ANALYSIS REPORT OF COMPANY BUSINESS AND FINANCIAL PERFORMANCE OVER 3-YEAR PERIOD

There are two categories of sources of information.

Primary data:

        this is fresh data normally collected by the researcher who looks to investigate new facts and trends in the business and organizational environment. This data merely looks to the future

Example:

how the use of computer assisted models aid decision making

The main limitation of primary data is that it leads to bias on the part of the researcher to arrive at an inaccurate conclusion by not having an entire population included in the sample such as many companies, industry sector or geographic area.

Non-usage of this data in the research report.

Secondary data:

            this data is obtained from other authors who have already investigated such facts and trends that are used by the researcher to supplement his understanding of the organization and business environment. This data merely looks at past which can be useful guide for future decision making.

for example, the use of government and other organizational statistics and other relevant sources for use as part of project in a consultancy company in advising clients regarding their decisions.

            I had not encountered any ethical issues when obtaining such information.althrough to obtain information from other sources such as overview of the health industry in India by ibef required to sign in and comply with their terms to access their report to supplement my analysis their view point’s will be properly referenced in the research report .

Information sources:

The range of information sources used during course of my research work include:

Annual report:

        Of 3 years, that of the Target Company and comparator includes financial statements disclosures, management summary, and CEO report, chairman report. This shall be used to facilate my analysis of financial and business performance of the company. This information was obtained from the investor relations website of these companies. This secondary data was the easiest to obtain than others.

Ibef (India brand equity foundation):

        a website that gives an overview of different industry sectors in India as a report .health care industry report was helpful to facilate my understanding of the industry environment for my pest analysis as well as competitive forces influencing strategy in industry . I have used the latest updated report of sept18 to facilate my business analysis.

News and media reports:

important information such as upcoming mergers that are threats to this industry shall be helpful to facilate my business analysis.

Use of accounting ratios and business models including their limitations

Accounting ratios:

        these include liquidity, profitability. They will be used to measure and analyze the financial and business performance of the company over 3-year period. They also include gearing and solvency ratios to analyze the financial position of the company in the long term.

Profitability ratio:

        the measure of return from operations after payments and expenses they include:

Gross profit margin, net profit margin, return on capital employed.

Gross profit margin:

        is a profitability ratio that calculates the percentage of sales that exceed the cost of goods sold. In other words, it measures how efficiently company uses its materials and labor to produce products and sell products profitability.

(myaccountingcourse.com, 2018)

Formulae is given as:

gross profit/ sales x100

Net profit margin:

  is the percentage of revenue left after all expenses have been deducted from sales.

(myaccountingtools.com, 2018)

Formulae defined as:

        PBIT/ SALESX100.

        The net profit here is usually after all non- direct expenses of operation have been paid but does not include finance cost and depreciation and taxation. Also known as PBIT / EBITDA.

        It can used to evaluate the net profitability of the company over years and compare them to industry competitors. It is necessary for the shareholders as well other investors to know how the company profits have fared in light of industry and macroeconomic conditions.

ROCE (return on capital employed):

        is a financial ratio that measures the company profitability and the efficiency with which its capital is employed.

(investopedia, 2018)

        It relates to the return on overall investment in the form of different sources of finance to the business both equity and debt. It can be compared over years and between companies in the same industry. It is one of the ratios where investors look for growth in their earnings to sustain their dividends or interest payments.

Formulae is defined as:

  PBIT / CAPITAL EMPLOYED (EQUITY+DEBT).

Liquidity ratio:

    Liquidity ratios analyze the ability of a company to pay off both its current liabilities when they become due as well as their long-term liabilities as they become current.

(myaccountingcourse.com, 2018)

Liquidity is not only the measure of how much cash a business has. It is also a measure of how easy it will be for the company to raise enough cash or convert assets into cash. (myaccountingcourse.com, 2018)

Quick ratio:

        it is measure of short-term solvency. But does not include inventory they are illiquid assets no sufficient to cover liabilities in the short term. Such inventory can include raw materials used in operation which cannot be sold.

Formulae is derived as:

Current assets-inventory/Current liabilities. It should be greater than 1.

Trade receivable days:

        The days taken to receive amounts outstanding from another company.

Formulae derived as:

Trade receivables/ salesx365. The number days should be shorter than preceding years and comparator.

Trade payable days:

        the days taken pay amounts outstanding. The days taken should be longer than preceding years and comparator.

Formulae derived as follows: Trade payables /Cost of sales x 365.

Solvency ratios:

they measure the company ability to survive as going concern and to be able to pay the debts as they accrue.

Gearing ratio:

        it is measured as percentage of debt over total liabilities. High level of debt than combined liabilities indicates high gearing.

Formulae is derived as:

long term debt/ long term debt+equity

Debt to equity:

        it is measured as ratio of debt to equity it should be less than 1.

Formula is derived as:

long term debt/equity.

Interest cover:

        it measures the company ability to meet interest payments. The interest cover should be greater than 1 for highly geared company.

Formula is derived as:

PBIT/ Interest payments.

Investor ratios:

        These ratios measure shareholder worth of their investment with company in terms earnings and dividend which will be explained in more detail financial analysis section of this report.

Limitation of accounting ratios of analysis of company business and financial performance over 3-year period

Availability of comparable information:

        when making comparison with other companies in the industry, industry averages may hide wide variations in figures. Figures for similar companies may provide better guide, but then there are problems identifying which companies are similar and obtaining enough detailed information about them.

Use of historical / out of date information:

        comparisons with previous history of a business may be of limited use if the business has recently undergone, or is about to undergo, substantial changes.

Ratios are not definitive:

        ideal levels vary industry by industry and even they are not definitive. Companies may be able to exist without any difficulty with ratios that are worse than industry average.

Need for careful interpretation:

        For example, if comparing two businesses liquidity ratios one business may have higher levels. This might appear to be ‘good’, but further investigation might reveal that higher ratios are a result of higher inventory and receivable levels which are result of poor working capital management by the business with better ratios.

Manipulation:

            Any ratio including profit may be distorted by choice of accounting policies. For smaller companies, working capital ratios may be distorted depending on whether a big customer pays or a large supplier is paid, before or after the year end.

Other information:

        Ratio analysis on its own is not sufficient for interpreting company accounts and there other items of information that should be looked at. (ACCA (AFM) BPP, 2018-19, p. 32)

Business models used of analysis of company business and financial performance over 3-year period

        There are two business models used to supplement my analysis of business performance of the company they are:

Competitive forces model

Pestle analysis

Each described in detail below

Competitive forces model:

        also known as porter five forces this model looks at how industry forces or factors influence the business strategy of the organization, there are five forces or five factors influencing strategy

Threat from existing rivalry

Threat from substitutes

Threat from new entrants

Bargaining power of suppliers

Bargaining power of customers

Threat from existing rivalry:

        Such threats include mergers and acquisition building up new capacity, rival marketing promotion and product launch. The threats to existing rivalry should always be low otherwise such an industry is considered volatile and strategies pursued will expensive and cut throat competitive

Threat from substitutes:

        Substitutes are products that replace the other .For example the substitutes for pizza would be burger. The threat from substitutes should be low otherwise the industry is perceived to be in decline say ship tourism compared to air tourism considering the high number of air travelers.

Threat from new entrants:

        New entrants are potential rivals seeking to enter the industry. This may have impact on the existing market share. The barriers to entry in this industry should be high such barriers will be discussed in the business analysis competitive forces model section

Bargaining power of customers:

        Customers can play role in the industry checking monopolistic prices and competition that override customer choice. For example if the government is sole spender in the economy such as infrastructure projects getting contracts would depend on the government budgets and spending and the strength of influence on the government from the contractors. Usually bargaining power of customers should be low.

Bargaining power of suppliers:

        is high in the industry by raising prices of their materials threatening boycott in the event of nonpayment or even become a competitor etc.  Usually the bargaining power of suppliers should be low otherwise the suppliers may shift competition in the industry bringing new players or even side with another competitor disrupting operations and sales.

Pestel:

The model PESTEL stands for the acronym:

        Political, Economic, Socio Cultural, Technology, Environmental Legal factors. These factors are outside the scope of the industry which cannot be influenced but influences all industries irrespective of the sector say a brief of the geographic location. it is political system, it culture legal system defines the industry response to these factors in terms of industrial operations marketing and compliance. An appreciation of these factors enables targeted response to customer’s investment and compliance. I shall discuss the Pestel factors relevant to India in terms of the health sector and use these to complete my competitive forces model.

Limitation of business models of analysis of company business and financial performance over 3-year period

1. Competitive forces model that looks at the company response to industry factors is too vague to understand the business performance of this company the factors relevant to internal strengths and weakness should also be accessed and used as a part of the analysis the information of which is not publically available.

2.  Pestel  analysis is a model too narrow focusing on factors some of which are not relevant to certain industry sectors say  in the entertainment industry environmental factors such as climate change or  pollution control are not relevant   even the services sector such as banking & finance sector do not warrant industry response to such environmental factors.

3. Pestel analysis conducted now can be outdated  for future use and will require frequent revision thus  using macroeconomic factors  yesterday to justify investment in old cars today in high tech country will be pointless.

4. It can difficult to compare the business performance of the company with a comparator using competitive forces model since both organizations have different working environment and culture say a hospital that is full hi tech from it s reception services consultation and  surgical operations  to hospital that performs part of these services manually .