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Buy for a lower price – Need to set one
1. Over reliance on debt
2. Poor management in general which we can fix!!!- (i.e. weird depreciation, increased
inventory)
3. Potential to grow
1. Business looks good without the high finance costs
Bad?
Good?
Low current and quick ratios
Paying back debt but
quite slow
Agency issues with the percentage of debt
Operating cash flows
still okay
Not really efficient rn – Lots of expenses (especially employees),
profits increased much more when buying PPE
Solutions:
• Automation
ROE, ROA, EBITPM falling
Growth:
• Need some advertising
• Buy more PPE and expand
ADVANTAGES OF RETAINED EARNINGS AS AN INTERNAL SOURCE
OF FINANCE
The advantage of having retained profits/earnings is clearly seen in its characteristics.
1. First, they are long-term finance and nobody can ask for their payments.
2. Secondly, since there is no additional equity to be issued, there is no dilution of control
and ownership in the business.
3. Thirdly, there is no fixed obligation of interest or installment payments.
4. Fourthly, retained earnings as an internal source of finance are cost effective considering
the fact that there is no issue cost attached to it which ranges between 2 – 3 %.
5. Lastly, investing retained earnings in the projects, with IRR better than ROI of the
business, will directly have a positive impact the shareholder’s wealth and thereby the
core objective of management will be served.
Assess everything against benchmarks: Performance in other periods, performance
of similar firms, budgeted performance for the current year
Debt Ratio: 2014-2017: 66.92%, 76.02%, 75.57%, 72.39%
The debt ratio is continuing to worsen, meaning the firm’s assets are becoming more and
more reliant on external sources of finance (rather than capital) to be financed.
This higher debt ratio means a greater reliance on borrowed funds, as the loans and
borrowings of the business have increased greatly from 2014-2016, where we now see a
sudden improvement in 2017 due to a lower amount of borrowings, which may be evidence
of the business taking action to improve. As the debt ratio is an indicator of a firm’s long term
stability, the high percentage albeit decreased in 2017, is associated with a high level of risk
for the business, which may result in higher interest paid, or may even eventually lead to
bankruptcy if corrective action is not used.
Debt ratio will have implications on profitability and ROE and therefore should not be
assessed alone.
A higher debt ratio however could also be associated with a higher ROE, albeit a higher risk.
As the business is more reliant on external sources of finance rather than capital for equity,
ROE can still increase without increasing profit. Therefore, the owner is utilising outside
funds but still retains all the profits.
Other argument: No doubt there is a high debt ratio, but it has somewhat capped in 2015
and is now experiencing a decrease. In addition, it can be dealt with using the net cash from
operating activities which look to remain stable in the recent years.
Employee Costs/Wages
The cost of wages are continuing to increase each year despite the fact that the expansion
of PPE happened between 2013-2014 and 2014-2015. The initial dramatic rise in wages
would have been due to more employees for the new centres/hospitals, but the continued
rise in wages after the PPE expansion shows that the business may have rostering issues or
bad management in the use of its employees. Poor management in workers may reduce
efficiency and motivation of employees to perform tasks and may decrease the overall
quality of their job performance, which may result in patients not wanting to come back to
visit the same doctor or GP in the future; hence decreasing profits. The business should look
into better management strategies to increase productivity and morale in the future, to grow
profits and decrease employee expenses through a better rostering system, (fewer sporadic
calls for casual employees).
Strategies may involve better budgeting in general, where the business can then allocate a
specific amount of employee expense they are hoping to incur in the future reporting period,
in comparison to the last period or figures of similar businesses.
Inject Addition Capital/Use of Retained Earnings
Presently, the entire business is mainly reliant on external sources of finance, given the high
debt ratio and loans; albeit slowly decreasing. Capital must be invested into the business as
a means of an internal source of finance that will help the business to pay off short term
debts as well as additional equipment and facilities to help expansion after present problems
are dealt with. Using internal sources of finance gives the ability to maintain autonomy and
control without the need of repayment of the principal or interest.
Working Capital Ratio: 2014-2017: 0.43, 0.51, 0.52, 0.56
The working capital across the 5 years is all unsatisfactory as it is below 1:1 CA:CL, which
suggests that the firm is unable to meet all of its short term debts as they fall due. Although
there is a slight increase in WCR, the change in minimal and does not suggest a proper
solution is being used to allow the business to meet its short term debts.
As the WCR is less than 1:1, the business may need to: make capital contributions, seek
additional finance (bank overdrafts).
Cash Flow Ratio: 2014-2017: 2.96, 2.96, 2.28, 2.31
The cash flow ratio shows a gradual decrease overtime, with a large deterioration between
2015-2016 possibly due to the overbearingly increasing amounts of interest-bearing loan
and borrowings the business has to make to pay off debts and other creditors. The operating
cash flow itself has increase from 2014-2015 proportionally to the increase and development
of the business (increase in PPE) and looks to remain stable in the current years.
However, due to the increasing current liabilities, cash flow from operating activities must
look to improve proportionally more than CL in order to also improve the overall liquidity of
the business.
Speed of liquidity
