These are those expenditures which we are using in the running of our business, not for our private use or we can say that the expenditures on such items that will be used time to time again & again and continually providing support in the business for following years.
FOR EXAMPLE:
Buy a car to run the mini cab because by the help of this car we generate income for us. We can also use this car to meet people for business purpose. Electricity, gas, computers and building on rent. Expenses that we bear in the maintenance of our business, hiring of people for our business these are also include in capital expenditure of the company.
AHSAN's Sports capital expenditures are building, machines, wood or other material that use in the preparation of sports goods, furniture and many more.
REVENUE EXPENDITURES:
These are those expenditures which we are using in order to make income in a sense to resale it or we can say that the expenditures that we are spending on the day to day items for the running of our business in order to get profit.
FOR EXAMPLE:
You buy a car for a while you use it and resale it and in order to get some profit or incur loss.
METHODE OF INVESTMENT APPRAISALS:
There are four methods of investment appraisals which are as follows:
Accounting Rate of Return(ARR)
Payback Method
Internal Rate of Return(IRR)
Net Present Value(NPV)
First two methods are known as conventional methods or non-discounting methods these are not widely use these days and last two methods are modern methods or discounting methods, many businesses are based on these two methods.
CONVENTIONAL METHODS:
ARR METHOD:
The ARR is the accounting profit as a %age of the capital employed. This method is simple and we can easily get the profit percentage by using it but there are some disadvantages of ignoring the time value of money and also is dependent on the depreciation policy adopted by the business.
PAYBACK METHOD:
Payback method tells us the time period needed to recover the starting investment and can be calculated accordingly.
MODERN METHODS:
IRR METHOD:
IRR is a yearly return rate in the form of percentage which a project may achieve keeping in view total of the discounted cash flows of the project over the project's life and is equal to discounted cash flows where Net Present Value becomes identical to Zero".
NPV METHOD:
Net present value is the net cash flows throughout the project which we will get in the future by deducting the initial cash that we invest in the beginning of the project.
ILLUSTRATION:
Now we are going to implement these techniques on my selected company to check that the project that Ahsan Sports select to go ahead is better for company or not in order to make profit or incur loss. Suppose Ahsan sports want to invest on its new projects because of this the owner of company want to know either project is good for company or not.
Company initial cash outflow is £3m they select the discount rate is 10%, and their cash inflow is £0.5m, £1.0m, £1.5m, £2.0m and £2.0.
NPV @ 12%
YEARs
CASH FLOW
(£m)
DISCOUNT FACTOR
@12 %
PRESENT VALUE
(£m)
0
-2500
1
-2500
1
750
0.8929
669.675
2
750
0.7972
597.90
3
900
0.7118
640.62
4
900
0.6355
571.95
5
595
0.5674
337.603
NPV=
317.748
NPV @ 15%
YEARs
CASH FLOW
(£m)
DISCOUNT FACTOR
@15 %
PRESENT VALUE
(£m)
0
-2500
1
-2500
1
750
0.8696
652.2
2
750
0.7561
567.075
3
900
0.6575
591.75
4
900
0.5718
514.62
5
595
0.4972
295.834
NPV=
121.479
NPV @ 20%
YEARs
CASH FLOW
(£m)
DISCOUNT FACTOR
@20 %
PRESENT VALUE
(£m)
0
-2500
1
-2500
1
750
0.833
624.75
2
750
0.694
520.50
3
900
0.579
521.10
4
900
0.482
433.8
5
595
0.402
239.19
NPV=
(160.66)
Now we get the value of both positive as well as negative values of NPV which are required in the calculation of IRR and the formula to calculate the IRR is given below:
IRR = (Discount Rate of +ive NPV) + (Difference b/w +ive and -ive Discount Rates) * (+ive NPV/ Range of +ive and -ive NPV)
Discount Rate of +ive NPV = 12%
Discount Rate of -ive NPV = 20%
Difference b/w +ive and -ive Discount Rates = 20% -12% = 8%
Positive NPV value = 317.748
Range of +ive and -ive NPV = 317.748 + 160.66 = 478.408
Put these values in the given formula
IRR= 12% + 8% * (317.748/ 478.408)
IRR= 12% + 8%* (0.664)
IRR= 12% + 5.312%
IRR= 17.31%
RESULT:
The value of IRR is 17.31% after calculating positive and negative NPV at different Discount Rates and 17.31% is good rate of amount to return of company investment, company can invest on this project, this is in favour of company to go with this project.
OUTCOME 6:
FINANCIAL ANALYSIS:
In the financial analysis we have to discuss the financial indicators, which are of two types financial indicators and non-financial indicators
Financial Indicators
Non-Financial Indicators
FINANCIAL INDICATORS:
There are four different types of financial indicators which are given below:
Profitability Indicator Ratio
Investment Indicator Ratio
Activity Indicator Ratio
Liquidity Indicator Ratio
PROFITABILITY RATIO:
This ratio usually captures the company's profits, what makes up the profits and how this relates to the income statement. These ratios are also guide lines for future acquisitions and starting up new activities. The main focus or we can say the aim of this type of indicator is the ability to generate income for the company.
Profitability Indicator Ratio includes
Gross Profit Margin
Net Profit Margin
Assets Turnover Ratio
Return On Assets(ROA)
GROSS PROFIT MARGIN:
In GP our focus is on the value of goods sold as a %age of sales. This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products and subsequently passes on the costs to its customers. The larger the gross profit margin, the better for the company.
Gross Profit Margin = GP/Sales * 100%
The gross profit margin of AHSAN's SPORTS for last three years is as under:
(i) 2008 = 8.23 % (ii) 2009 = 8.56 % (iii) 2010 = 8.26 %
NET PROFIT MARGIN:
The net profit margin shows how much of each sales pound shows up as net income after all expenses are paid. The net profit margin measures profitability after consideration of all expenses including taxes, interest, and depreciation.
Net Profit Margin = NP/Sales * 100%
The net profit margin of AHSAN's SPORTS is low in 2008 but it now better in 2010 that is 7.8%.
RETURN ON ASSETS:
The Return on Assets shows how effectively the firm's assets are being used to generate profits. The return on assets of AHSAN's SPORTS for last three years is as under:
FORMULA:
ROA = Net Income / Average Total Assets * 100
Suppose our Net Income in 2008 = 8130
Average Total Assets = 116635
ROA = 8130/116635 * 100
= 6.97%
(i) 2008= 6.97 % (ii) 2009= 4.74 % (iii) 2010 = 6.1%
ASSET TURNOVER RATIO:
The asset turnover ratio of AHSAN's SPORTS for three years is as under:
2009
2010
2011
NET SALES
129000
97000
NET ASSETS
114538
118732
102750
FORMULA:
Assets Turnover = Net Sales / Total Average Assets
Total Average Assets= (114538+118732)/2 = 116635 for 2009
By putting this value in given formula
Asset Turnover = 129000/116635 = 1.1 times
0.1 shows that here company use 10% more assets than the sales.
LIQUIDITY RATIO:
The liquidity ratio tells us how much cash you have in your bank or cash in hand. Liquidity ratios are being used to determine the company's ability to meet its short term obligations as they come through. In this ratio we discuss two sub-ratios: Current Ratio and Acid Test Ratio (Quick Ratio).
CURRENT RATIO:
FORMULA:
Current Ratio = Current Assets / Current Liabilities
No. of Years
2009
2010
Current Assets
38366
38294
Current Liabilities
27945
30347
CR= CA/CL
FOR 2009 FOR 2010
CR= 38366 / 27945 CR= 38366 / 27945
= 1.40:1 = 1.26:1
0.40 shows that Company wealth is 40% more than the using Liabilities.
QUCIK RATIO:
FORMULA:
Quick Ratio = Current Assets - Stock / Current Liabilities
Closing Stock for 2009, 2010 = 7500 and 8900
Quick Ratio for 2009 = (38366 - 7500) / 27945 = 30866 / 27945 = 1.10 : 1
Quick Ratio for 2010 = (38294 - 8900) / 30347 = 29394 / 30347 = 0.96 : 1
ACTIVITY RATIO:
The aim of this ratio is to pay more focus on the ability of the day to day operations or the daily basis tasks done by the company business. It is divided into three parts which are discussed below:
Receivable Turnover Ratio
Payable Turnover Ratio
Inventory Turnover Ratio
RECEIVABLE TURNOVER RATIO:
This method is used for customers or debtors or you we can say how quickly your credit sales to customers. The receivable net turnover for AHSAN's SPORTS for 2009, 2010 and 2011 are as follows:
2009
2010
2011
NET Credit Sales
129000
97000
Amount Receivable
18567
19230
17599
Average NET Receivable for 2009 = (18567 + 19230) / 2 = 18898.5
Average NET Receivable for 2010 = (19230 + 17599) / 2 = 18414.5
FORMULA:
Receivable Turnover Ratio = NET Credit Sales / Average NET Receivables
Receivable Turnover Ratio for 2009 = 129000 / 18898.5 = 6.825
Receivable Turnover Ratio for 2010 = 97000 / 18414.5 = 5.2675
PAYBACK TURNOVER RATIO:
This method is used for suppliers or creditors/credit purchase or you we can say how quickly your credit purchase to suppliers. The payback turnover ratio for AHSAN's SPORTS for 2009, 2010 and 2011 are as follows:
No. of Years
2009
2010
2011
NET Credit Purchase
154000
96000
Amount Payable
25000
64000
73500
Average NET Payable for 2009 = (25000+ 64000) / 2 = 44500
Average NET Payable for 2010 = (64000 + 73500) / 2 = 68750
FORMULA:
Payable Turnover Ratio = NET Credit Purchase / Average NET Payable
Payable Turnover Ratio for 2009 = 154000 / 44500 = 3.46 Times
Payable Turnover Ratio for 2010 = 96000 / 68750 = 1.39 Times
INVENTORY TURNOVER RATIO:
This method is used for daily basis tasks done by the company business in simple words day to day operations. The inventory turnover ratio for AHSAN's SPORTS for 2009, 2010 and 2011 are as follows:
No. of Years
2009
2010
2011
Cost of Goods Sold
70950
59740
Inventory
12309
12202
12102
FORMULA:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Average Inventory for 2009 = 12255.5
Average Inventory for 2010 = 12152
Inventory Turnover Ratio for 2009 =70950 / 12255.5 = 5.78 Times
Inventory Turnover Ratio for 2010 =59740 / 12152 = 4.91 Times
INVESTMENT RATIO:
It is cleared from the name Investment mean the amount that is invested by the company owner or partners in order to generate the net income for the partners or investors. Investment ratio is further divided into five sub categories which are as follows:
Return on Investment (ROI)
Return on Capital Employed (ROCE)
Earnings per Share Ratio (EPS)
Price Earnings Ratio
Dividend Payout Ratio
RETURN ON INVESTMENT (ROE):
By using ROE company can know how much profit is achieved by using the money that is invested by the share holders of the company.
FORMULA:
Return on Equity= Net Income/ Shareholder Equity
Calculation:
2008 = [386/3877] * 100 = 9.96 %
2009 = [308/4182] * 100 = 7.36 %
2010 = [560/6010] * 100 = 9.32 %
RETURN ON CAPITAL EMPLOYED:
ROCE shows the relationship b/w the profit and investment made by company to check whether the business is in profit or not.
FORMULA:
ROCE = Net profit (operating profit)/ capital employed * 100
Calculation:
2008 = 570/4701 * 100 = 12.12 %
2009 = 664/6309 * 100 = 10.52 %
2010 = 720/6573 * 100 = 10.95 %
EARNINGS / SHARE RATIO:
This type of ratio is involved in the profitability ratio or we can say that involves in the financial indicators side. It is cleared from name that in it we have to focused on the earning profit or loss on the behave of each share holder.
FORMULA:
EPS= (Net Income - dividends on preferred stock)/ Average. Outstanding Shares
PRICE EARNINGS RATIO:
FORMULA:
PER= Market Price / Earnings per Share
DIVIDEND YIELD RATIO:
FORMULA:
Dividend Yield Ratio = Gross Dividend per share / Market price per share
FINANCIAL POSITION RATIO:
DEBT TO EQUITY RATIO:
FORMULA:
Debt to equity ratio = noncurrent liabilities/capital equity * 100
Calculation:
2008 = 1497/ 6010 * 100 = 25%
2009 = 1465/ 4182 * 100 = 35%
2010 = 1435/ 3877 * 100 = 37%
DEBTORS COLLECTION DAYS:
FORMULA:
Debtors collection days = average trade receivable/ Credit (sales) revenue * 365
Calculation:
2008 = 1121/ 9255 * 365 = 44 days
2009= 1228/ 8235 * 365 = 54 days
2010 = 1175/ 7530 * 365 =57 days
SUMMARY:
AHSAN'S SPORTS can issue different type of shares. In the situation if owner capital or share capital can meet the financial requirement then company will issue different type of debentures which can help to meet the financial requirement of company. Company is financial sound and value managed company. But there is need to maintain financial performance of company. Company can acquire different projects because have sufficient resources. Overall company performance good and going in right direction.
