Henwell PLC (financial statements analysis)

Introduction

Henwell PLC is founded in U.K in 1953. It is also moved into other countries as well. One of its major investments is in U.K. it has recently changed its CEO. Reasons behind was dissatisfaction of shareholders with board of directors. New CEO has been examining company conditions. Its revenue and income has been decreasing. U.S investment is not providing suitable returns. Revenue is also relatively small. Investment in U.K is also reducing in term of revenues and net profits. In this report, existing financial position of company is analyzed. It is compared with previous year. Reasons in reduction have also been included.

Analysis

Question 1

  1. (i)

Description 1 related to the statement of financial position and description 2 related with the statement of comprehensive income.

(ii)

In description 1, 50million bank loan is liability of company. This liability should be included in financial position. Financial position includes assets and liabilities. On the other hand, description 2 is related with the statement of comprehensive income. Reason is bonus paid is directors are expense and expenses are recorded in statement of comprehensive income. These would be included in general and administrative expenses.

(iii)

In statement of financial position, assets, liabilities as well as equity is provided as for year ended. Owner equity changed due to change in net income. Owner equity has been changed due to change in net income as well as investment and withdrawal from company. Difference in net profit is 1780. This is negative. In 2014, net profit decreased. It is indicating that owner equity should also be deceased. However, it did not happen. Owner equity has been increased with 921. Retained earnings in 2014 in balance sheet are linked with retained of previous year with addition of net income in this year. Dividend is deducted from this amount. Retained earnings in 2014 are 8,958. It is obtained by adding previous year earnings and net income after deducting tax. In 2013 retained earnings is 9,037+ 1,386 (net income in 2014) - 1,465 (dividend paid) = 8958. It means that there exist link between income statement and balance sheet. Statement of financial position is also linked with cash flow. Increase in assets is linked with the cash used in investing and cash originated from sale of assets. Closing balance in the end of year 2013 is also same in balance sheet as retained earnings. Closing balance in the end of 2014 is also included as retained earnings in year 2014. Difference in property, plant and equipment is also included n investing activities in balance sheet. Increase or decrease in assets is linked with cash flow. All financial statements are linked together. These can use together for better identification of position of company. (Revsine, Collins and Johnson, 2008)

Question 2

Revenue

  1. (i) In 2014, revenue has been decreased. It was high in 2013 but in 2014, it decreased. Percentage of decrease in revenue can be calculated by subtracting previous year with current year that is 2014. It should be divided by year 2013. Percentage decease is 9.8%. If this percentage is applied to next year that would be 2015, then value of revenue would be $51994 million. In 2014, value of revenue is calculated $ 57,643 million. In 2015, it same trend of deceasing is applied then value would be $51994 million.

(ii) Its business segment is divided into U.K, U.S and rest of the world. U.K revenue is showing negative trend.  Revenue in 2014 has decreased with percentage of 17. In 2015, it would be $32812 million. U.S segment is showing increasing trend in revenue. It is increased with 111%. It would be $6216 million. Rest of the world is also showing increasing trend in revenue. It is increased by 1.8%. In 2015, its revenue would be $15437 million.

(iii) Total revenue has been decreased due to decreased in revenue from U.K. it is reduced due to inability of company to analyze culture differences in U.S and competitors emergence in U.K. One reason can be not providing discounts on goods. Company did not provide discounts on products due to their reasonable prices but people in U.K appreciate discounts. It was the reason of decrease in sales in U.K. total revenue is decreased due to reduction in revenue from U.K operations.

Gross profit

  1. Value of gross profit has been decreased in 2014. Despite of decreasing cost of goods sold, gross profit has been decreased due to reduction in revenue. Company should increase its revenue and decrease its cost of goods sale to increase its gross profit.
  2. (i) Gross margin ratio provides percentage of gross profit in revenue. Gross margin for U.K is calculated 6.09% in 2014. It is 7.99% in 2013. U.S segment has gross margin of 3.53% in 2014. In 2013, it is 3.16%. For segment indicating rest of the world, gross margin is 10.39% in 2014. It is again 10.39% in 2013.

(ii) Gross margin has fallen due to decrease in revenue. Reduction in revenue is due to reduction in sales in U.K. sales decreased due to difference in buying pattern and preferences of customers. Another reason may be its competitors. Competitors have efficient strategies to attract customers.

(iii) In U.K Company is operating from 1993. It has increased its expansion in U.K On the other hand, it has moved to U.S in recent years. It has opened small retail stores in U.K that do not go fit with customer’s preferences.

Cost of goods sales

  1. Major movement is in wholesale price of purchase. It has decreased from 35,633 to 30,437. On the other hand, depreciation is showing major increasing trend.
  2. Minor movement is seen in general running cost of retail stores. It is increased with points 4.
  3. Wholesale purchase is reduced to decrease in sales of goods. Demand of goods decreased. Running cost has reduced with insignificant amount because it is fixed expense. Company has to bear it despite of having low sales.

(e). Gross margin has been decreased due to decrease in revenue. In 2013, it was high that is why gross margin was also high. In 2014, gross margin decreased due to decrease in revenue. It means that despite of decreasing in cost of goods sales gross margin decreased due to reduction in revenue in 2014.

Other SOCI costs

          (f) (i) Administrative expenses have been increased in 2014. Trend analysis shows that it increased with ratio of 13% in 2014. Finance cost has been increased with 146%. It is recorded $279 million in 2013 and in 2014; it is recorded $ 687 million.

(ii) Administrative expenses increased due to increase in bonuses for managers. Finance cost has increased due to increased in borrowings cost.

Question 3

  1. This investment has increased property, plant and equipment value in 2014. On the other hand, borrowings also increased in 2014 due to U.S investment. Both are major changes n balance sheet. Share capital also increased with 1000.
  2. (i) Gearing ratio has been comparing its long-term debts with equity capital. It is describing financial; leverage position of company. It is comparing financing through owners and creditors investments. High ratio indicates its riskiness. Ratio is increased in 2014. Its long-term debts have increased. Interest ratio is also stating that in 2014 its solvency has decreased as compared to previous year.

(ii) These two ratios are indicating high insolvency risk. (Plenborg and Petersen, 2011)

Payable and provisions

(c). Provisions are provided for estimation. It includes that a liability may incur in future. On the other hand, trade payable is liability incurred but not paid by company.

(d) It fulfills criteria of provision because case is not concluded. It is not finalized. Liability has not proved. Company expected that it would have to pay $450 million in case of providing case against it. Therefore, it is included in liability section under provision.

(e) (i) Payable day’s ratio has been increased. It is increased due to increase in trade payables.

(ii) It is increased due to increase in borrowings.

Assignment on Henwell PLC (financial statements analysis) Student’s identification #: Date: Words count : 1514 Introduction Henwell PLC is founded in U.K in 1953. It is also moved into other countries as well. One of its major investments is in U.K. it has recently changed its CEO. Reasons behind was dissatisfaction of shareholders with board of directors. New CEO has been examining company conditions. Its revenue and income has been decreasing. U.S investment is not providing suitable returns. Revenue is also relatively small. Investment in U.K is also reducing in term of revenues and net profits. In this report, existing financial position of company is analyzed. It is compared with previous year. Reasons in reduction have also been included. Analysis Question 1 (i) Description 1 related to the statement of financial position and description 2 related with the statement of comprehensive income. (ii) In description 1, 50million bank loan is liability of company. This liability should be included in financial position. Financial position includes assets and liabilities. On the other hand, description 2 is related with the statement of comprehensive income. Reason is bonus paid is directors are expense and expenses are recorded in statement of comprehensive income. These would be included in general and administrative expenses. (iii) In statement of financial position, assets, liabilities as well as equity is provided as for year ended. Owner equity changed due to change in net income. Owner equity has been changed due to change in net income as well as investment and withdrawal from company. Difference in net profit is 1780. This is negative. In 2014, net profit decreased. It is indicating that owner equity should also be deceased. However, it did not happen. Owner equity has been increased with 921. Retained earnings in 2014 in balance sheet are linked with retained of previous year with addition of net income in this year. Dividend is deducted from this amount. Retained earnings in 2014 are 8,958. It is obtained by adding previous year earnings and net income after deducting tax. In 2013 retained earnings is 9,037+ 1,386 (net income in 2014) - 1,465 (dividend paid) = 8958. It means that there exist link between income statement and balance sheet. Statement of financial position is also linked with cash flow. Increase in assets is linked with the cash used in investing and cash originated from sale of assets. Closing balance in the end of year 2013 is also same in balance sheet as retained earnings. Closing balance in the end of 2014 is also included as retained earnings in year 2014. Difference in property, plant and equipment is also included n investing activities in balance sheet. Increase or decrease in assets is linked with cash flow. All financial statements are linked together. These can use together for better identification of position of company. CITATION Rev08 \l 1033 (Revsine, Collins and Johnson, 2008)Question 2 Revenue (i) In 2014, revenue has been decreased. It was high in 2013 but in 2014, it decreased. Percentage of decrease in revenue can be calculated by subtracting previous year with current year that is 2014. It should be divided by year 2013. Percentage decease is 9.8%. If this percentage is applied to next year that would be 2015, then value of revenue would be $51994 million. In 2014, value of revenue is calculated $ 57,643 million. In 2015, it same trend of deceasing is applied then value would be $51994 million. (ii) Its business segment is divided into U.K, U.S and rest of the world. U.K revenue is showing negative trend. Revenue in 2014 has decreased with percentage of 17. In 2015, it would be $32812 million. U.S segment is showing increasing trend in revenue. It is increased with 111%. It would be $6216 million. Rest of the world is also showing increasing trend in revenue. It is increased by 1.8%. In 2015, its revenue would be $15437 million. (iii) Total revenue has been decreased due to decreased in revenue from U.K. it is reduced due to inability of company to analyze culture differences in U.S and competitors emergence in U.K. One reason can be not providing discounts on goods. Company did not provide discounts on products due to their reasonable prices but people in U.K appreciate discounts. It was the reason of decrease in sales in U.K. total revenue is decreased due to reduction in revenue from U.K operations. Gross profit Value of gross profit has been decreased in 2014. Despite of decreasing cost of goods sold, gross profit has been decreased due to reduction in revenue. Company should increase its revenue and decrease its cost of goods sale to increase its gross profit. (i) Gross margin ratio provides percentage of gross profit in revenue. Gross margin for U.K is calculated 6.09% in 2014. It is 7.99% in 2013. U.S segment has gross margin of 3.53% in 2014. In 2013, it is 3.16%. For segment indicating rest of the world, gross margin is 10.39% in 2014. It is again 10.39% in 2013. (ii) Gross margin has fallen due to decrease in revenue. Reduction in revenue is due to reduction in sales in U.K. sales decreased due to difference in buying pattern and preferences of customers. Another reason may be its competitors. Competitors have efficient strategies to attract customers. (iii) In U.K Company is operating from 1993. It has increased its expansion in U.K On the other hand, it has moved to U.S in recent years. It has opened small retail stores in U.K that do not go fit with customer’s preferences. Cost of goods sales Major movement is in wholesale price of purchase. It has decreased from 35,633 to 30,437. On the other hand, depreciation is showing major increasing trend. Minor movement is seen in general running cost of retail stores. It is increased with points 4. Wholesale purchase is reduced to decrease in sales of goods. Demand of goods decreased. Running cost has reduced with insignificant amount because it is fixed expense. Company has to bear it despite of having low sales. (e). Gross margin has been decreased due to decrease in revenue. In 2013, it was high that is why gross margin was also high. In 2014, gross margin decreased due to decrease in revenue. It means that despite of decreasing in cost of goods sales gross margin decreased due to reduction in revenue in 2014. Other SOCI costs (f) (i) Administrative expenses have been increased in 2014. Trend analysis shows that it increased with ratio of 13% in 2014. Finance cost has been increased with 146%. It is recorded $279 million in 2013 and in 2014; it is recorded $ 687 million. (ii) Administrative expenses increased due to increase in bonuses for managers. Finance cost has increased due to increased in borrowings cost. Question 3 This investment has increased property, plant and equipment value in 2014. On the other hand, borrowings also increased in 2014 due to U.S investment. Both are major changes n balance sheet. Share capital also increased with 1000. (i) Gearing ratio has been comparing its long-term debts with equity capital. It is describing financial; leverage position of company. It is comparing financing through owners and creditors investments. High ratio indicates its riskiness. Ratio is increased in 2014. Its long-term debts have increased. Interest ratio is also stating that in 2014 its solvency has decreased as compared to previous year. (ii) These two ratios are indicating high insolvency risk. CITATION Ple11 \l 1033 (Plenborg and Petersen, 2011)Payable and provisions (c). Provisions are provided for estimation. It includes that a liability may incur in future. On the other hand, trade payable is liability incurred but not paid by company. (d) It fulfills criteria of provision because case is not concluded. It is not finalized. Liability has not proved. Company expected that it would have to pay $450 million in case of providing case against it. Therefore, it is included in liability section under provision. (e) (i) Payable day’s ratio has been increased. It is increased due to increase in trade payables. (ii) It is increased due to increase in borrowings. Question 4 (a)(i) Cash inflow is important to conclude that it is running operations in better way to generate positive outcomes. Operating income should be more than operating expenses. (ii) Depreciation is non-cash expense. It should be added back in profit before interest and tax. Only cash transactions are recorded. (b). (i) It is decreased due to use of cash in other sources. (ii) It can increase by investing in short term liquid securities. Conclusion It is concluded that overall revenue is decreasing due to reduction in revenue from U.K operations. Its net profit margin is also reducing. Its financial statements are linked with each other. Despite of reduction in cost of goods sold, gross margin has decreased in year 2014. Borrowing has been increased due to investment in U.S. Investment in United States is not going fit due to cultural differences. Due to emergence of competitors in U.K, revenue is decreasing. It should improve its selling strategy to improve its position. Administrative expenses should be reduced. Cash and cash equivalents should be increased by investing in short term securities. References BIBLIOGRAPHY \l 1033 Plenborg, T. and Petersen, C. (2011) Financial Statement Analysis. Revsine, L., Collins, D. and Johnson, W.B. (2008) Financial Reporting and Analysis.

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