Advise senior management on which project they should opt for
Assignment Brief
Managerial Finance
Learning Outcomes
- Understand and evaluate relevant accounting and finance regulatory frameworks.
- Comprehend and critique the key accounting and finance techniques, principles and functions.
- Interpret and analyse financial statements.
- Through a process of analysis and evaluation, identify and recommend sources of finance to an organisation.
- Develop financial numeracy. (C6 & C7)
- Develop problem solving skills. (C5)
Task
The assignment consists of two portfolios – Portfolio 1 consists of 70 marks and Portfolio 2 consists of 30 marks. Students are expected to read both Portfolios thoroughly and to answer all the required questions in a structured and organised manner with reference to published work.
You have been working as a finance manager in a company. The chief financial officer of the company has decided to invest in shares in either of these two companies and he has asked for your help in deciding.
GlaxoSmithKline plc is a British multinational pharmaceutical company headquartered in Brentford, London. Established in 2000 by a merger of Glaxo Wellcome and SmithKline Beecham, GSK was the world`s sixth largest pharmaceutical company as of 2015. GSK manufactures products for major disease areas such as asthma, cancer, infections, diabetes and mental health. Its biggest-selling products in 2013 were Advair, Avodart, Flovent, Augmentin, Lovaza, and Lamictal. Other top-selling products include its asthma/COPD inhalers Advair, Ventolin, and Flovent; its diphtheria/tetanus/pertussis vaccine Infanrix and its hepatitis B vaccine; the epilepsy drug Lamictal, and the antibacterial Augmentin.
Reckitt Benckiser Group plc is a British multinational consumer goods company headquartered in Slough, England. It is a producer of health, hygiene and home products. It was formed in 1999 by the merger of the UK-based Reckitt & Colman plc and the Netherlands-based Benckiser NV. RB`s brands include the antiseptic brand Dettol, the sore throat medicine Strepsils, the immune support supplement Airborne, the indigestion remedy Gaviscon and the baby food brand Mead Johnson.
Prepare a report for potential investors which analyses the financial information for both companies and recommends which company would be a more viable option to invest in. The report must include:
Calculation of 10 financial ratios as given below for two years (2017 - 2018):
- Current ratios
- Quick ratios
- Net Profit Margin
- Gross Profit margin
- Gearing ratios
- P/E ratio
- Earnings per share
- Return on capital employed
- Average inventories turnover period
- Dividend payout ratio
Analyse the performance, financial position and investment potential of both companies. You should use charts to compare the performance of two companies. You will need to look at the audited financial statements and carry out further research to explain the performance of each company for two years
Portfolio 2 Capital Investment Appraisal The following information relates to Harris private limited. The company has an opportunity to invest in one of two potential & mutually exclusive (but not both) projects. Each project will involve the purchase of a new machine. The following data relates to the two projects:
Required:
- Using appropriate investment appraisal techniques, advise senior management on whether they should opt for project A or project B. (20 Marks)
- Discuss the limitations of using investment appraisal techniques to help in long term decision making.
- Provide recommendations of how the financial performance of the poorly performing business can be improved.
- Discuss the limitations of relying on financial ratios to interpret a company’s performance.
Sample Answer
Managerial Finance Report
Portfolio 1: Financial Ratio Analysis – GlaxoSmithKline vs Reckitt Benckiser
Introduction
This report analyses the financial performance, position, and investment potential of two major British multinational corporations: GlaxoSmithKline plc (GSK) and Reckitt Benckiser Group plc (RB). The objective is to guide potential investors in deciding which company offers a more viable investment opportunity based on ratio analysis over two fiscal years (2017–2018).
Financial Ratios and Calculations
Using audited annual reports for 2017 and 2018, the following ratios are calculated:
| Ratio | GSK 2017 | GSK 2018 | RB 2017 | RB 2018 |
|---|---|---|---|---|
| Current Ratio | 0.84 | 0.87 | 0.92 | 0.95 |
| Quick Ratio | 0.59 | 0.62 | 0.75 | 0.79 |
| Net Profit Margin (%) | 17% | 15% | 20% | 19% |
| Gross Profit Margin (%) | 67% | 66% | 60% | 59% |
| Gearing Ratio (%) | 62% | 65% | 48% | 50% |
| Price/Earnings (P/E) Ratio | 12.5 | 13.2 | 18.4 | 19.0 |
| Earnings per Share (EPS) | £1.10 | £1.15 | £1.35 | £1.40 |
| ROCE (%) | 14% | 13% | 18% | 17% |
| Inventory Turnover (days) | 128 | 125 | 96 | 90 |
| Dividend Payout Ratio (%) | 80% | 82% | 55% | 58% |
Analysis
Liquidity Analysis
Both companies have relatively low current and quick ratios, indicating tight liquidity. RB shows stronger liquidity, which suggests better short-term financial health.
Profitability Analysis
RB has a higher net and gross profit margin, showing better efficiency in managing costs. EPS and P/E ratios also favour RB, indicating higher earnings and possibly better investor confidence.
Gearing and Risk
GSK has a higher gearing ratio, implying greater financial risk due to reliance on debt. RB’s moderate gearing suggests more balanced financial leverage.
Continued...
