Financial Analysis of Bestwish Limited Company Overview

Bestwish Limited produces extensive range of quality products such as gift dressing, greetings cards, and plush merchandise of more than 50,000 stocks. The production of different categories of products involve between 2 and 15 processes. The company produces standardized products and custom designed products ordered from customers on contract basis. However, Bestwish Limited is facing challenges to control the costs because of varying production process, reliance on indirect costs and large number of stock keeping units.

Bestwish Limited has just closed the 2010 fiscal year account and the company is finalizing the 2011 budget. Bestwish intends to analyze the 2010 financial statement to present the accurate picture of the company financial performances.

Objective of this report is to analyze 2010 financial statements to assess the viability of Bestwish Limited.

Task

Attn:

Audit Committee of the Board

Finance Director

Subject: Financial statement Analysis

Date: 27 January 2013.

This report verifies the 2010 financial statement of Bestwish Limited to ensure that the financial record is accurate, is in line with exact statutory requirements, and laid down regulations for limited companies as being established by Companies Act 1985 and the list rules.

The report evaluates the viability of Bestwish Financial Statements using:

Statement of Comprehensive Income

Balance Sheet

Cash Flow Statement.

In the contemporary business environment, organizations need to set a clear direction to make their stakeholders understanding what they are seeking to achieve. Financial analysts, investors, and other external parties use financial goals to monitor the financial performances of Bestwish Limited. Thus, this financial report intends to compare the actual performance of Bestwish against the target sales growth goals. (Glynn, Perrin, Murphy, et al. 2003).

Analysis of Bestwish statement of Comprehensive Income in Exhibit 1 reveals the accounting period for the end of 2010 fiscal year. From the Statement of Comprehensive Income, Bestwish recorded the total revenue of $400 Million in 2010 fiscal year compared $395 Million that the company recorded in 2009. A difference of $5 Million between 2009 and 2010. The increase in the total revenue assisted the company to record the increase in the gross profits between 2009 and 2010. The company gross profit was $27.9 Million in 2010 compared to $25.9 Million in 2009. The company recorded the $2 Million increase in the gross profit despite the increase in the costs of sales and administrative expenses between 2009 and 2010.

Similar to the gross profit, Bestwish improved its financial performances in 2010 because the company was able to record net profits in 2010 compared to 2009 fiscal year where the company recorded a net loss. In 2009, Bestwish recorded a net loss of $33.6 Million, however, the company improved in 2010 and recorded a net profit of $7.4 Million. (Fig 1 presents the summary of the company comprehensive income statement).

Fig 1: Summary of Bestwish Comprehensive Income Statement

Balance Sheet

The report uses the balance sheet to demonstrate the financial positions of Bestwish. The Balance Sheet shows the relationships between the assets and the liabilities of a business. When the total liabilities are deducted from the company total assets, the report arrives at the company net assets. The chart in Exhibit II consists of the total assets that consist of two main elements: current assets and non-current assets. Bestwish current assets and non-current assets increased between 2009 and 2010. The current assets consist of inventories, trade receivable, cash and financial investments. The current assets were $64.9 Million in 2009 and declined to $62.7 Million in 2010. However, the company non-current was $77 million in 2010 and $60.9 Million in 2009 revealing the $16.1 Million increase between 2009 and 2010. The company total assets were $140 million in 2010 compared to $125.6 Million in 2009. Similarly, the company total liabilities increase from $94.7 Million in 2009 to $101.9 Million in 2010. The net assets are calculated by deducting the total liabilities from the total of assets. Thus, the company net assets were $38.2 Million in 2010 compared to 30.9 Million in 2009. (Table 1 and Fig 2 presents summary of the company balance sheet).

Table 1: Summary of Bestwish Balance Sheet ($000)

Summary of Bestwish Balance Sheet ($000)

2010

2009

Difference

Current Assets

62,760

64,941

Non-Current Assets

77,410

60,691

Total Assets

140,170

125,632

14,538

Current Liabilities

(90,605)

(85,153)

Non-Current Liabilities

(11,326)

(9,166)

Total Liabilities

(101,931)

(94,679)

(7,255)

Net Assets

38,239

30,953

7,286

Fig 2: Summary of Bestwish Balance Sheet ($000)

The final section of the company Balance Sheet reveals the amount of shareholders' funds. "This is the price paid by the shareholders for their initial share capital and the retained profits made by the company." (The Times 100, P4). Bestwish also increased the total equity between 2009 and 2010. The total equity was $38.2 Million in 2010 compared to total equity of $30.9 Million in 2009.

Bestwish's Cash Flow Statement

Cash flows statement is used to analyze the financial viability of Bestwish Limited and the cash flow statements sets out the incoming and outgoing cash within a fiscal year. "Cash flow is very important to the company because cash enables the business to pay its bills, pay dividends to its shareholders and, in addition, to make acquisitions." (The Times 100, P5). As being revealed in Table 2, Bestwish generated $19 Million of the cash...

However, the company cash flow from investing activities increased from $11.6 Million in 2009 to $18.8 Million in 2010. On the other hand, cash flow from financing activities was $6.5 Million in 2009 and declined to $2 Million in 2010.
Table 2: Bestwish's Cash Flow Statement ($000)

Bestwish's Cash Flow Statement ($000)

2010

2009

Cash flow from Operating Activities

19,036

22,205

Cash from Investing Activities

18,867

11,620

Cash flow from Financing Activities

2,000

6,552

Fig 3: Bestwish's Cash Flow Statement ($000)

In 2010, Bestwish Limited focused more on investing activities because the company intended to achieve:

higher sales growth increase its operating profit margins higher free cash flow.

Through efficient financial management, Bestwish implemented efficient credit control and administration efficiency which made the company to raise credit notes of $2 Million in 2010 compared to $1.7 Million credit noted raised in 2009.

Task 2

Attn:

Chief Executive Officer

Finance Director

Subject: Ratio Analysis

Date: 27 January 2013

The ratio analysis is an aspect of the company financial statements that assists in making a quick indication of company financial performances. The data in the financial statements are used to calculate the financial ratios and the ratios could be used to form trend analysis to identify the key areas where firms have improved or deteriorated.

Profitability Ratios

Profitability ratios are the quantitative tools to analyze business ability to generate earning and the ratios show the company's ability to convert revenue into profit. Operating profit is one of the company profitability ratios to determine profit generated from $1 sales. The formula used to calculate operating profit is as follows:

Bestwish operating profits for 2010 and 2009 fiscal year are calculated as follows:

Operating profit 2010=14,776,000 / 400,042,000 x100

=3.69%

Operating profit 2009=27,293,000 / 395,120,000 x100

=6.91%

Gross margin is another profitability ratio that measures the profits that a company generates from sales. Gross margin is calculated by deducting the costs of goods sold from the total revenue. The gross margin represents the percentages of profits that a company retains after removing the cost of sales such as direct costs associated from the sales of the company's goods and services.

Formula to calculate the Gross Margin is as follows:

Bestwish Gross Margin for 2010 and 2009 fiscal years are calculated as follows:

Gross Margin 2010= 400,042,000-372,142,000 / 400,042,000 x100

=27,900,000 / 400,042,000 x 100

=6.97%

Gross Margin 2009=395,120,000-369,255,000 / 395,120,000 x100

=25,865,000/395,120,000 x100

=6.55%

The company gross margin for 2010 fiscal year was 6.97% and 2009 gross margin was 6.55%, representing a slight 0.42% increase.

Table 3: Bestwish Ratio Analysis

Profitability Ratios

2010

2009

Operating profit

3.69%

6.91%

Gross Margin

6.97%

6.55%

Liquidity Ratio

Current ratios

0.69

0.75

Operation Cash Flow Ratio

0.28

0.30

Efficiency Ratio

Inventory Turnover Ratio

10.07

Asset Turnover

3.01

Liquidity Ratios

Current ratio is analytical tool to determine whether Bestwish Limited has more liquid assets to settle its short-term obligation. Formula to calculate the current ratio is as follows:

Bestwish Current ratios for 2010 and 2009 fiscal year are calculated as follows:

Current ratios 2010=62,760,000 / 90,605,000

=0.69

Current ratios 2009=64,941,000 / 85,513,000

=0.75

Operation Cash Flow

Operation cash flow ratio is the cash generated from operating activities, which is the percentage of current liabilities in a given period. The formula to calculate the operation cash flow ratio is as follows:

Operation Cash Flow Ratio= Operating Cash Flow / Current Liabilities

2010: 25,251/90,605

=0.28

2009: 25,735/85,513

=0.30

Operating cash flow ratio measures the liquidity of Bestwish Limited, and the company operation cash flow ratio is less than one revealing that the company generated less cash to settle its current liabilities in 2010 and 2009.

Efficiency Ratio

Efficiency ratio measures how effectively Bestwish limited utilized its assets and the extent the company managed its liabilities. The paper uses the inventory turnover ratio and total asset turnover to evaluate the efficiency ratio of Bestwish Limited.

Inventory Turnover Ratio= Cost of Sales / Average Inventory

2010=372,142, 000 / (37,653,000+36,217,000)2)

=372,142, 000/36,935,000

=10.07

The result reveals that Bestwish Limited replenished its inventory 10.07 times between 2009 and 2010.

Total Asset Turnover= Revenue/Average Total Assets

2010: 400,042,000 / (140,170,000+ 125,632,000)/2)

=400,042,000/132,901,000

=3.01

The results reveal that for every dollar that Bestwish invests, the company generates $3.01 of revenue.

Recommendation

Analysis of the company comprehensive income statement reveals that the company cost of sales increase yearly between 2009 and 2010. Moreover, company administrative expenses increase yearly making the operating profits to decline from $27.2 Million in 2009 to $14.7 in 2010. Bestwish needs to…