Principle of Financial Management Assignment - Interpretation of Financial Statements and Risk Appraisals, College of Banking and Financial Studies, Oman
Topic - Ratio Analysis and Expected NPV
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Task A - Financial Statement Analysis
a. A common size analysis and Index analysis for the statements of comprehensive income and statements of Financial Positions.
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Common Size Analysis
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Ali Abdullah (LLC)
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Income Statement
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2014
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2015
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2016
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207
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2018
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Sales
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100.00%
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100.00%
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100.00%
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100.00%
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100.00%
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Cost of goods sold
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71.96%
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74.40%
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73.50%
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74.40%
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73.50%
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Gross profit
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28.04%
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25.60%
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26.50%
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25.60%
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26.50%
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Operating expenses
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19.19%
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16.53%
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17.08%
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16.53%
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17.08%
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Operating profit
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8.85%
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9.08%
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9.42%
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9.08%
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9.42%
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Finance cost
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0.62%
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1.26%
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1.22%
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1.26%
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1.22%
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Profit before tax
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8.24%
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7.82%
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8.20%
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7.82%
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8.20%
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Tax
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3.29%
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3.02%
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3.52%
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3.02%
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3.52%
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Profit for the year
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4.95%
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4.80%
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4.67%
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4.80%
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4.67%
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The common size analysis of the income statement with last five years data starting from 2014 and ending with 2018 clearly indicates changes in the cost of goods sold which means the company is not a position to control the cost of goods sold as the different proportion of the cost of goods in the five years data. The gross profitability and the operating profitability of the company are also not a specific trend either increasing or decreasing as there is minor fluctuation in the gross profitability over the last five years. The net profitability of the company has minor fluctuation showing no specific trend in the performance (Nikolai, Bazley, & Jones, 2009). Therefore, the financial performance of the company is poor regarding net profitability without much change over the last five years.
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Common Size Analysis
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Ali Abdullah (LLC)
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Income Statement
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2014
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2015
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2016
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207
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2018
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Non-Current Assets
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Property, plant, and equipment
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36.17%
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43.01%
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36.66%
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43.01%
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36.66%
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Total Non- Current Assets
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36.17%
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43.01%
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36.66%
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43.01%
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36.66%
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Current Assets
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Inventories
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28.46%
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25.37%
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27.61%
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25.37%
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27.61%
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Receivables
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27.51%
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27.86%
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34.03%
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27.86%
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34.03%
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Cash
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7.86%
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3.76%
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1.70%
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3.76%
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1.70%
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Total Current Assets
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63.83%
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56.99%
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63.34%
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56.99%
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63.34%
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Total Assets
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100.00%
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100.00%
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100.00%
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100.00%
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100.00%
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Equity and Liabilities
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Current Liability
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Payables
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26.09%
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28.58%
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30.35%
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28.58%
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30.35%
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Accruals
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4.22%
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5.01%
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4.93%
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5.01%
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4.93%
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Bank overdraft
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3.50%
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8.74%
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8.82%
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8.74%
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8.82%
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Total Current Liabilities
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33.81%
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42.33%
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44.10%
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42.33%
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44.10%
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Long term Liabilities
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Long term loan
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7.01%
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9.71%
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7.98%
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9.71%
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7.98%
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Total long term Liabilities
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7.01%
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9.71%
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7.98%
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9.71%
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7.98%
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Total liabilities
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40.82%
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52.04%
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52.08%
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52.04%
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52.08%
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Equity
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Share capital
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38.54%
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24.27%
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21.00%
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24.27%
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21.00%
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Retained earnings
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20.64%
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23.69%
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26.92%
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23.69%
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26.92%
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Total Equity
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59.18%
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47.96%
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47.92%
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47.96%
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47.92%
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Total Equity and Liabilities
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100.00%
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100.00%
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100.00%
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100.00%
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100.00%
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The common size analysis of the balance sheet of the company reflects higher portion of total assets in the current assets than that of the non-current assets. It reflects the company has invested the higher fund in the current assets than the non-current assets. The portion of both the current assets and the non-current assets to the total assets has minor change over the last five years. Long term liabilities proportion is higher than the current liabilities with minor changes in the liabilities. However, there is a change in the equity portion in 2019 as this year higher portion of the equity in total assets as compared to the lower portion in rest of periods (Nikolai, Bazley, & Jones, 2009). Therefore, there is no much change in the composition of assets and liabilities in the balance sheet of the company.
b. An analysis of the organization's profitability, Liquidity, efficiency and solvency over the last 5 years. Your analysis should evaluate the strength and weaknesses of the organization's performance including graphs depicting the trend over the last 5 years.
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2014
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2015
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2016
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207
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2018
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Profitability
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Gross profit margin
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28.04%
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25.60%
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26.50%
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25.60%
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26.50%
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Net Profit Margin
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4.95%
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4.80%
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4.67%
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4.80%
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4.67%
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Return on Capital employed
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22.23%
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22.85%
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23.14%
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22.85%
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23.14%
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Efficiency
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Inventory holding period
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86.84
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85.74
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99.85
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85.74
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99.85
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Days
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Settlement period for trade receivable
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60.40
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70.06
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90.44
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70.06
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90.44
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Days
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Settlement period for trade payable
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79.61
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96.60
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109.75
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96.60
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109.75
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Days
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Liquidity
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Current Ratio
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1.89
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1.35
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1.44
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1.35
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1.44
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Times
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Acid test ratio
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1.05
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0.75
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0.81
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0.75
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0.81
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Times
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Solvency
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Gearing ratio
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0.41
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0.52
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0.52
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0.52
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0.52
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Times
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Interest cover
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14.38
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7.22
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7.70
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7.22
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7.70
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Times
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The profitability ratios reflect reasonable gross profitability with the reducing trend as the ratio is 26.50% whereas the same in 2014 is 28.04%. The net profitability ratio also reflects the overall reduction in the performance due to the ratio is 4.95% in 2014 whereas the same is 4.67% in 2018. The return on the capital employees reflects sufficient return on the investment with the improvement in the performance. Therefore, the overall profitability performance of the company is reasonable and not high over the last five years.
The managerial efficiency of the company has some improvement over the last five years especially regarding accounts payable by delaying the payments for increasing liquidity without burden of the cost. However, the company has reduced performance regarding inventory and accounts payable over the last five years (Ojugo, 2009).
The liquidity position of the company is strong as the company is highly efficient to cover its all the current liabilities with the current assets. However, the company is not capable to make immediate payment of all the current liabilities. The liquidity position of the company has a decreasing trend over the last five years (O'Regan, 2015).
The solvency risk level of the company has improved over the last five years. The company has higher debt portion against the equity portion in the total assets. The company is efficient to cover its debt service charge with earnings from the operating activities. However, the company has decreased its performance over the period (Pinson, 2008).
Therefore, the company has reduced its performance over the last five years regarding managerial efficiency performance, profitability performance, liquidity position and solvency risk.
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Task B - Project Risk Analysis
Q1. Calculate Expected NPV. Calculate the Standard Deviation of NPV.
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Project A
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NPV ($M) (X)
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Probability of Occurrence
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Expected NPV
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(X-µ)
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(X-µ)^2
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Expected value = (X-µ)^2×P
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20
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0.1
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2
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-22
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484
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48.4
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40
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0.5
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20
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-2
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4
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2
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50
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0.4
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20
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8
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64
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25.6
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Mean (µ)
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42
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Variance
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76
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Standard Deviation
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8.717798
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Project B
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NPV ($M) (X)
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Probability of Occurrence
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Expected NPV
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(X-µ)
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(X-µ)^2
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Expected value = (X-µ)^2×P
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30
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6
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180
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-12
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144
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864
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40
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0.2
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8
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-2
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4
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0.8
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80
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0.2
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16
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38
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1444
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288.8
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Mean (µ)
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204
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Variance
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1153.6
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Standard Deviation
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33.96469
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Q2. Appraise the management about this project with your comments.
Project B is more reliable as compared to Project A because of lower fluctuation to the expected NPV. Project A has expected NPV of $42 Million with the standard deviation of $8.72 Million whereas Project B has expected NPV of $204 Million with the standard deviation of $33.96 Million which reflect Project B has lower variability in the earning of the expected NPV (Brigham & Houston, 2012).
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