Part A

1.
Profitability
Gross Profit Margin = (Gross
Profit/Net Sales) x 100

2013
(8280/19480) x 100 =
42.5%

2012
(8245/17250) x 100 =
47.8%

Net Profit Margin = (Profit

before Tax/Net Sales) x 100

(2690/19480) x 100 =
13.8%

(4175/17250) x 100 =
24.2%

ROCE = (Operating
profit/Capital Employed) x
100

(4435/16545) x 100 =
26.8%

(5285/12990) x 100 =
40.7%

9220 + 7325 = 16545

7885 + 5105 = 12990

(565/9220) x 100 = 6.13%

(1875/7885) x 100 =
23.8%

*Capital
Employed=Shareholders
fund + Non-Current
Liabilities
Return on Equity (ROE) =
(Profit after Tax &
Preference Dividend/Equity)
x 100

6670 + 2550 = 9220

*Equity = Ordinary Share
Capital + Reserves

5900 + 1985 = 7885

Asset Turnover =
Sales/Capital Employed

(19480/16545) = 1.18

(17250/12990) = 1.33

Liquidity
Current Ratio = Current
Assets/Current Liabilities

2013
4560/685 = 6.66

2012
4105/860 = 4.77

Quick ratio = (Current Assets

Inventory/Current
Liabilities)

(4560 - 1065) / 685 = 5.1

(4105 - 985) / 860 = 3.63

Inventory Turnover Ratio (in

12265 / 1065 =

9990 / 985 = 10.1 times

times) = Cost of
sales/Average Inventory

11.5 times

*Average Inventory =
(Opening Inventory
Closing Inventory) / 2

(1065 + 1065) / 2 = 1065

(985 + 985) / 2 = 985

Inventory Turnover Period

(in days) = (Average
Inventory/Cost of Sales) x
365 days

(1065 / 12265) x 365 =

32 days

(985 / 9990) x 365 =

36 days

Trade receivable collection

period (in days) = (Trade
receivable (net)/Credit sales)
x 365 days

(3495 / 19480) x 365 =

65 days

(2650 / 17250) x 365 =

56 days

Trade Payable Payment

Period (in days) = (Trade
Payable/Credit Purchases) x
365 days

(2165 / 12265) x 365 =

64 days

(2260 / 9990) x 365 =

83 days

Gearing
Gearing Ratio = (Prior
Charge Capital/Capital
Employed) x 100
*Prior Charge Capital =
Preference Shares +
Debentures + Long Term
Loan
Interest Over = Profit before
Interest and Tax/Interest
Expense

2013
(7325 / 16545) x 100 =
44.3%

2012
(5105 / 12990) x 100 =
39.3%

4435 / 1745 = 2.54 times

5285 / 1110 = 4.76 times

Asset Utilization
Total Asset Turnover = Sales
/ Total Asset
Fixed Asset Turnover = Net
Sales / Net Property, Plan
and Equipment
Inventory Turnover = Sales /

2013
19480 / 20420 = 0.95

2012
17250 / 16235 = 1.06

19480 / 15860 = 1.23

17250 / 12130 = 1.42

19480 / 1065 = 18.3

17250 / 985 = 17.5

Inventory
Days Sales Outstanding =
(Average Inventory / Cost of
Goods Sold) x 365

(1065 / 19480) x 365 =

20 days

(985 / 17250) x 365 =

21 days

Report for the Board of Sterling Plc.

Financial ratio is used as the magnitude to compare two statically values which
obtained from the financial statements of an organization. The purpose of using the ratio
analysis is to compare performance between two companies at the same time is known as
industry analysis. It can also be used to compare companies performance even in different
time periods. The financial ratio is used to identify the strength and weaknesses of a company
and the security analysts also able to make comparison between various companies.
There are five types of ratio which are profitability ratios, efficiency ratios, liquidity
ratios, and also return to investors/shareholders ratios. The profitability ratios used to measure
the capability of an organization to generate profit. There are four elements under
profitability ratios, which are gross profit net margin, net profit margin, return on equity and
return on capital employed. Meanwhile, liquidity ratios are used to measure the capability of
an organization to settle its current debt including current ratio and also quick ratio. The
efficiency ratios used by an organization to measure the quality of receivables and its
efficiency in controlling the organization inventory, and also to know the effectiveness of the
firm in paying their suppliers. The efficiency ratios include inventory turnover, trade payable
turnover and trade receivable turnover. As for capital ratios, it used as to measure on how the
assets of the organization are financed, as example loan versus equity. Finally, the return
investors/shareholders is used to measure the return obtain by the investors and it is defined
through dividend yield, dividend cover, earnings per share and also price earnings ratio.
Sterling Plc. gross profit margin shows that there are drop from year 2012 to year
2013, which is from 47.8% to 42.5%. The margin actually shows the gross profit before
minuses any expenses. It shows that the company is having problem in controlling the cost of
sales and the selling may drop lower. The net profit margin shows the profit gained for every
sale by the company after minuses the expenses. There is also a big drop in the net profit
margin from year 2012 to year 2013, which is from 24.2% to 13.8%. it shows that the

company is facing hard time in controlling the operating expenses. This scenario also may
have occur because of high interest payment due to business loans or also high depreciation
cost when purchasing additional plant, property and equipment. Return of Capital Employed
(ROCE) used to generate income by businesses as to measure the efficiency of the capital.
ROCE also dropped from 40.7% to 26.8%. This indicates that the efficiency of the company
is low as it is not able to utilize the capital to generate profit. Return on Equity is used to
measure on the return gained by the owners ordinary shares investment. ROE of the
company also dropped badly from 23.8% to 6.13%. This situation explains that the profit
lower for every RM1 invested by the ordinary shareholders or also additional issue of the
ordinary shares.
As for liquidity ratios, the current ratio for 2013 is 6.6 which is higher from year
2012. The ratio should be more than 1 in order to know that the company has more current
assets to cover current liabilities. The current ratio of Sterling Plc. shows that the current
assets are higher due to better financial performance in the form of sales or profit. The quick
ratio used to determine the capability of an organization to settle its current debts by using the
current assets as it is easily convertible to cash. The quick ratio of the company is 5.1, which
means that the business is financially sound and also able to settle its current debts.
The inventory turnover ratio (in times) is used to determine how many times in a year
the average inventory can be sold off. Meanwhile, the inventory turnover ratio (in days) used
as to know how many days the goods were kept before it been sold. In year 2013, Sterling
Plc. inventory turnover ratio and its inventory turnover period are 11.5 times and 32 days.
Compared to year 2012, there is a decrease in the inventory turnover period and increase in
the inventory turnover ratio which means that there maybe increase in the pace of selling the
goods and the period of the goods held have shorten. The trade receivable collection is to
know how many days it takes for the company to collect from its customer after sales, and it
is 65 days for Sterling Plc. the company credit control is average and it should offer more
cash discounts as to encourage their customers to make early payment. The trade payable
period is used to know how many days it takes to pay the supplier after purchases been made,
and Sterling Plc. takes 64 days to make the payment. The company payment period is shorter
and this is maybe because the company has no problem with the cash flow as the quick ratio
is 5.1.

Besides that, the gearing is used to measure the part of capital in the sense of
borrowing. The gearing ratio of the company in 2013 is 44.3%. The company is in low geared
phase as the ratio is below 50% and it indicates that the company have high chances in
getting loan with lower risk. The interest cover is used to know how many times the profit
can be used to cover the interest payment. The interest cover of the company is low with 2.54
times. It explains that the company may facing high interest expense due to high borrowings
together with high risk.

2)
Working Capital Cycle
2013
2012
Working Capital = Current Asset Current
Working Capital = Current Asset Current
Liabilities
Liabilities
= 4560 - 685
= 4105 - 860
= 3875
= 3245
WCC = (3875/19480) x 365 = 73 days

WCC = (3245/17250) x 365 = 69 days

The purpose of liquidity ratio is to show the companys capability in handling the debt
obligation. Compared to year 2012, in 2013 both current ratio and quick ratio is higher. It
shows that the company is able to use their current assets in paying their current debts. The
working capital cycle shows the number of days taken to change the current asset into cash to
cover the current liabilities. In year 2012 it takes 69 days but increased to 73 days in 2013.
The longer the cycle is, the longer the company is tying up capital in its working capital
without earning a return on it.

3)

Financial Ratio Analysis is used to calculate and compare the main indicators by
using the information obtained from the companys financial statement. Financial ratio is

used in order to find out the organizations performance and also status. In financial ratio, the
liquidity analysis is being done as to provide the investors, management and creditors with
the information they required. The purpose of the ratio analysis is the relative measurement
from the datas related to finance as to assist in wise investment, credit and also managerial
decision. The cross-sectional analysis is used to compare few firms that categorized under the
same industry as to come up with conclusion on the entitys profitability and also the
financial performance. The inter-firm analysis also comprised with cross-sectional because
the analysis carried out by implying some fundamental ratios of the industry that the firm
belongs and it is also work as the benchmark on the companys performance evaluation.
Meanwhile, time series analysis is done by using past ratios that are obtained through the past
financial statements of the same organization. The deterioration in an organizations
performance over the period can be known by comparing the current year ratio with the past
years ratio.
There are few limitations involve in the use of the ratio analysis. Firstly, it is not easy
to discover the proper basis to compare. It is normally advisable that the ratio use to the
comparison should the industry average. However the industry average is not always
available. Besides that, other limitation is faced when the situation of both the companies are
never similar. Likewise, the performance of the company in current year not always
influenced by the same factors that play part from the past year. This makes the ratio
comparison between the companies hard. Other than that, the limitation also occur when
there is changes in the value of money when interpretation and comparison of the ratio done.
The monetary unit shown in the financial statement is expected remain constant, but over the
years the price changes and the assets that bought at different dates will be expressed at
different amount in the balance sheet, which makes the comparison no meaning.

Part B
1)
The break-even point (BEP) is a situation where the organization experience neither
profit nor loss. According to Atril and McLaney (2011), the organization gain profit when the

volume of activity goes beyond BEP, and experience loses when the volume of activity goes
lower than BEP. For the year 2012, the break-even point for Grantham Ltd. in units sold is
80625 and the revenue BEP is 18140625. In the year 2013, the BEP for units sold is 93500
and the BEP for revenue is 26273500. It shows increase in BEP from 2012 to 2013.
Grantham Ltd. in year 2013 has taken longer time to reach BEP soon and get the profits. This
is maybe due to the increase in selling price 25% by the company and also the increase in
fixed cost of 1450000 compared to year 2012. BEP increases shows that Grantham Ltd has
high risk in their business operation.
The company should use the margin of safety together with the break-even point. It is
because the sales can be set safely in order for the company to avoid loss in their profit. It is
easy for Grantham Ltd to set the margin of safety when they know the break-even point. In
year 2013, the margin of safety is 126500 units with the revenue of 35546500. The margin
of safety should not be set lower than these figures because the company will get profit only
when the sale is above the margin of safety.

2)
The practice of break-even analysis is tied to three main assumptions, namely the
average sales price per unit, variable unit cost and monthly fixed cost. The average sales
price per unit is based on the sales discounts and also through special offer. The company
managers have to predict the value for the unit price from sales. As mentioned by Lynch
(2005), some companies use percentage than unit as to indicate on the per earning unit is per
unit of cost. This problem usually arises in the same product sales market. This makes the
managers to assume the BEP based on the sales price. Meanwhile, variable unit cost is based
on the production cost. It is managers duty to clearly verify which cost belongs to the
production cost while using the BEP. The profit per unit produce by one sale product can be
known through the contribution margin per unit calculation. The monthly fixed cost is based
on the administrative cost, depreciation and also other fixed costs that have to be paid every
month. The BEP defines that the fixed costs will still be cost even if it broke or not useable.
The break even analysis can be used to evaluate the economic value of a project and it
can also show the financial benefit of the merits on several projects, which filter out the
optimal solution. The break even analysis could not be used to determine the profitability of a
project even though it discusses the price changes uncertainties, fixed cost, variable cost and

also profit and loss gained through a project. Even though break even analysis is static
analysis but it does not contemplate the time value of money and there are some limitation
applies becouse the magnitude of change are uncertainties by artificial.

Part C
a)
Every business should have proper plan for its operations through effective decisions
and actions from the various departments. Budgeting is known as the planning of the
financial operation of an organization. Budgeting assist the firm to make plans on their work
and uses the plan in achieving the companys vision and mission. But the process has both
advantages and disadvantages. So it is crucial for an organization to be cautious on these two
factors when prepare the budget for the company.
The budget helps the management in looking ahead into the future. The management
must focuses into events as to see the possibility of the effect of the mentioned events to the
firm when preparing the budget. Moreover, the strategic level of the firm is needed to plan
out detailed road map for the organization including the departments as well. This will assist
in shaping the right direction of the organization.
The other benefit of planning budget is to make sure that the coordination and
communication is well throughout the organization. As for the management to make sure that
every layer in the organization understands the companys vision and mission, the budget
have to be documented and cascaded to all department of the organization. With this, it will
be easier for the firm to achieve the budget planned.
Besides that, budgeting also use to support the performance appraisal of the
employees. It is because the budget is normally the benchmark used to measure and asses the
actual performance. The management also able to carry out variance analysis as to do the
comparison between actual and budget data after the actual work completed.
As a conclusion, budget will be a guideline for the organization in allocating
resources such as material, money, method, market and machine as to utilized it efficiently,
economically and also effective manner.

2.
Every business needs few main sources of finance to fund their business. There is
short term and long term finance but the most preferable type of financing by organization is
long term source of finance. The finance source in long term base includes the fund the
company obtained from sources which the payback period is above one year. For certain
situations, there is no obligation for payback and it can be categorized into three main sorts,
which are the equity financing, debt financing and preference shares.
The equity financing includes the selling or ordinary shares or the companys retained
earnings. The investment made by the firms ordinary shareholders (which are also the
owners of the company) known as ordinary shares. The share that been issues normally has
the same nominal or face value, the dividend will be paid to the holders only afte the profit
goes above certain figures.. The good part of this share is that holders given the rights to vote.
Moreover, the organization also is not beholden in making payments to the stock holders and
the shares also do not have a fixed maturity due.
Debt financing is defined as getting money from a third party and the interest will be
paid in regular basis and also normally in a fixed rate semiannually. . Additionally, the firm
have to pay back the nominal value. The debt has a previous claim on the firm regardless of
the profit received and too at times of liquidation. Though, the debt owners not have given
the right to vote or to voice out in the management.
The final source of finance in long term is the preference shares. These type of share
have fixed rate on the dividends and also the holders given precedence claim on any of the
profit by the company that is available for distribution. These preference shares will be not
deducted by tax. Besides that, the dividend receive is lower than the interest implied on debt
compensate additional risk. The preference shareholders is not given the right to vote.