Importance of Managerial Finance for RBG Plc and GSK Plc

In this report, different topics like computation of ratios, evaluation of performance, proper recommendation and drawback of ratios in the context of respective companies are discussed. In Addition effective suggestion id given to manager of company to select either project A or B by using different investment appraisal techniques.

TASK 1

(a) Calculation of different financial ratios for two years (2017 – 2018):

Ratio analysis relates to systematic financial and mathematical tool that is applied by managers in entity to ascertain aggregate actual financial position.

 

1. Current ratio = Current assets / Current liabilities

All data in £ million except current ratio	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
	2017	2018	2017	2018
Current assets	15907	16927	5424	4952
Current liabilities	26569	22491	6576	7614
Calculation	15907/26569	16927/22491	5424/6576	4952/7614
Current ratio	0.60 times	0.75 times	0.82 times	0.65 times

 

2. Quick ratio = Quick assets / Current liabilities

All data in £ million except Quick ratio	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
	2017	2018	2017	2018
Quick assets	10042	11121	4223	3676
Current liabilities	26569	22491	6576	7614
Calculation	10042/26569	11121/22491	4223/6576	3676/7614
Quick ratio	0.38times	0.49 times	0.64 times	0.48 times

 

3. Net profit margin = Net profit / net sales x 100

All data in £ million except net profit margin	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
	2017	2018	2017	2018
Net profit	1532	3623	6172	2161
Net sales	30186	30821	11512	12597
Calculation	1532/30186*100	3623/30821*100	6172/11512*100	2161/12597*100
Net profit margin	5.07%	11.75%	53.61%	17.15%

 

4. Gross profit margin = Gross profit / Net sales x 100

All data in £ million except gross profit margin	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
	2017	2018	2017	2018
Gross profit	19844	20580	6870	7635
Net sales	30186	30821	11512	12597
Calculation	19844/30186*100	20580/30821*100	6870/11512*100	7635/12597*100
Gross profit margin	65.74%	66.77%	59.68%	60.61%

 

5. Gearing ratio = Total Debt / Equity

All data in £ million except Gearing Ratio	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
2017	2018	2017	2018
Total Debt	56449	53706	23480	22908
Equity	-68	4360	13533	14742
Calculation	56449 / -68	53706 / 4360	23480 / 13533	22908 / 14742
Gearing Ratio	-830.13	12.32	1.74	1.55

 

6. Price earning ratio = Market Price Per Share / Earning Per Share

All data in £ million	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
2017	2018	2017	2018
Market Price Per Share	1361	1491.2	6841	5964
Earning Price Per Share	0.3152	0.7455	8.3859	2.9361
Calculation	1361 / .3152	1491.2 / .7455	6841 / 8.3859	5964 / 2.9361
Price Earning Ratio	4317.89	2000.27	815.77	2031.26

 

7. Earning per share = Net Profit / Ordinary Numbers of Shares

All data in £	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
2017	2018	2017	2018
Net Profit	1532	3623	6172	2161
Ordinary Numbers of Shares	4860	4860	736	736
Calculation	1532/4860	3623/4860	6172/736	2161/736
EPS	0.3152	0.7455	8.3859	2.9361

 

8. Return on capital employed = Operating profit (EBIT) / Capital employed *100

All data in £ million except Return on capital employed ratio	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
	2017	2018	2017	2018
EBIT	6061	7064	2963	3280
Capital employed	29812	35575	30437	30036
Calculation	6061/29812*100	7064/35575*100	2963/30437*100	3280/30036*100
ROCE	20.33%	19.86%	9.73%	10.92%

Working Note:

Capital employed = Total assets – Current liabilities

 

9. Average inventory turn over period = Average stock / Cost of goods sold * 365 days

All data in £ million except Average inventory turn over period	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
	2017	2018	2017	2018
Average stock	5557	5476	1201	1276
Cost of goods sold	10342	10241	4642	4962
Calculation	5557/10342*365	5476/10241*365	1201/4642*365	1276/4962*365
Average inventory turn over days	196 days	195 days	94 days	93.86 or 94 days

 

10. Dividend payout ratio = Total debts / total equities

All data in £ million except Dividend payout ratio	Glaxo Smith Kline plc		Reckitt Benckiser Group plc
	2017	2018	2017	2018
Total debts	56449	53706	23480	22908
Total equities	-68	4360	13533	14742
Calculation	56449/-68	53706/4360	23480/13533	22908/14742
Dividend payout ratio	-830.13	12.31	1.73	1.55

 

(b) Analyse the performance, financial position and investment potential of both companies:

For effectively analysing and evaluating financial performance of Company GSK (Glaxo Smith Kline) Plc and Company RBG (Reckitt Benckiser Group) Plc graphs are developed based on figures of calculated ratios along with interpretation, as follows:

Current ratios:

The graph above reveals that company RBG Plc's current ratio is greater than that of company GSK Plc. In year 2017, Company RBG and GSK have reported current ratio are 0.6 and 0.82 respectively, which are in year 2018 have been reached to 0.75 and 0.85 respectively. In case of both company current ratios have been increased over the period. This implies that the corporation with figure of higher current ratio has enough current assets and funds to pay short term liabilities(Liable to pay within one-year). This also demonstrates that the corporation's liquidity is greater than another.

Quick ratios:

It has been ascertained from this diagram that Comapny RBG Plc's quick ratio in year 2017 was greater than company GSK Plc, however the corporation's ratio was smaller than the other in year 2018. In year 2018, quick ratio of GSK corporation and RBG corporation are 0.49 and 0.48 respectively which in 2017 were 0.38 and 0.64 respectively. The gap in ratio is quite small, but perhaps the RBG's financial efficiency is strong if contrast is made on basis of the quick ratio.

Net Profit Margin:

The graph above indicates that Reckitt Benckiser Group Plc's net-profit margin is quite large relative to Glaxo Smith Kline Plc in 2017 and 2018. Review of the above graph shows that the net profit levels of GSK for 2017-2018 are 5.07 percent and 11.75 percent, while the net profit percentages of RBG for the same duration are 53.61 percent and 17.15 percent. RBG Plc's net profits have been dropped significantly with a significant gape displaying over the timespan, the efficiency of the corporation to deliver net profits has also been reduced.

Gross Profit margin:

This ratios demonstrates how effective company is to produce income via its business environment activities as it defines gross profit as just a difference between revenue and selling costs. The graph above suggests that the gross profit margin rates of GSK is significantly higher than that of company RBG. Company GSK's gross profit margin in period 2017-2018 are 65.74 percent and 66.67 percent (increase), while company RBG's margin is 59.68 percent and 60.61 percent (increase) respectively. As a whole, GSK is much more competitive in term of gross profit generating capacity as opposed to company RBG.

Gearing ratios:

For improved visualization, the gearing ratio of GSK is shown at 0 in the graph as it is negative i.e.-830.13.

GSK Plc's gearing ratio during year 2017 is negative at 830.13, that has been increased in year 2018 and hit to 12.32 percent. For 2017, the negative gearing proportion was attributed to the negative equity statistic in the financial statements of the corporation. While in year 2017, RBG plc's gearing ratio is 1.74, which decreased to around 1.55 in year-2018. Collective gear ratio evaluation suggests that the gear ratio of RBG is smaller than the company GSK. This indicates that there's no consistency in company's financial performance, so if stakeholders put their capital in this business, there is a significant potential for losses to be faced.

P/E ratio:

The above graph, that is based on PE ratio, indicates that for company GSK Plc this was higher in year 2017 and for company RBG Plc it was higher in year 2018. As per the ratio computations, the second corporation has a strong market stance since its ratio shows a growing trend while on other hand there is a decreasing trend in company GSK plc.

Earnings per share:

In contrast with company RBG Plc, earnings per share in company GSK Plc have been evaluated according to above chart to be cheaper. A higher P / E suggests that a stock's price is excessive relative to income and overvalued. There is a substantial decrease in GSK Plc's PE ratio between year 2017 and year 2018 from 4317.89 to 2000.27. While the PE ratio of RBG was increased in 2017 and 2018 simultaneously from 815.77 to 2031.36. Relatively, the results of RBG with respect of Gearing Ratio is much superior than that of GSK, as the rise in PE implies an improvement in shareholder confidence in the corporation.

Return on capital employed (ROCE):

This has been identified from the graph above that Glaxo Smith Kline Plc's return on capital invested is very large relative to Reckitt Benckiser Group Plc. This demonstrates that first enterprise is capable of earning a return on the money this hires. If outcomes of such a ratio are taken into account then Glaxo shows good financial performance rather than Reckitt and the investor will invest in the first business.

Average inventories turnover period:

GSK Plc's total inventory turnaround time is quite high relative to RBG Plc, meaning that its capacity to transform the stock into revenue is very poor, as it takes nearly 6 months to produce positive outcomes. The investor should pick the second organization to invest money when drawing up investment decision because its financial results is strong compared to other companies.

Dividend payout ratio:

This has been evaluated from this graph that GSK Plc's payout ratio is quite higher compared to RBG Plc, which implies it provides the entity's investors with higher dividends. It can encourage investors as they get higher returns on the funds that they are looking to invest in business.

c. Recommendation of the way in which financial performance of the poorly performing business can be improved

Form the above calculation of different important ratio it is founded that GSK have a poor performance in the existing market. Thus manager are required to make effective steps to execute planned action focusing to increase the overall market image. Different recommendations are given which can be implemented by manager to increase the overall financial strength of company. These are defined below:

• GSK executives will pay close attention to rising liquid assets in order to raising liquidity rates. This will enable to fulfil efficiently and in less period the short-term commitments.
• By making valuable and effective plan and strategies such as more focused to increase sales and optimise the cost that directly help in improving overall earning per share (Osterhoff and Kaserer, 2016).
• The organism's gross margin is quite small, so it's quite necessary for management to develop new regulations which can lead to higher productivity so it can add to the firm's sound financial results.
• The company's total inventory time is very high, and seeking ways to lower the duration is important for management. Manager should develop new approaches to boost it as it will help the development of the overall financial performance.

d. Discussion of the limitation of relaying on financial ratios to interpret a company's performance

The process which is used by manager to determine the overall financial strength and status of company is known as Ratio analysis (Xiang and Worthington, 2015). It is an effective and quicker approach to evaluate the financial performance but at the same time have certain limitations due to which wrong results are extracted. In order to reach to the best suitable conclusion it is vital for them to be aware of all the weaknesses of it. Some of them are discussed below:

• Examination of the proportion does not rely on effects of inflation, so this is not feasible for manager to produce accurate results.
• If an individual has two different financial choices for two firms from different sectors, this will not be helpful to collect correct and sufficient data to reach a decision. Thus many time create situation of confusion and hamper the overall performance of company (Limitations of Ratio analysis for decision making, 2019).
• Due to specific variation within the accounting practices that might have a greater impact on the accuracy of ratio analysis.
• Changes in final accounts numbers are rendered in all businesses until the end of the financial reporting years and it is not necessary for shareholders to obtain specific correct information about all figures.

PORTFOLIO 2

a. Use of appropriate investment appraisal techniques and advise to senior management on whether project a or b should be selected

In present business era, it is very crucial for manager to effectively analyse and compare the different investment option before making any investment which could give higher return (Van Essen, Otten and Carberry, 2015). These are net present value, discounted payback period and rate of return for accounting. In this report, Harris Private Limited are considering to buy a new machine and have two separate options to select the best favourable and profitable. These option are assessed with the support of different invest appraisal techniques to determine the best.

Provided information:

• Initial investment = 110 (For both the projects)
• Salvage value = Project A (0), Project B (8)
• Net profit:

Years	Project A	Project B
2019	45	10
2020	45	15
2021	45	25
2022	35	55
2023	35	65
2024	25	50

 

Pay back period:

Formula: Completed years + [(Initial investment – CCA of completed year) / Cash inflow of next year]

Pay back period for Project A = 2 + (110 – 90) /45

= 2 + (20 / 45)

= 2 + 0.44

= 2.44

Pay back period for Project B = 4 + (110 – 105) / 65

= 4 + (5 / 65)

= 4 + 0.07

= 4.07

Based on the above figures, the payback period of Program A is small as compared to B and this must be chosen by the company.

Net present value:

Formula: Discounted cash inflow – Initial investment

NPV for Project A = 147.31 – 110

= 37.31

NPV for project B = 120.92 – 110

= 10.92

Based on above computation, it is founded that proposal A's have a greater NPV than other option , so it should be chosen for purchasing device by Harris Private Limited.

Accounting rate of return:

Formula: Average net profit – initial investment / average investment * 100

ARR for Project A = [(45 + 45 + 45 + 35 + 35 + 25) 6] - 110 / (110 / 2) * 100

= [(230 – 110) / 6] / 55 * 100

= 20 / 55 * 100

= 36.36%

ARR for project B = [(10 + 15 + 25 + 55 + 65 + 50 + 8) 6] - 110 / (110 / 2) * 100

= [(228 – 110) / 6] / 55 * 100

= 19.66 / 55 *100

= 39.32%

Based on the above figures, investing in Project B because its ARR is better than the other business was proposed to Harris private Limited.

Recommendation: It was suggested to the Harris Private Limited to allow investing in Project A from all the above mentioned investment evaluation strategies as several of the strategies demonstrate good outcomes for proposal A. This will be advantageous for it to accomplish its goals and objectives of maximizing profit as well as sales.

b. Discussion of limitation of using investment appraisal technique to help in long term decision making

Investment appraisal techniques are being consider the crucial method for Harris Private Limited because that support in making a better and profitable investment decision in future. There are various limitation of them to help if long term decision making. All of them are as follows:

• The disadvantage of the repayment period being that it lacks the value of money, that can contribute to poor results so it's very challenging for administrators to make regular-term choices with both the aid of this technique.
• The net current value can be used for proposals of the same scale because two solutions are various sizes it is not feasible to compare them objectively because in this case can not be extended (Yarram and Dollery, 2015).
• All the measurements created in ARR are focused on book prices, so it is not feasible to transmit their figures because they may be incorrect due to the absence of correct information.

CONCLUSION

In the end of this report, it is concluded that the legal framework that include entire activity which are connected with distribution of monetary resources in the most favourable use in known as managerial finance. Ratio analysis help different investors to analyse the overall performance of company and determine the best one for future investment. Various type ratios like gross profit margin and net profit margin, ROCE, quick and current ratio, gearing, EPS etc. are calculated to define the overall performance of GSK and RBF. Companies uses effective investment techniques like NPV, ARR and pay back period in order to make a better investment decision so that higher results are attained in future.

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