200/20200) * 100

=20.8%

=(4832/23800) * 100

=20.3%

  • There is not much difference in forecast year. It has slightly got down by some points. But in forecast year their total assets has gone up and the sales also increased slightly. Reason can be receivables are collected more than last year.

1.2 Net profit

NP = (Net profit/sales) * 100

Last year

Forecast year

= (257/4200)*100

=6.11%

= (250/4832)*100

=5.17%

  • This result shows a negative impact for the organization this is because of the declining of the net margin due to the increase of cost and decrease of the gross profit. The total expense for the Forecast year has increased. The management will have to control the outflow of the expenses efficiently to overcome the situation. Cutting of unnecessary expenses and increasing the sales through marketing strategies are also recommended solution

2. Liquidity Ratios

These are the ratios which help to measure the company’s ability to cover its expenses. This ratio has namely two types of ratios as current ratio and quick ratio.

2.1Current ratio

This is the ratio which reflects the financial strength of the organization which identifies the number of times that current assets exceed than of its current liabilities.

CR= Current assets/Current liabilities

Last Year

Forecast Year

= (2200+1900+1000)/1800

=2.8 Times

= (3800+2300+400)/(2500+1700)

=1.55 Times

  • The current Ratio has been declined when compared to last year from to forecast year. This can be unfavorable for the organization, because the chance of occurring liquidity problem is high when compared to last year to forecast year.
  • One reason that can be happen this situation is current liabilities are increasing in forecast year, and the current liabilities is increasing due to Overdraft of Forecast year.
  • When liquidity going up profitability will go down, when liquidity decreasing company profitability will be increase. That is the relationship between these two.
  • The current ration can be improved by taking measures like selling fixed assets, putting back profits to business and acquiring long term loan which are payable in more than one year. By taking above mention measures the organization can increase current asset and decrease its current liabilities which results the increase of the current ratio.

2.2Quick Asset Ratio

This is also called the acid test ratio because the quick ratio only looks at the company’s most liquid assets and compares them to the current liabilities of the organization. This ratio helps the organization to identify whether they could survive in adverse situations

Quick Asset Ratio = (Total Current Asset – Total Inventory) / Total Current Liabilities

Here the assets considered to be the quick assets include cash, stock and account receivables. And also can be said as current assets other than inventory.

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