NON-FINANCIAL MANAGERS

Finance for Non-Financial Managers



Finance for Non Financial Managers

Introduction

The focus of this paper would be on analyzing financial position of Barnet Solutions PLC using financial ratios techniques. Beside this, this essay will also highlight areas where Financial Performance of the company could be improved along with recommendations.

Discussion

Overview of the company

Barnet Solution PLC is a UK listed company involved in sourcing and distribution of a range of hair care products. It is medium-sized, well-established company and their operations have been spread throughout the country.

In order to see whether company is performing well with respect to profitability, Efficiency, Capital Gearing, Liquidity and Investor Value, Ratio Analysis techniques will be utilized. The reason for using this technique is due to it fact that it shows immediate financial performance of the company in key areas for investors (Fridson, 2012, p. 29).

a) Ratio Analysis

Profitability Ratios

Profitability ratios measure company's ability in generating profit. This ratio reveals combined impact of company's debt management as well as asset management (Steffy, Zearley, Strunk, 2012, p. 74).

Profit Margin measure how much dollars company has earned on its sales. Profit Margin of Barnet Solution is not showing a good picture. In 2011, PM was 3.87% which means that company after paying expenses has left only 3.87 cents on each sale. This trend reduced to 3.31% in 2012 due to percentage increase in cost of sales in 2012 as compared to sales which were lower in 2011. Beside this, interest expenses increase in 2012 while it was lower in 2011 i.e. 3.92% increase in 2012 (Steffy, Zearley, Strunk, 2012, p. 74).

Return on Equity measures income that is generated through shareholder investments. ROE of Barnet Solution has been reducing since last year. In 2011, ROE was 10.77% which means that on each shareholder investment, investors will get 10.77 cent. This trend reduced in 2012 i.e. 8.98% due to reduction in net income. According to finance theories, higher this value better for company as this shows that company has been employing investors' funds efficiently in generating income(Steffy, Zearley, Strunk, 2012, p. 75). Hence, equity in 2012 increased to 217.2 from 197.7 in 2011. Overall, ROE is not up to the mark due to lower net income.

Efficiency Ratios

These ratios determine how efficiently company has been managing their assets and also measure their quality of their receivables and management of their inventories (Yadav, 2011, p. 7).

RTO of Barnet Solution has been improving in these two years. In 2011, company RTO was 4.78 while it increased to 5.81 due to improvement in their credit policy. According to theories, company having higher turnover means that company has been collecting their receivables early. At the same time, too high turnover also state that company offering their product on high discount for early payment or have restriction on credit policy. In 2011, company was taking 76 days to collect their money while in 2012; they were collecting in 63 days which state that they have been improving in their ...