Managment Of Finanncial Resourses Smartchip Plc

1.Introduction

1.1.The balance sheets and profit and loss accounts for SmartChip PLC have been analyzed for the years 2003 to 2006, and compared with the industry average.

1.2.The financial performance of SmartChip PLC has been based upon calculating financial ratio’s which are detailed below.

Profitability

Efficiency

Liquidity

Investment

Gearing

1.3.Comments are made upon the results of the ratios and where necessary, areas requiring further investigation are highlighted.

2.Results of Ratios Calculated

2.1.The results of the ratios calculated are summarized in Appendix 1.

3.Evaluation of Business Financial performance

Financial statements can provide an indication of financial position but are not really useful to bench mark a company. Financial ratios are useful indicators of a company’s performance and financial situation. Ratios are calculated from financial statements and are used to analyze trends and compare the company’s financials to another company’s.

3.1.Profitability

Profitability ratios provide a measure of profit and performance over time. A company with a higher profitability ratio than its competitors is running more efficiently.

The gross profit percentage while above the industry sector norm in 2003 has been decreasing approximately 2.3% per annum with a further decrease in 2006. This will be an indication the cost of sales has increased. This can be seen Materials/Sales has risen 8%, Wages/Sales has risen 2.5% and sales growth has decreased from 2003/2004 8.6% to 2005/2006 4%, although Overheads/Sales are down 12.5%. This is an area for investigation as gross profit should be maintained as high as possible.

Net profit has risen from 2003 2% to 2004 3.8% with a small improvement in 2005 4.4% and then in 2006 decreasing to 3.3%. The company has not managed to meet the average of its competitors or meet the business sector norm. This shows the company is not managing its cost control or is there another reason? The company needs to be more efficient in converting revenue into actual profits. This is an area for investigation as this should be higher.

The return on capital employed (ROCE) is an important ratio for shareholders or potential shareholders. The company’s ROCE has been slowly decreasing from 2003 to 2006 and is lower than its competitors and the business sector norm. The shareholders would be displeased with these figures as it shows again the company could be financially more efficient. This could be due to sales decreasing, cost of sales increasing, increase of fixed assets or a combination of all of these.

3.2.Efficiency

Efficiency ratios are an important way of measuring the company’s efficiency in managing assets, sales, stock, creditors and debtors. It can also show how the company can meet short and long term obligations.

Fixed asset productivity is decreasing showing that the money invested in fixed assets has a low return, also the figures are below competitors and industry standard. Fixed assets have increased by 37% (2003 to 2006) and sales have only risen by 20% (2003 to 2006). Further investigation must be done as the increase in fixed assets may be due to a new product being released thus the product will be at the start of the product life cycle and not having its full return yet.

The increase in debtor’s (Receivables) collection period shows bad financial management. It has risen from 80 days in 2003 to 96 days in 2006 while a competitor is 56 days and the business sector norm is 70 days. Further investigation will be needed because it could be the company is giving its customers more time to pay their accounts because they have special deals. The goal should be the shortest period for customers to pay.

The creditors payment period rose from 2003 45 days to 2005 49 days this shows good financial management, keeping money in the bank for the longest period of time. In 2006 this figure dropped to 40 days which is bad financial management. Still all the figures are below the competitor and business sector norm which shows bad financial management. The company should negotiate longer payment periods with suppliers and take advantage of free credit. Further investigation is needed it may be the case the company is paying earlier for cheaper prices.

The stock turnover is steadily decreasing from 2003 5.9% to 2006 4.8% being lower than the competitor and the business sector norm. This is bad financial management as it shows stocks are building up as they are not selling as many components as they are producing. This figure needs to increase either they need to increase sales or ease off production or try business strategies like Just In Time production methods.

3.3.Liquidity

Liquidity is capital management concerned with making sure we have exactly the right amount of money and lines of credit available to the business at all times.

The current ratio has risen slightly from 2003 3.5% to 2006 3.7% is higher than the competitor and the business sector norm. A figure between 1 (sometimes risky) and 1.5 shows very good financial management and anything over 2.5 shows bad financial management. Although these figures are good if a bank or supplier is checking the company for credit purposes, the figures are probably high due to the high number of stocks and the long periods of debtors and receivables which are bad financial management. Shareholders will prefer a lower ratio as it shows that more of the company’s assets are working to earn them money.

The quick ratio has been decreasing from 2003 2.5% to 2006 1.3% and is now below the competitor and the business sector norm. This ratio is lower than the current ratio because it does not take in to account stocks. If this was to be lower than 1 the company would be technically insolvent.

3.4.Investment

Investors use investment ratios to determine if a company is a good investment choice.

Earnings per share although higher than the competitor is below the industry sector norm, it did rise a small amount but dropped back in 2006. This is because of falling gross and net profits and the return on capital employed. This could be down to the spending on fixed assets for new products that have not

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