Carlos Arturo Molina - Financial Management

Financial
Analysis,
Evaluation and
Recommendatio
ns for Outdoors
PLC
By: Carlos Arturo Molina Quijano
Student Number: 2162400
Masters of Business Administration
Financial Management
Lecturer: Paul Lydon
December 2016
Financial Analysis, Evaluation and Recommendations for Outdoors PLC

CONTENTS INTRODUCTION

A. Profitability ------------------------------------ 2
I. Gross Profit Margin -------------- 2 In this Financial Analysis
II. Return on Assets ----------------- 4 Outdoors PLC profitability,
equity and efficiency have
B. Liquidity --------------------------------------- 5
I. Current Ratio --------------------- 5 been compared with one of
II. Quick Ratio ----------------------- 7 the leaders in the garden
furniture market in the UK:
C. Investment --------------------------------------------
8 Wyevale Garden Centres
I. Earnings per Share ----------------------- Capital Limited . In order to
9 having a better perspective,
II. Dividends per Share --------------------
10 deeper inside of the
III. Net assets per Share ------------------- companys position in the
10 industryand how it manages
IV. Dividend Cover Ratio ----------------- 11
its resources.
D. Efficiency
------------------------------------------------ 12 Furthermore, has been
I. Operating Asset Turnover Ratio ------ analysed, and selected the
12 posible investment options of;
II. Working Capital Turnover --------------
14 expanding its flourishing
retail outlet, developing
E. Gearing -------------------------------------- 16 internet sales and producing
I. Debt to Equity Ratio ----------- 17
II. Interest Cover Ratio ----------- 18 greenhouses and
conservatories. Using different
F. Investment Options ---------------------------- 19 Financial Modelling
I. Net Present Value -------------------- 21
II. Project Selection (CVA) ------------ 24 techniques.
III. Internal Rate of Return -------------- 26
G. Divisible Projects ---------------------------------

28
H. Financing ------------------------------------------- 29
I. References
------------------------------------------32
2162400 - Carlos Arturo Molina Quijano 1




Profitability
"Profitability is a set of financial indicators that are used to measure a

business's ability to generate income as compared to its expenses
incurred during a specific period of time" (Gang 2016 p83).
It's important to measure the profitability of the business, because it's

what Stakeholders, Investors and Managers look for, in order of having
an idea how much they can earn, how their money has been used just
for compare the business with others in the market. Based on the
ratios that measures the company's facility to generate profit.
In this case the profitability has been analysed based on the following
information given by Outdoors PLC from 2011 to 2015;
Outdoors PLC 201 201 201 201 201

Profitability 5 4 3 2 1
Ratios
Margi % 7.8 7.5 7.0 7.2 7.3

n
Return on % 16.3 17.6 16.2 18.2 18.3

Assets
Gross Profit Margin (GPM)
According to Siciliano (2003 p 56). "Gross profit is the gain the

company earns after selling its products and paying for all elements of
the cost of sales".
And Its measurement, better known as GPM is calculated as follows;
[(Sales - Cost of Sales) / Sales ]x100
Considering this formula, we get a percentage that measures the how

much money is left after paying the costs of the service/goods sold.


For example:
Sales: $5000 USD
Cost of Sales: $2000 USD
GPM: (3000/5000)x100= %60
This means that for every American Dollar earned, 60 cents are Gross
Profit.
If the number is closer to 0 it says that the Profit is also almost null.
So, higher the number means more profit.
The following information is the GPM of Wyevale Garden Centres

Capital Limited.
Wyevale 201 2014 2013 2012

Garden Centres 5
Capital Limited
(Group
GPM % 54.0 56.5 53.2 49.7
Source: Wyevale Garden Centres Capital Limited Annual Reports ,

2013, p26 and 2015, p19.
Interpretation: If we compare the lower GPM of Outdoors PLC in

2015 with 7.8%, against the Wyevale Garden Centres GPM of 54.0 in
the same year, we can assume that the Gross Profit Margin of
Outdoors PLC is extremely low, considering the average of the
competitor in the same industry.
In Outdoors PLC situation, from 2011 to 2013 had a decreasing on its

GPM starting with 7.3% in 2011, 7.2% in 2012 and 7.0% in 2013. The
last mentioned it's the lowest, because it had an increment from 7.0%
to 7.5% in 2014 and it went higher in 2015 with a GPM of 7.8%.
It means that 2015 was the year with better GPM, obtaining a profit of
7.5 pence for each 1 earned.


The possible reasons if a low GPM: low selling prices, high supplier
costs, lack of efficiency in Product mix costs.
Return on Assets (ROA)
The ROA is the percentage of the return generated with the resources
(assets) that the company has. Lets say that a 50% of ROA means
that every $1 earned, came from every $2 of investment.
The following formula will be considered for this analysis.
[(Sales-Cost of Sales) / Net Operating Assets ]x100

For example:
ABC PLC ROA in 2015
Sales: $5000 USD
Cost of Sales: $2000 USD
Net Operating Assets: $9500 USD
ROA: (3000/9500)x100= %31.5
We can consider that, ABC PLC managed to generate a return of

%31.5 ($1 from every $3.17) with its assets.
Interpretation: In the information given by Outdoors PLC we can

appreciate, a continuous decrease of the ROA; from 18.3% (1 from
every 5.45) in 2011 to 16% (1 from every 6.25) in 2015.
The possible reason if this decreasing ROA in the demand decline and
over investing in stock or other assets.


Liquidity
Siciliano (2003 p34) also says that Liquidity is "the ability to meet
obligations with cash or other assets that can be quickly converted to
cash, to pay the bills as they come due".
In simple words, is how much does the company can pay its obligations
and still having money available. The opposite of this is "Insolvency".
Outdoors PLC 2015 2014 2013 2012 2011

Liquidity Ratios
Quick ratio 0.74:1 0.73:1 0.78:1 1.13:1 0.93:1
Current ratio 1.34:1 1.30:1 1.42:1 1.79:1 1.75:1
Current Ratio
Siciliano (2013 p 102) says that Current Ratio is "The relationship between
current assets (which are cash or will become cash within the next 12
months) and current liabilities (debts that must be paid within the same 12
Months)".
It Is calculated as follows:
Current ratio: current assets/current liabilities.
It is shown as x.x:y, and some intuitions want to see ratios of 2:1, but it
depends on the industry.
Lets analyse the Current Ratios of Wyevalen Garden Centres
'000


Wyevalen Garden Centres 2015 2014

(Group) Liquidity
Cash and cash equivalents 146,488 18,917
Trade and other receivables 18,439 20,050
Inventory 50,986 43,463
Current liabilities 151,517 72,428
Source: Wyevalen Garden Centres Annual Report 2015, p81.
2015 Current Ratio: (146,488+18,439+50,986)/151,517=1.425
2014 Current Ratio: (18,917+20,050+43,463)/72,428=1.380
Wyevalen Garden 2015 2014

Centres (Group)
Current ratio 1.42:1 1.40:1
Interpretation: Wyevalen Garden Centres in 2015 had 1.42 of current

assets to cover each 1 in current liabilities. And in 2014 had 1.40 for
covering each 1.
Considering the average of 1.4:1 of current ratio in 2 years, lets analyse

the case of Outdoors PLC
In 2011 it had a high ratio of 1.75:1 then, it grew up to 1.79 in 2012, but
then a constant decrease took place from 2013 with 1.42:1 to 2015 with a
Current ratio of 1.34. Even though, this ratio has been going lower,
Outdoors PLC is still positioned on the Wyevalen Garden Centres Current
Ratio average.
Its possible that in 2011, Outdoors PLC had problems with its working
capital management, although in 2013 they improved it. But they may not
reach less than 1.30:1 considering the industry average (of 1.40:1) given
by Wyevalen Garden Centres.
Quick ratio (Acid test ratio)


"How quickly a company's assets can be turned into cash, which is why
assessment of a company's liquidity also is known as the quick ratio, or
simply the acid ratio" (Calculating Acid-Test Ratio, Bloomsbury Business
Library - Actionlists & Checklists, 2007 p20).
This is very like Current Ratio, but here we will assume that the Inventory
take time to be sold, so, it won't generate quick cash.
Its calculated as follows:
Acid test ratio: (Current assets - stocks) / current liabilities.

Using again the same data given before of Wyevalen Garden Centres in its
Annual report of 2015, p81.
2015 Acid Ratio: (146,488+18,439-50,986)/151,517= 0.752
2014 Acid Ratio: (18,917+20,050-43,463)/72,428= - 0.062
Wyevalen Garden 2015 2014

Centres Capital
Limited
Acid ratio 0.75:1 -0.06:1
Interpretation: Comparing Wyevalen Garden Centres with Outdoors PLC

in the same years. Our company looks lightly better in 2015 (0.74:1), even
if they had an alarming Ratio in 2014, later we are in the average with a
ratio of 0.75:1. This means that since 2011 Outdoors PLC has been able to
pay its liabilities without the necessity of using the sales earnings.


Investment
The investment potential can be measured by earnings per share,

dividends per share and net assets per share and dividend cover ratios.
These measurements are important for future investors because this is

how they can know how much they can earn if they invest in shares.
The following information was given by Outdoors PLC
Outdoors 2015 2014 2013 2012 2011

PLC
Investment
Ratios
Earnings p 15.65 13.6 10.98 11.32 12.18

per share
Dividends p 5.90 5.40 4.90 4.60 4.10

per share
Net assets p 120.10 89.22 85.95 85.79 78.11

per share
Dividend Time 2.7 2.6 2.1 2.5 3.1

Cover Ratio s
Earnings per share (EPS)


"It represents the amount of profit available to ordinary shareholders the

company has earned during the year for each ordinary share" (Alexander
et al, 2014 p243).
Earnings per share (EPS) is found by dividing profit attributable to the

ordinary shareholders by the number of ordinary shares in issue.
(Alexander et al, 2014 p582).
Considering the last statement, we can assume that the formula is:
EPS: (Net Profit-Preference Shares)/Number of Ordinary

Shares
Interpretation: There has been a gradual increase on the EPS in the 5-

year period. From 12.18p in 2011 to 15.65p in 2015.
The Net Profit of the company also has been increased each year, that is
reflected directly on the EPS,
"Earnings per share is influenced, as for profitability, by the profit but also
(like dividends) by the number of shares issued" (Collier, 2013 p89).
Dividends per share (DPS)


When a company pays to its shareholders a portion of the earnings is

called "Dividend" and DPS is how much of that dividend correspond to a
single share.
This means that the amount of the dividend given to the shareholder will
depend on how many shares he owns.
Interpretation: Same as EPS, has been a gradual increasing, and it is

directly related with the net profit, where the dividends are paid.
This may encourage to future investors to buy shares, or to the actual

ones, to remain with the company.
Net Assets Per Share (NAVPS)
Is very similar to EPS, but in this case instead of considerate the ordinary
shares, we will take the total of shares in the company.
NAVP= Net Profit/Number of Outstanding Shares
Interpretation: There has been a good performance in almost all the

years. From 2011 to 2054 the NAVPS has been increasing from 78.11 to
120.10, this means that Outdoors PLC has been growing up.
Dividend Cover Ratio (DCR)


According to Dyson (2010 p230), "This ratio shows the number of times
that the ordinary dividend could be paid out of current earnings".
And it's calculated as follows:
DCR: (net profit taxation preference dividend)/ordinary

dividends.
Interpretation: During the 5-year period, the company has been

maintaining its DCR between 3.1 and 2.5; This means that it has the
possibility to offer the almost the same level of ordinary dividends, it
indicate the companys ability to payout dividends.


Efficiency
"Companies stay efficient and competitive by keeping inventory levels

down and speeding up collection of what they are owed" (Mc Clure 2014).
In simple words, efficiency is; How much time does the company takes for
selling the actual stock and how much it can earn.
Outdoor PLC 2015 2014 2013 2012 2011
Efficiency
Ratios
Operating Times 2.1 2.4 2.3 2.5 2.5

asset
turnover
Working Times 8.6 8 7 7.4 6.2

capital
turnover
Operating Asset Turnover Ratio (OATR)
It measures how much does the revenues covers the value of

operating assets.
If the number is bigger it means that the revenue is bigger than the
value of the company assets.
Its calculated as follows:
OATR= Sales / Net Operating assets
Now, lets calculate the OATR of Wyevalen Garden Centres,

considering the information of its Annual report of 2015.


'000
2015 2014
Wyevalen Garden Centres
Sales 311,143 290,415
Net Current Assets 64,396 12,002
Non-Current Assets 436,239 433,387
Non-Current Liabilities 451,391 410,219
Source: Wyevalen Garden Centres Annual Report (2015, pp 79 and

81).
A: 2015 OATR= 311,143 / (64,396+436,239-451,391)=
2015 OATR= 311,143 / 49,244 = 6.318
B: 2014 OATR= 290,415/ (12,002+433,387-410,219) =
2014 OATR= 290,415/ 35,170 = 8.257
2015 2014
OATR 6.32 8.26
Comparing both companies, Wyevalen Garden Centres has better OATR

than Outdoors PLC, it means that it manages better its assets in order to
generate profit.
Interpretation: Outdoors PLC is below the competitors average. Between

2011-2012 it had the same OATR, but since 2013 a decrease took place.


From 2.3 to 2.1, the possible reason is that the company, just like
Wyevalen Garden Centres, acquired more Assets, or they revalued them to
a greater value.
Even though theres not significant change in the Outdoors PLC OATR, we
should analyse the stock management, because possibly there is an
excess of inventory.
As a recommendation: Improve on stock management, in order to enhance

the Operating Asset Turnover Ratio.
Working Capital Turnover (WCT)
It measures how much does the sales cover the money invested to
generate short term operations or better known as working capital
(current assets - current liabilities).
WCT: Sales/Working Capital
WTC calculation of Wyevalen Garden Centres, considering the

information of its Annual report of 2015
'000
2015 2014
Sales 311,143 290,415
Current Assets 215,913 84,430
Current Liabilities 151,517 72,428
Source: Wyevalen Garden Centres Annual Report (2015, pp 79 and 81).
A: 2015 WCT= 311,143 / (215,913-151,517) =
2015 WCT= 311,143 / 64,396 = 4.831


B: 2014 WCT= 290,415/ (84,430-72,428) =
2014 WCT= 290,415/ 12,002 = 24.197
Interpretation: Wyevalen Garden Centres had two totally different

ratios in the two years. But it depends directly on the working capital
of the year. We can see that the company "invested" less in 2014 than
2015.
In the case of Outdoors PLC, the efficiency is going better gradually.

From 6.2 in 2011 to 8.6 in 2.15
Outdoors PLC is in constant efficiency improvement, and each year,

the need of external funding is lees necessary. In other words, the
company is less dependent of other resources.


Gearing
According to Alexander et al (2014 p241) the gearing ratio "try to measure

the risk involved in the repayment of debt and the ability of a company to
meet its debt in the long-run a high debt/equity ratio implies higher
financial risk, since a higher ratio points a higher interest charges, and
wider exposure to possible interest changes".
Outdoors 2015 2014 2013 2012 2011

PLC
Gearing
Interest Times 2.9 4.8 5.1 6.5 3.6

Cover Ratio
Debt to % 65.9 61.3 48.3 10.8 36.5

equity
Ratio
Collier (2003, p86) says "The higher the gearing, the higher the risk of
repaying debt and interest. The lower the interest cover, the more
pressure there is on profits to fund interest charges".
Debt to Equity Ratio (Gearing)


It's the most used Gearing Ratio and it's calculated as follows:
Gearing Ratio: long-term debt/(shareholders' funds + long-

term debt)
Interpretation: Collier (2003, p86) "As debt increases in proportion to

shareholders' funds, the gearing ratio will increase". Considering the
Collier's words, Outdoors PLC from 2013 to 2015 has been borrowing more
money in proportion of the shareholders profit.
This mean that the company needs more external investment to run, than
the internal. Is possible that this may be caused by possible new projects.
Recommendation: To run more with equity than debt, there may exist
difficulties for paying in the future if the gearing ratio goes up.
Interest Cover Ratio (ICR)


(Alexander et al, 2014 p241). "The interest cover ratio is a ratio which
indicates the safety margin between profits generated and interest
charges and is calculated as follows":
ICR: Net profit before interest and taxes/Total interest

charges
In other words, it measures how much of interest of debt can pay the
company with its earnings.
Interpretation: From 2011 to 2014 the ICR was over 3.6, But, in 2015. It
decreased to 2.9 times. Its possible that between 2014 and 2015 the
company borrowed more money even if they had good earnings.
Recommendation: Be careful, don't reach lower than 2.5, considering other

ratios (Profitability and Liquidity), the company has been managing well
it's profits, it is asking more money borrowed in proportion than the profits.
If an overstock happens, and the sales goes down. Outdoors PLC can face
serious problems paying the debts, theres no risk, but if the ICR goes
lower, the company could have issues in the short term.
Investment Options


Outdoors PLC has the potential to expand the business, and there are
identified three main options for a four-year plan:
A. Expand its flourishing retail outlet to include all products.

With an initial expenditure of 75,000
B. Develop into internet sales.

With an initial expenditure of 120,000.
C. Produce greenhouses and conservatories.

With an initial expenditure of 200,000
The most recent estimates on year-end cash flows is as follows:

Year 1 Year 2 Year 3 Year 4
000 000 000 000
(A) 40 50 50 50
(B) 50 60 80 100
(C) 50 100 150 150
In order to select the best option of investment, its necessary to make a

Financial Modelling.
According tom Anandarajan et al (2004, p109) The Financial Modelling,

enables users to predict the profitability and assess the impact of future
similar ventures. Financial modelling is a cost effective, practical way to
test risks and assess financial implications before committing to corporate
change.
The most used techniques are:
Accounting Rate Return (ARR): Compare the profit of a project

with the capital invested in it (Dyson, 2010 p426).


Payback: Calculates how many years it will take in cash terms

to recover the initial investment, on the assumption that the shorter
the payback period, the better the investment (Collier, 2003 p186).
These methods are called non-discounting techniques, and are widely

used by decision makers because they are compatible with a similar
accounting ratio used in financial accounting, relatively easy to
understand, not difficult to compute, draws attention to the notion of
overall profit (Dyson, 2010 p428).
Even though, these Financial Modelling techniques exist, the actual era
requires Discounting Methods of Investment Appraisal. Because the money
now is more volatile than it was in past years.
Neither the accounting rate of return nor the payback method considers
the time value of money, i.e. that 100 is worth more now than in a years
time, because it can be invested now at a rate of interest that will increase
its value (Collier, 2003 p186).
In this case the best options are; the Net Present Value (NPV)
technique, because it considers cash outflows and inflows as would occur
in a real world and then rank the various alternatives (Anandarajan et al,
2004 p109), and the Internal Rate of Return (IRR) technique estimates
what rate of return is required in order to ensure that the total NPV equals
the total initial cost (Dyson, 2010 p430).
Net Present Value (NPV)
With this technique, we can have an idea of how much does the future
cash values today.
It is calculated as follows:


NPV of Cash Flows= F0 / (1 + r)0 + Fn / (1 + r)n + ....
F = Cash flow in the future
R = Discounting rate
N= Number of period
The discount rates to be applied are based on the companys cost of

capital. The cost of capital represents the weighted average of the cost of
debt and equity and takes into account the riskiness of a project (Collier,
2003 p187).
In this case the Discounting rate is assumed of 10% (Cost of Capital).
NPV for Project A
000
Project A Discount
Period PV of Cash Flow
Factor 10%
Cash Flow
0 -75 1 - 75
1 40 0.909 + 36.36
2 50 0.826 + 41.30


3 50 0.751 + 37.55
4 50 0.683 + 34.15
Project A NPV: 74,360.00
NPV for Project B
000
Project A Discount
Factor 10%
Cash Flow
0 -120 1 - 120
1 50 0.909 + 45.45
2 60 0.826 + 49.56
3 80 0.751 + 60.08
4 100 0.683 + 68.30
Project B NPV: 103,390.00

NPV for Project C
000
Project A Discount
Factor 10%
Cash Flow
0 -200 1 - 200
1 50 0.909 + 45.45
2 100 0.826 + 82.60
3 150 0.751 + 112.65
4 150 0.683 + 102.45
Project C NPV: 143,150.00


Project Selection
For select the most appropriate project, two key points must be
considered:
1. Which one is safer? The Project NPV must be a positive number,

covering the initial investment, if it is not, it means that we are
losing money.
As the net present value is negative, the project should not be

accepted since the present value of future cash flows does not
cover the initial investment (Collier, 2003 p187).
2. Which of them is more profitable?
Cash Value Added (CVA) or Profitability Index, which is a ratio

of the NPV to the initial capital investment (Collier, 2003 p187).
Cash Value Added = NPV/ Initial capital investment
CVA for Project A


CVA A = 74,360/ 75,000= 0.9915

CVA A = 99.15%
CVA for Project B
CVA B = 103,390/ 120,000= 0.8616

CVA B = 86.16%
CVA for Project C
CVA C = 143,150/ 200,000= 0.7158

CVA C = 71.58%
Recommendation: Considering that all the projects cover the initial

investment, we should consider the one which has the highest Cash Value
Added.
Outdoors PLC should invest in the Project A
Even if the flourishing retail expansion (Project A) initial investment is

considerably smaller than the other projects. Its Profitability Index is much
bigger than the others, with a CVA of 99.15%. In simple words, Project A
has the potential of generate a profit of almost the same investment
amount.


Internal Rate of Return (IRR) of the selected project A
The internal rate of return (IRR) method is also based on discounting. It is

very similar to the NPV method, except that instead of discounting the
expected net cash flows by a predetermined rate of return, it estimates
what rate of return is required in order to ensure that the total NPV equals
the total initial cost (Dyson, 2010 p430).
Its expected that the IRR must be at least the same Required Rate of
Return (in this case the Cost of Capital), so we can be sure that we are
doing a good investment.
It is calculated as follows:
Step 1: Select two discount factors, according to Dyson (2010,

p431) One of the factors should produce a positive NPV, and the
other a negative NPV.
000
Period Cash A B A B
Flow Discount Discount Present Present
Factor Factor Value Value
45% 50%
0 -75 1 1 -75 -75
1 40 0.689 0.666 27.56 26.64
2 50 0.475 0.444 23.75 22.20
3 50 0.328 0.296 16.40 14.80
4 50 0.226 0.197 11.30 9.85


PV= 4.01 PV=

-1.51
Step 1: Calculate the specific break-even rate of return (Dyson,

2010 p432)
IRR= Positive Discount Factor + [(Positive NPV/ Positive NPV+

Negative NPV) x Range of Rates]
IRR= 45% + [(4.01/ 4.01+1.51) x (50% - 45%)]
IRR= 45% + [(4.01/ 5.52) x 5]
IRR= 45% + [0.7264 x 5]
IRR= 45% + 3.632
IRR= 48.632
Project A IRR= 48.63%
Conclusion: The project A is completely profitable and safe. The

expectation is fulfilled, due the Required Rate of Return is of 10% and the
IRR is 48.63%.


Divisible Projects
If the company has a bigger funds and Outdoors PLC is interested on

investing on more than one project, we can divide them.
The funds are limited to 250,000. In order to select the best option, we
will consider the ratios obtained with the Cash Value Added formula used
before.
Cash Value Added
(Profitability Index)
Project A 99.15 %
Project B 86.16 %
Project C 71.58 %
Recommendation:
1. Use the 250,000 completely in projects A and B, 55.000 will

remain because the total Initial investment of both projects is
165,000.
2. Divide the project C using the remaining 55.000. It means the

27.5% of the project, previously budgeted with 200.000.
NPV of projects A, B and C at 27.5%
Project Initial Investment NPV

A (100%) 75,000 74,360
B (100%) 120,000 103,390
C (27.5%) 55,000 (27.5%) 39,366 (27.5%)
TOTAL 250,000 217,116


Financing
The advantage of the project A is that the initial investment is relative

low to the other ones, it means that its financing of the same easier than
the other ones.
There are two type of MediumLong Term financing:
1. Share Holder Orientation Internal:
Ordinary Shares: Expansion of the company could be financed by

increasing the number of ordinary shares available, either on the
open market or to existing shareholders in the form of a rights issue
(Dyson, 2010 p438).
The advantage of this type of financing is that Outdoors PLC doesnt

have to ask money borrowed, it can invest by its own resources.
The disadvantage is that it can take too much time, and this is a
medium-term project.
2. Credit Orientation External
Bank loan: Asking borrowed money to the bank is the most

traditional option, the banks have already different payment plans
suited for the business.
Advantage: Regular repayments of both the capital and the interest

will be expected (Dyson, 2010 p437).
Disadvantage: Bank loans are a common form of financing but the

restrictions often placed on the borrower may be particularly
demanding (Dyson, 2010 p437).


Credit sale: Outdoors PLC can pay for the goods, without having
ownership of them until the contract is finished.
Advantage: Sometimes very generous terms can be arranged, e.g.

no
payment may be necessary for at least 12 months (Dyson, 2010
p437).
Disadvantage: The basic cost of the goods may be far higher than
other suppliers are charging (Dyson, 2010 p437).
Hire purchase:
Advantage: Similar to a credit sale except that the seller remains

the
legal owner of the goods until all payments due have been
completed (Dyson, 2010 p437).
Disadvantage: HP is usually an expensive method of financing the

purchase of fixed assets
Leasing: The lessor is legally the owner of the asset.
The lessee becomes the de facto owner. Leasing can be expensive

although if the lessor passes on what can sometimes be very
generous
tax allowances it can be a reasonably economic method of financing
projects (Dyson, 2010 p437).


Recommendation: Profitability and Liquidity ratios of Outdoors PLC have

been improving gradually, it means that each year the company has more
profit and it can pay easier its debts.
Considering these ratios, the best option for finance in Project A is to take
a credit orientation.
Leasing is a good option. If, we use this financial source, it wont impact
very hard to the company gearing.
As it was as said before, the initial investment of this project is relatively

low, thus the debt should be relatively liquidated in a shorter period of
time.
In the case of the Divisible Projects plan, my recommendation is the same,

but also Outdoors PLC must have in mind its gearing ratio, it is going up
each year. In 2015 it was 65.9, If it goes higher, the company will have
problems to pay its debts. Therefore, its necessary to consider the
Ordinaire Shares Financing, in order of cushioning the gearing ratio,
financing also with the Internal resources.


References
Gang, SS. (2016), Profitability Analysis of Indian Cement Industry: A

Study During 2010-15, CLEAR International Journal of Research in
Commerce & Management, 7, 9, pp. 83-86, Available at:
http://eds.b.ebscohost.com/eds/pdfviewer/pdfviewer?sid=61b262a2-
2e6b-4235-add6-60c345bd555e
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Financial

G. Divisible Projects ---------------------------------

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"Profitability is a set of financial indicators that are used to measure a

It's important to measure the profitability of the business, because it's

Outdoors PLC 201 201 201 201 201

Margi % 7.8 7.5 7.0 7.2 7.3

Return on % 16.3 17.6 16.2 18.2 18.3

Gross Profit Margin (GPM)

According to Siciliano (2003 p 56). "Gross profit is the gain the

And Its measurement, better known as GPM is calculated as follows;

[(Sales - Cost of Sales) / Sales ]x100

Considering this formula, we get a percentage that measures the how

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Sales: $5000 USD

Cost of Sales: $2000 USD

GPM: (3000/5000)x100= %60

The following information is the GPM of Wyevale Garden Centres

Wyevale 201 2014 2013 2012

GPM % 54.0 56.5 53.2 49.7

Source: Wyevale Garden Centres Capital Limited Annual Reports ,

Interpretation: If we compare the lower GPM of Outdoors PLC in

In Outdoors PLC situation, from 2011 to 2013 had a decreasing on its

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Return on Assets (ROA)

The following formula will be considered for this analysis.

[(Sales-Cost of Sales) / Net Operating Assets ]x100

ABC PLC ROA in 2015

Sales: $5000 USD

Cost of Sales: $2000 USD

Net Operating Assets: $9500 USD

ROA: (3000/9500)x100= %31.5

We can consider that, ABC PLC managed to generate a return of

Interpretation: In the information given by Outdoors PLC we can

2162400 - Carlos Arturo Molina Quijano 5

Outdoors PLC 2015 2014 2013 2012 2011

Quick ratio 0.74:1 0.73:1 0.78:1 1.13:1 0.93:1

Current ratio 1.34:1 1.30:1 1.42:1 1.79:1 1.75:1

Current ratio: current assets/current liabilities.

Lets analyse the Current Ratios of Wyevalen Garden Centres

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Wyevalen Garden Centres 2015 2014

Cash and cash equivalents 146,488 18,917

Trade and other receivables 18,439 20,050

Inventory 50,986 43,463

Current liabilities 151,517 72,428

Source: Wyevalen Garden Centres Annual Report 2015, p81.

2015 Current Ratio: (146,488+18,439+50,986)/151,517=1.425

2014 Current Ratio: (18,917+20,050+43,463)/72,428=1.380

Wyevalen Garden 2015 2014

Current ratio 1.42:1 1.40:1

Interpretation: Wyevalen Garden Centres in 2015 had 1.42 of current

Considering the average of 1.4:1 of current ratio in 2 years, lets analyse

Quick ratio (Acid test ratio)

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Its calculated as follows:

Acid test ratio: (Current assets - stocks) / current liabilities.

2015 Acid Ratio: (146,488+18,439-50,986)/151,517= 0.752

2014 Acid Ratio: (18,917+20,050-43,463)/72,428= - 0.062

Wyevalen Garden 2015 2014

Acid ratio 0.75:1 -0.06:1

Interpretation: Comparing Wyevalen Garden Centres with Outdoors PLC