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# Financial Decision Making

## Part 1. Business performance analysis:

### 2.1 Analysis of profit and loss account statement:

In this regard, Roast Ltd's income-statement review reveals that the company's revenue have grown between the years of 2017 and 2018 from 2022,000 to 2534,000 pounds (25.32 percent growth), with production costs increasing between 2017 and 2018 from 1055,000 pounds to 90 million pounds (32.23 percent growth). Operating revenues of the Corporation were 60,000 in year 2018. Operating costs, on the other hand, rose from £ 466,000 in 2017 to £ 477,000 in 2018. Operating profits of 127000 and 51000 in 2018 and 2017 were published by Roast Ltd., showing an upwards trend respectively. In 2018 and 2017, the corporation's net income amount was 81000 and 36000, reflecting an improvement in total profitability.

Evaluation of distinct ratios will be beneficial in further efficient interpretation of the corporation's P&L account. Ratio helps to understand the output of the corporation by evaluating the key ties of various items throughout one or more periods of profits. Two equations for the study of Roast Ltd's income statement are as follows:

### Gross Profit Ratio:

 (GBP'000) Year-2017 Year-2018 Gross profit 517 544 Net sales 2022 2534 Gross profit Margin = Gross profit/ Net sales x 100 25.57% 21.47%

This is key profitability ratio commonly applied by managers to evaluate business actual fiscal wellness by exhibiting sum remain out of revenue after providing costs incurred against goods sold. Evaluation of the corporation's gross margin (percentage) revealed that the gross margin business gained in year 2018 is 21.47%, which was of 25.57% for year-2017. This suggests that the performance of the corporation to generate gross profits before any operating or non-operating expenses has been decreased over the period.

### Operating Profit Ratio:

 (GBP'000) Year - 2017 Year - 2018 Operating profit 51 127 Net sales 2022 2534 Operating profit ratio= Operating profit/ Net sales x 100 2.52% 5.01%

This ratio forms and evaluates relationship among business's operating profits and entire net-revenue obtained though its operations or net-sales figures. It is also a kind of profitability ratio which is expresses generally in percentage form. In 2018 and 2017, the operating ratio in the corporation was 5.01 percent and 2.52 percent. The trend indicates that its operating operations have improved the company's ability to make profits. This basically means that business costs have been reduced and that operational profits have been improved.

Suggested: Financial management - Important Aspect for Business Growth

### Net-Profit Margin ratio:

 (GBP'000) Year - 2017 Year - 2018 Net profit 36 81 Net sales 2022 2534 Net profit ratio = Net Profit / Net Sales 1.78% 3.20%

This ratio expresses a customer relationship between net amount of profits earned by corporation and net sales through its entire business operations. It is more clearly shows corporation's net profitability level and demoted in certain percentage. As shown above, the net profit ratios of the table business in year-2018 and 2017 were 3.2 percent and 1.78 percent. That simply specifies that the degree of net profitability of the organization has been enhanced. Over the time, the aggregate net-margin creation potential of the business has been improved and it would be advantageous in terms of profit opportunity for acquisition purposes.

### 2.2 Statement of financial position:

It has been noted, in this context, that the corporation has made capital expenditure for purchasing property, plants and equipment (PPE) as the PPE cost of the company was raised from £670000 to £996000 in 2017 to 2018, as shown in a review of items listed in the Roast Ltd Statement of Financial position. Another noteworthy aspect is zero cash and cash equivalents stated during 2018 by company while during year2017 it was £ 134,000, which indicates that in 2018, the corporation utilized all cash resources/funds. The current total assets figure was at £ 447000, that in year-2017 was £ 347000. In 2018, the Company has granted no securities, because the equity capital of the corporation is £ 200,000 for both years. Respective organization's overall-retained earnings are £ 660,000 in 2018, which amounted to £ 579 000 in 2016, including income and general reserves or special reserves. So cumulative equity figure rise to £ 860000 from £ 779000.

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Long-term lending for firms is drastically increasing, with long-term debt for businesses hitting £ 275,000 in 2018, which amounted to £ 100,000 in 2017. During 2018, the corporation also obtained a overdraft account of £ 73,000. During the duration of 2017-2018, business creditors are adjusted from £138000 to £235000. In 2017 to 2018, overall obligations/liabilities have been increased by £ 345,000 (from GBP 238,000 to GBP 583,000).

In addition, a number of key metrics are described in the analysis for better assessing the financial position of the respective organization when taking account of key balance sheet elements. Ratio-analysis offer a better insight into the real-time fiscal or actual monetary situation of the business. The following are important business ratio-metrics in this respect:

### Current Assets:

 (GBP'000) Year - 2017 Year - 2018 Current assets 347 447 Current liabilities 138 308 Current ratio = Current assets / Current liabilities 2.51 times 1.45 times

The above figures reveal that the corporation's current ratio in year-2017 was higher than two times, that is 2.51, while it decreased to 1.45 times in year-2018. The fall in the current ratio means that companies have lost flexibility in the servicing of current obligations by their current assets.

### Debt to Equity Ratio:

 (£'000) Year - 2017 Year - 2018 Debts 238 583 Equity 779 860 Debt to Equity Ratio = Debs / Equity 0.3055 0.6779

As the figures indicate, the debt-to-equity ratio of the corporation has risen from 0.3055 over the period from 2017 to 2018 to 0.6779. This increase in debt-equity ratio reflects that company's long-term liquidity position has been improved.

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