Business Decision Making Assignment Help
a) Analysis of the profitability of nawal ltd
b) Analysis of the liquidity of nawal ltd
c) Analysis of the efficiency of nawal ltd
d) Recommendations to nawal ltd for improvement of performance
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Section A: Profitability analysis of Nawal Ltd
Profitability is the core to any organization and profitability ratios enable an organization to determine its strengths and weaknesses and project the financial performance to investors. Nawal Ltd mainly uses gross profit margin, ROCE, operating profit margin and sales growth as its major profitability ratios. All these ratios shall be analysed in the upcoming sections.
Gross profit margin - The purpose of this ratio is to analyse cost of goods sold vs sales. The result implies the effectiveness of inventory management strategies and manufacturing costs spent by the organization. When the ratio is higher, the company's position is stronger. When we consider the average ratio of Nawal Ltd for the last 5 years, the ratio is above 60% and this is a positive sign. From 65% in 2014, it has dropped to 60% in 2018 and this needs to be checked.
ROCE: It stands for return of money on capital and this ratio is important for the shareholders. When the ratio is high, it implies the company is in a better position. Nawal Ltd has had an increase in past and then decreased but 2018 seems to be the highest of all years.
Operating profit margin - We can call this as earnings before interest and tax too. Even before interest and taxes are added to income statement, the earning will be calculated. This ratio helps to understand the net efficiency considering all the expenses. A company is in a better position when the ratio is larger. Nawal Ltd has displayed mixed values as the trend has increased and then decreased and again increased to its highest in 2018.
Sales growth - This ratio informs the capacity of a company to sell the product and it is entirely based on sales made from the past. Once again, it has achieved its peak in the year 2018.
Section B: Liquidity analysis of Nawal Ltd
The purpose of liquidity ratio is to analyse the company's capacity to repay the immediate debt. Current and quick ratios are calculated to understand the liquidity status.
Current ratio - It indicates the company's capacity to pay the debt based on the asset holdings at that point. When the ratio is greater than 1, it is safer for the company. However, in the case of Nawal Ltd, it has reduced until 2018 and this is an indicator that the company has tried to materialize all its current assets and the liabilities have not changed yet.
Quick ratio - This is yet another ratio that does not consider inventory as the asset to repay the short term obligation. However, the ideal number is above 1. Without its inventory, it is possible for Nawal Ltd to repay the debt obligations as the quick ratio is 1 but this has been reducing too which raises concern.
Section C: Efficiency analysis of Nawal Ltd
The purpose of efficiency ratio is to analyse the capacity of company to utilize asset and management liability for a shorter term. This has been analysed as follows.
Inventory turnover - This ratio allows the company to analyse its inventory based on sales generation and the ratio above 1 is treated idle. As per the data of Nawal Ltd, the ratio in the year 2018 was recorded the highest and it indicated that the policies are intact to manage the inventory.
Asset turnover ratio - This ratio is used to calculate company's revenue generating ability from assets. When the ratio is high, it implies that the assets are effectively used. Once again, the value was highest in 2018 and the assets have been helpful for the firm in generating revenue.
Creditors collection period - The average period taken by a company to repay the money that is being owed to the creditors is called creditors collection period. This period has to be higher for ensuring success in the business. Creditor's policy management has not been strong enough because the period is dropping annually.
Debtors collection period - The average period taken by a company to collect its money that is being owed to debtors is called debtors collection period. For a company to be successful, the period has to be low. The policy of Nawal Ltd is strong that the collection period is reducing periodically.
Section D: Recommendations for better performance
The numbers identified and discussed in the previous sections have been very helpful in understanding the situation and financial performance of Nawal Ltd at the present year. Further, there is a need for better strategies to fall in place to improve sustainability.
- Creditors policy will have to be effective. This is due to the point that they get additional time to pay creditors and the company's financial status does not get affected at any instance during the year.
- Maintenance of sufficient assets is important for the company to pay their liabilities in due course of time. Perhaps, these assets help the company to lead a sustainable business in the market.
- Throughout the year, Nawal Ltd will have to maintain at least the baseline of stock to consider as inventory. This will be taken into consideration at different points during the year and at the end of the year as well. Nawal Ltd has to improve on its inventory management strategy.
- To control the fluctuation in its ratios, the company has to develop and maintain effective profitability policies. These policies will have to regard assets, liabilities and inventory.
- The money collection process from debtors has not been stable in the past. The graphs have clearly indicated fluctuations and this need to be addressed immediately with better financial policies.
It is perhaps easier and possible for Nawal Ltd to improve its overall performance when the policies are framed on time and executed. At this stage, the policies for creditors and debtors will have to be considered first and the rest can be addressed a little later as the former have affected the performance.
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