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    Importance of Managerial Finance for RBG Plc and GSK Plc

    University: Bloomsbury institute london

    • Unit No: 2
    • Level: Undergraduate/College
    • Pages: 17 / Words 4365
    • Paper Type: Assignment
    • Course Code: LSBM203
    • Downloads: 320
    Question :

    This assessment will cover following questions :

    • Provide Understanding and evaluate relevant accounting and finance regulatory frameworks.
    • Comprehend the key accounting and finance techniques, principles and functions.
    • GSK plc is the biopharma company and RBG plc is the professional service group. Evaluate and analyse financial statements.
    • Through a process of analysis and evaluation, identify and recommend sources of finance to an organisation.
    • Develop financial numeracy and problem-solving skills GSK plc and in RBG plc.
    Answer :

    INTRODUCTION

    In the present business environment the systematic method which is utilised for the intention of controlling the monetary resources is known as managerial finance (Ahmed and Malik, 2015). Managerial finance becomes important for managers related to take the necessary steps with respect to money management in order to carry duties and assignments with company. The report cover the contrast and comparison among RBG Plc and GSK Plc have been made to understand the importance of managerial finance. Both companies are located in UK and 

    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.

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    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.

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    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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