Financial Analysis of Bill’s Bikes Plc for the Year Ended 31.12.2016

Table 1: Bill’s Bikes Plc Income Statement

1. b) Statement of Financial Position 

Table 2 below is the Statement of financial position for Bill’s Bikes Plc for the year ended 31.12.2016.

Table 2: Statement of financial position for Bill’s Bikes Plc

Income Statement and Statement of Financial Position Importance

The income statement (also referred to as the Profit and Loss Statement) is used to show the profit or loss incurred by a business during a specific period, in addition to the expenses and incomes that resulted in the overall profit or loss (Hussey, 2010). The amount of loss or profit for an entity during a specific period (usually a year) is used to indicate the financial performance of the business. The income statement, like the Statement of Financial Position, is useful to financial analysts as it helps to show the current value of a business (Shim & Siegel, 2008). In addition, the expenses and revenues are listed on the income statement and they help determine the net and gross profits. When operating expenses are deducted, the analyst can show the operating profit of Bill’s Bikes Plc for the year ended 31.12.2016. In addition Investors and analysts use the income statement to gauge if the management of the company operates in an efficient manner concerning the primary activities of the company (Nikolai, Bazley, & Jones, 2010). This also established the financial health and soundness of the company. For instance, from the income statement, the company has made a loss, which implies that some adjustments have to be made such as reducing the expenses in the next financial year to make profits.

Statement of Financial Position

Statement of Financial Position is also referred to as the Balance Sheet, and it is used to present the financial position of an organization at a specific date. The three primary elements are equity, assets, and liabilities. The primary purpose of a Statement of Financial Position is to assist financial analysts in assessing the financial soundness and health of an organization in terms of financial risk, liquidity risk credit risk, and business risk (Albrecht, 2007). A statement of financial position is useful to financial analysts because it can be used to assess the financial health of an entity. When analyzed over several accounting periods, balance sheets may assist in identifying underlying trends in the financial position of Bill’s Bikes Plc for the year ended 31.12.2016. Subsequently, it could be used to determine the state of Bill’s Bikes Plc’s liquidity risk and financial risk to establish whether the company requires extra funding. When used together with other income statements of Bill’s Bikes Plc as well as those of its competitors, the statement of financial statement could assist in identifying the links and patterns that are indicative of potential issues and areas that require further improvement (Wanjialin, 2004; Weygandt, Kimmel & Kieso, 2010). Thus, the analysis of the statement of financial position for Bill’s Bikes Plc could help the users of financial statements to make predictions on the amount, volatility, and timing of the entity’s future earnings. It is also important in establishing the assets, liabilities, and equity of a company. Current assets help a company realize economic benefits from its use in the long term and such identification helps differentiate them from liabilities.

PART B

Table 3 below shows the ratios for the year ended 31.12.2016

Table 3: Financial Ratios

As shown in Table 3the gross profit margin was 65.2%, which is an indication that the company’s sales exceeded the cost of goods sold (Peterson & Fabozzi 2012). The ROCE was 49.4% and this indicates the profit each pound of employed capital generates for the company.  The rate of stock turnover was 8.3 days, which indicates that there are limited inventories in the company. The debtor’s collection period was 89 days, which implies that the company takes longer to pay its debts (Peterson & Fabozzi 2012). On the other hand, the creditor’s payment period was only 22 days an indication that suppliers are paid in less than a month. Lastly, the gearing ratio was 21.9%, which shows that the company can use its assets to cover its long-term liabilities twenty-one times.

Table 4 is a comparison of the ratios for the two years (2015 and 2016).

Table 4: Ratio Comparison

As shown in the Ration comparison table, the gross profit margin in 2015 was 60% and it increased by 5% to reach 65.2 % in 2016. This could have been attributed to an increase in revenue and the percentage of sales that exceeded the cost of goods sold (Peterson & Fabozzi 2012). The gross profit ratio plays an important role as it shows management and investors the profitability of a company and the fact that it can make less regardless of the indirect costs. Thus, it shows that the company can efficiently make sales within a year. The return on capital employed, it increased from 37.6% in 2015 to 49.4%, which is an implication that the total liabilities increased in 2016 and the company should work toward reducing liabilities and increasing the assets. On the other hand, a higher ROCE is an indication that there was a more efficient use of capital in 2016 compared to 2015 (Vandyck 2006). Thus, the company is employing its capital effectively and it is generating more shareholder value, compared to 2015.

The gearing ratio implies the ultimate analysis ratio of the level of long-term debt of a company in comparison to its equity capital. The ratio declined from 32.81% in 2015 to 21.9% in 2016 and it implies a decline in long-term liabilities in the company. Thus, the ratio measures the riskiness of financial structure of the company (Peterson & Fabozzi 2012). Thus, the company does not pose any risk to investors and creditors, and debt financing can be applied in the company to raise capital (Vandyck 2006). The rate of stock turnover was significantly the same in the two years, and indication that there was no significant change in the inventories. The Debtor’s Collection Period however, increased from 22 in 2015 to 89 days in 2016, which indicates that the company takes more days to pay its long-term debts and borrowings, and this is not good for business. The Creditor’s Payment Period declined 35 days in 2015 to 23 days in 2016. Thus, the company takes fewer days to settle its debts with trade suppliers. In addition, the company is now able to pay its suppliers on time compared to the past, which is an indication of its liquidity (Peterson & Fabozzi 2012).

References

Albrecht, W. S. (2007). Accounting, concepts & applications. Mason, Ohio: Thomson/South-Western.

Hussey, R. (2010). Fundamentals of international financial accounting and reporting. Singapore: World Scientific.

Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2010). Intermediate accounting. Australia: South-Western/Cengage Learning.

Peterson, D. P., & Fabozzi, F. J. 2012 Analysis of financial statements. Hoboken, New Jersey: John Wiley & Sons.

Shim, J. K., & Siegel, J. G. (2008). Financial management. Hauppauge, N.Y: Barron’s Educational Series.

Vandyck, C. K. 2006 Financial ratio analysis: A handy guidebook. Victoria, B.C: Trafford.

Wanjialin, G. (2004). An international dictionary of accounting & taxation: 12000 + entries on accounting, auditing & taxation in the USA, Canada, UK & Australia ; Cear one sentence definition right to the point. New York, NY: Universe Publ.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting: IFRS. Hoboken, N.J: Wiley