Accounting and Finance

Part 1

Introduction

The financial performance analysis is being termed as important aspect of investment planning and financial decision making. It covers a detailed assessment different performance indicator such as profitability, liquidity, financial position and many more. This report applies the ratio analysis to evaluate the financial performance of Hornby Plc that is known as a leading brand of United Kingdom that offers a wide range of model railway tools and components (Waworuntu, Wantah and Rusmanto, 2014). This report also covers a systematic evaluation of share prices and dividend policy of company along with the evaluation of financial data so as an individual investor would be able to take appropriate investment decisions within the shares of Hornby Plc. The company is listed on the London Stock Exchange. If you need assistance with finance dissertation help, feel free to reach out to us.

An analysis of Sales and Profitability

For carrying of a systematic assessment of sales and profitability of the selected organisation, the evaluation of different profitability ratio is carried out below:

As per the appendix 1, the company has recorded improvement in its annual sales in 2020 that has been reached to £37842K in 2020 as compared to £32759K. Therefore, the gross profit ratio of the Hornby Plc is increased to 44.14% in 2020 with reference to 40.94% of 2019 so as it can be stated that company has maintained improvement in its revenue generation capabilities (Sarlin, 2015). However, the assessment of net profit margin of the company has determined that the company has recorded the loss of 8.97% and 16.22% in 2020 and 2019 respectively. Apart from that, the business entity has recorded the reduction in loss value in 2020. It shows that operating expenditures of Hornby Plc are leaving the adverse impact on the company’s profit (Mahesh and Prasad, 2012). In similar way, the above table shows the negative trends in the operating profit margin that is respectively -7.44% and -15.94% for the period of 2020 and 2019 respectively. It leaves the negative impact on the efficiency of business operations. The has recorded loss in 2019 and 2020 that leaves the negative impact on the return on equity of the business entity so as the value of return on equity is -9.17% and -20.59% of 2020 and 2019. However, the reduction in the loss value could leave positive impact on the perception of shareholders.

An analysis of Cash Flow Performance, Liquidity Position and Efficiency

For evaluating the efficiency of business operation, liquidity and flow of cash are being perceived as important performance indicators. In this context, the assessment of key ratios is carried out below:

As per the above table, there are two types of liquidity ratios identified. In this regard, the current ratio determines the relationship between the current assets and current liabilities. In 2020, current ratio of Hornby Plc has been reached to 5.1 in comparison of 2.5 of 2019. It shows that company has achieved the ideal current ratio of 2:1 in both years. Therefore, it can be stated that the business entity has maintained appropriate current assets to manage the payment of all current liabilities (Hazzi and Kilani, 2013). However, the increase in current ratio indicates that organisation has maintained an appropriate cash flow within different business operations. In similar way, the quick ratio determines the availability of cash and cash-equitant current assets with reference to total current liabilities. In the present case of Hornby Plc, the quick ratio is increased to 2.4 in 2020 with reference to 1.1 of 2019 so as company has maintained cash and cash-equitant current assets in an appropriate value to manage business requirements of current liabilities (Delen, Kuzey and Uyar, 2013).

For evaluating the efficiency of business operations, the assets turnover ratio determines the relationship between the total sales and total assets employed by business entity. In the present case of Hornby Plc. The assets turnover ratio is being reduced to 0.8 in 2020 with reference to 1 of 2019. The main reason behind the reduction in assets turnover ratio is that revenue of company has not been increased with reference to increment in the total assets of business entity. It shows the reduction in organisational efficiency of business entity (Faello, 2015). In addition to that the account receivable turnover days is also reduced to 63 days in 2020 from 80 days of 2019 so as organisation could assess the increment in positive cash flow because the company receives the early funds from debtors. In similar way, the accounts payable period determines the average time schedule in which the business entity has to manage the payment to all creditors. In the present case, creditor payment period is being reduced to 84 days in 2020 with reference to 103 days of 2019. It shows that organisation has to manage extra working capital to manage the early payment to all creditors in an efficient manner. The comparison of accounts receivable days and accounts payable days

An analysis of Gearing and the funding structure (debt vs equity)

The gearing ratio is used to evaluate the proportion of debt capital in relation to equity capital. It determines the solvency risk with reference to debt capital of business entity.

As per the above table, the debt-equity ratio has become 0.00 in 2020 as compared to 0.02 of 2019. The management of Hornby Plc has removed all debt capital within the capital structure in 2020 so as the value of debt-equity ratio has become 0.00 that has reduced the solvency risk (ANNUAL REPORT AND ACCOUNTS 2020, 2020). Therefore, it can be stated that the reduction in the debt capital may leave positive impact on the efficiency of business operations.

An analysis of the share price trend and dividend policy

As per the above chart, the assessment of share price trends of Hornby Plc within the last 5 years has disclosed that the company has maintained a stable growth in share price till 2019 but the little downfall has addressed in 2020. However, organisation has maintained the strong recovery in the share price in 2021 that play a critical role in influencing the perception of shareholders (Kanapickienė and Grundienė, 2015).

In 2020, the business entity is facing loss within the last 2 years so as the business entity has not announced any dividend to shareholders. In the context of contemporary business environment, the management of Hornby Plc did not announce any kind of interim dividend. Therefore, this dividend policy may leave adverse impact on the perception of stakeholders (Borhan, Mohamed and Azmi, 2014).

Assessment of latest new

The assessment of recent news associated with the business operation of Hornby Plc has disclosed that models and collectables manufacturer Hornby group has recorded a significant increment in the sales for the third quarter that is seemed the positive and ahead of the same period last year (Rist and Pizzica, 2014). However, the announcement of Brexit has incorporated several uncertainties for the business and also affects the international trade operations. Moreover, the management of Hornby Plc has disclosed that online platforms are being emerged as key sales driver for business entity and it supported business in controlling the organisational losses (Hornby Plc HRB, 2021).

Conclusion

As per the above assessment, this investigation concludes that an investor should consider the shares of Hornby Plc for the long term. Due to adverse market conditions, the business entity has addressed the loss within the last two years. However, the business entity has maintained the strong business efficiency in in terms of cash flow, liquidity and efficiency. This thing would enhance the overall operational capabilities of business entity along with future sustainability so as shareholder would be able to assess the long term capital gains. Furthermore, company has recorded a significant increment in share prices that may leave positive impact on the share prices. In addition to that, the business entity has managed the payment of all debts that could reduce solvency risk of the firm.

Part 2

A

Hornby has recorded the value goodwill within the Statement of Financial Position of £4,564,000 for the year ended 31 March 2020. It is aligned with the definition of International Accounting Standards. In this context, IAS 38 Intangible Assets outlines the accounting requirements for intangible assets in which management considers all non-monetary assets that do not have any kind of physical substance and identifiable (Kimbro and Xu, 2016). In addition to that, intangible assets like goodwill are meeting the relevant recognition criteria that are initially measured at cost with consideration of different kinds of revaluation model, and it would be amortised in an appropriate manner over their useful lives. The consideration of goodwill as an assets will enhance overall value of assets and it helps the management in evaluating the role of goodwill in generating the revenue along with the business profitability. Moreover, the consideration of goodwill within the Statement of Financial Position enhances the two fundamental qualitative characteristics that could be perceived as the critical financial information (Qasim, Haddad and AbuGhazaleh, 2013). Therefore, the consideration of goodwill as assets increases the relevance and appropriateness of financial data. The assessment of goodwill in relation to assets of the business entity determines that how goodwill supports companies in raising funds and revenue for companies.

However, the treatment of goodwill as an asset could result improper presentation of financial position of business entity because the goodwill does not have any kind of finite cost or monetary value. In some cases, it misleads the financial performance. Moreover, the goodwill impairment is being termed as the message to the markets that the value of the acquired assets has been fallen below the amount that the company initially paid (Eloff and de Villiers, 2015). Moreover, the accurate representation of goodwill data has not found possible because it does not have any kind of appropriate goodwill valuation approach to represent the goodwill in an efficient manner. Goodwill presents the value of the total reputation of an organisation that has been built over time that would influence the expected future profits and it would be a significantly higher than the normal profits. In this regard, a well-established firm earns a good name in the market by building trust between the customers and business entity and it would support business entity for developing more business connections in comparison of newly set up business (Wen and Moehrle, 2016). Therefore, the perception of employee is termed as Goodwill and it influences their purchase decisions.

B

As per the case, if goodwill was being written off against in the year ended 31 March 2020 or it was not being included as an asset within the balance sheet of the company then the business entity would find the change in assets turnover ratio because the non-consideration of goodwill may reduce the total value of assets so as the assets turnover ratio will be increased (Ratiu and Tudor, 2013). This thing shows that the assets are having higher revenue generation capabilities. In addition to that, writing off to goodwill will reduce the total assets so as the management has to restructure its capital structure.

C

As per the above assessment, it has been concluded that the management of Hornby Plc should treat the Goodwill as the assets within the balance sheet of business entity. The main reason behind consideration of this decision is that an organization with efficient management would be able to generate the high productivity and cost efficiency. This thing gives increase in business profits and it is significantly aligned with the high goodwill. The goodwill also presents customer satisfaction and brand trust worthiness that supports the management in generating an appropriate value of profit margin.

Reference

Borhan, H., Mohamed, R. N., and Azmi, N. (2014). The impact of financial ratios on the financial performance of a chemical company. World Journal of Entrepreneurship, Management and Sustainable Development.

Delen, D., Kuzey, C., and Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert systems with applications, 40(10), 3970-3983.

Eloff, A. M., and de Villiers, C. (2015). The value-relevance of goodwill reported under IFRS 3 versus IAS 22. South African Journal of Accounting Research, 29(2), 162-176.

Faello, J. (2015). Understanding the limitations of financial ratios. Academy of Accounting and Financial Studies Journal, 19(3), 75.

Hazzi, O. A., and Kilani, M. I. A. (2013). The financial performance analysis of Islamic and traditional banks: Evidence from Malaysia. European Journal of Economics, Finance and Administrative Sciences, 57, 133-144.

Hornby Plc HRB. (2021). [Online]. Accessed through:. [Accessed on 10th June 2021].

Hornby Plc. (2021). [Online]. Accessed through:. [Accessed on 10th June 2021].

Kanapickienė, R., and Grundienė, Ž. (2015). The model of fraud detection in financial statements by means of financial ratios. Procedia-Social and Behavioral Sciences, 213, 321-327.

Kimbro, M. B., and Xu, D. (2016). The accounting treatment of goodwill, idiosyncratic risk, and market pricing. Journal of Accounting, Auditing and Finance, 31(3), 365-387.

Mahesh, R., and Prasad, D. (2012). Post-merger and acquisition financial performance analysis: A case study of select Indian airline companies. International journal of engineering and management sciences, 3(3), 362-369.

Qasim, A., Haddad, A. E., and AbuGhazaleh, N. M. (2013). Goodwill accounting in the United Kingdom: The effect of international financial reporting standards. Review of Business and Finance Studies, 4(1), 63-78.

Ratiu, R. V., and Tudor, A. T. (2013). The Theoretical Foundation of Goodwill-A Chronological Overview. Procedia-Social and Behavioral Sciences, 92, 784-788.

Rist, M., and Pizzica, A. J. (2014). Financial ratios for executives: How to assess company strength, fix problems, and make better decisions. Apress.

Sarlin, P. (2015). Data and dimension reduction for visual financial performance analysis. Information Visualization, 14(2), 148-167.

Waworuntu, S. R., Wantah, M. D., and Rusmanto, T. (2014). CSR and financial performance analysis: evidence from top ASEAN listed companies. Procedia-Social and Behavioral Sciences, 164, 493-500.

Wen, H., and Moehrle, S. R. (2016). Accounting for goodwill: An academic literature review and analysis to inform the debate. Research in Accounting Regulation, 28(1), 11-21.