Accounting

1. Running head: ELB’S FINANCIAL PERFORMANCE 1
ELB’s Financial Performance
Student’s Name
University Affiliation

2. ELB’S FINANCIAL PERFORMANCE 2
Analysis of ELB’s financial performance
ELB’s financial performance has dramatically improved over the two years. According
to the company's financial statements, ELB reported an increase in its financial position in 2018
compared to the preceding years. For instance, in 2017, the firm's financial situation was $ 32.2
million. But this figure increased in 2018 to $ 40.93 million, which was driven by the excellent
performance of the company activities in the markets (Fridson, & Alvarez, 2016).
Income statements analysis of ELB Company
Horizontal analysis
Even though the ELB Company reported excellent performance in financial position,
the company's net profits reduced in 2018 compared to its value in 2017. During the two fiscal
years, the company reported an increase in revenues, which indicates an improvement in the
business's performance. While the revenues of the firm increase, the cost of sales also
increased, which led to a decrease in the net profit of the company (Fridson & Alvarez, 2016).
For instance, ELB Company's cost of goods sold risen in 2018 $ 24 million from $ 20.25. The
increase in the cost of products sold was due to a rise in the company's production cost. As
such, this finally led to a decrease in the net profit of the firm in general. Despite an increase
in the value of the cost of sales, the firm still reported an increase in the gross profit in 2018
compared to the amount of gross profit in 2017. In 2017, the value of gross profit of ELB
Company was $ 8.65 million but, the value increased to $ 10.2 million in 2018 which was an
indication that the company's financial performance improved in 2018 compared. Also, the
main aim for a rise in gross profit of ELB is due to a rise in net sales, which led to an increase
in the revenue value of the company ion 2018.
Additionally, ELB Company also reported an increase in administration expenses in
2018 by $ 1.82 million from $ 3.3 million in 2017 to $ 5.12 million in 2018. Generally, an
increase in spending reduces the net profit of a company (Hales, 2017). As a result of the rise

3. ELB’S FINANCIAL PERFORMANCE 3
in an increase in the company's distribution and administration expenses, there was a likelihood
that the company's net profit would reduce in 2018 compared to the value in 2017. Also, other
costs of the company, such as finance cost, increased by $ 0.07 million in 2018 from $ 0.45
million in 2017 to $ 0.52 million in 2018. This means that the company spent more money on
financial obligations in 2018 as compared to 2017 (Hales, 2017). As a result of the tremendous
increase in the company's expenses in 2018, the company's profit before tax reduced in 2018
to $ 4.56 million from $ 4.9 million. The latter was an indication that ELB Company realized
heavy losses in 2018. As such, there is a need for the management to find possible ways of
reducing the expenses of the company to improve its performance
Due to a reduction in profit before tax, the company income tax reduced in 2018 by $
0.01 million from $ 0.1.4 million to $ 1.3 million. Since income tax is imposed on the amount
of profit made by a company during the year, the corporation tax charged on the company was
based on the amount of income earned during the year (Hales, 2017). As a result, ELB
Company's net profit reduces in 2018 by 6.9 %, which is likely to influence the future financial
performance of the business in case the net profit continue to decrease in the preceding years.
Vertical analysis
According to the percentage change of various particulars of ELB, the total company
revenue increased by 18.3 % in 2018 when comparing the full value of income of 2018 an that
of 2017. The increase in revenue might be due to the rise in sale during the year compared to
the preceding year. Also, the company's cost of sales rose by 18.5 % in 2018. Despite the
general rise in the cost of sales by the company, the gross profit also increased in 2018 by 17.9
% for the previous year. Besides, ELB net expenses increased in 2018, which led to a decrease
in profit before by 6.9 %.

4. ELB’S FINANCIAL PERFORMANCE 4
Balance sheets and leverage ratios
Over the two years, the company's both non-current and current assets have increased,
which contributed to a significant change in its financial position. The overall change in the
firm's fiscal situation between the two years was brought about many factors. First, the
company's PPE increased from $ 17,880 in 2017 to $ 25.93 million in 2018 which is a sign that
the company increased the value of its non-current assets between 2017-2018 financial years
(Stein, 2019). Besides, the cost of investments of the company's investments available for sale
increased between in 2017 and 2018 form$ 5.4 million to $ 6.2 million which contributed
significantly to the overall increase in the financial position of ELB Company.
Besides, to increase in the non-current assets, the company's current assets also
increased in 2018, which contributed a reasonable position for the general increase in the
company's financial situation. During 2018, EPL acquired more inventories to improve its
business activities. As a result, this led to a rise in the financial position of the business in 2018
compared to the last years (Stein, 2019). Conversely, the firm’s cash and cash equivalent
reduced to zero in 2018 from $ 0.12 million in 2017. The reduction in cash and cash equivalent
is a sign that the business is not in a position to service its short term obligation in 2018. Also,
a reduction in the company's cash and cash equivalent contributed to a reduction in the value
of the total current asset in 2018.
Even though the company's cash and cash equivalent reduced in 2018, its total current
assets for the two years are still higher, the total current liabilities of the previous years. As a
result, the quick ratio of ELB is above 1.0, which implies that the company is able of meeting
its short-term responsibilities. Therefore, the company cannot be liquidated at any point
because it will be capable of servicing its short-term debts and obligation in case of solvency.
Furthermore, account receivables of the company reduced from $ 5.2 million in 2017
to $ 4.3 million in 2018, which implies that many customers and other stakeholders have paid

5. ELB’S FINANCIAL PERFORMANCE 5
the amount of money they owed the company. However, the difference in the amount was not
much more significant; thus, the change did not lead to a decrease in the financial position of
ELB (Stein, 2019). Despite a decrease in the trade receivables, the business's financial situation
still increased in 2018 compared to 2017 due to an increase in other particulars such as an
increase in inventories and non-current assets of ELB.
Although the analysis of the ELB's assets, liabilities, and shareholders' equity played
an essential part in increasing ELB’s financial position between 2017 and 2018. According to
the value of ordinary shares, there was no enormous difference between the value of the
company's ordinary stock in 2017 and 2018. The value of the ELB’s share capital remained the
same at $ 10 million for the two years with a par value of $ 1 per ordinary. The latter infers that
the company did not issue any additional share as a way of increasing its capital base. However,
the value retained earnings, which comprises of the profit from the previous years of the
company, raised in 2018 by 3.26 million from 7.46 million in 2017. The amount increased
because the profit earned during 2018 were not distributed to shareholders as dividends. As a
result, this led to a more significant difference between retained earnings in 2018 and 2017.
Also, the gain in the revaluation of reserves of the ELB Company increased in 2018 by
$ 3.1 million from $ 1.1 million in 2017. The increases in revaluation reserve significantly
contributed to the overall rise in ELB financial position in 2018 compared to 2017. The gain in
the revaluation of reserves related to the additional value of PPE that were revalued during
2018 financial year. As such, a rise in the value of other reserves of the company by $ 0.8
million from $ 1 million in 2017 has also contributed to a rise in financial position ELB
Company. An increase in the value of other reserves was to gain from the sale of investments
of the company.
Apart from ordinary share capital, the company, other sources of capital include loans
and borrowings. However, between 2017 and 2018 the value of the company's long-term

6. ELB’S FINANCIAL PERFORMANCE 6
investment did not change which infers that the management did not increase the liquidity
nature of the company by acquiring more loans (Rivera, 2014). But the company's acquired a
6% bonds repayable by 2020 which increased from $ 5.2 million in 2017 to $ 5.4 million in
2018 which is an indication that the company increased its debt-equity ratio in 2018.
Lastly, the company’s trade and other payables increased in 2018 by $ 1.1 million from
4.7 million in 2017. An increase in these current liabilities increased the company’s liquidity
position. As such, this is likely to put the company at risk in case of solvency because the
company might not be able to meet all its short term obligations. On the same note, the
company also increased its short term borrowings in 2018 by 0.27 million from zero balance.
Consequently, this contributed a rise in value of current liabilities in 2018 (Rivera, 2014).
However, an increase in current liabilities and a decrease in assets of the company can
adversely affect ELB Company might fail to service its short term obligations when they fall
due.
Liquidity ratios
i. Quick ratio = (Total current asset – inventories)/ current liabilities
Quick ratio = ($ 8.8 - $ 4.5 m) / $ 6.07 m
Quick ratio = 0. 7
According to results from the calculation of quick ratio, the company is likely to fail to
meet its short term obligations because its ratio is less than 1. The quick of ELB Company for
2018 was 0.7:1, which less than the target of the company (Weaver, 2018).
ii. Current ratio
Current ratio = CA/ CL
Current ratio = $ 8.8 m / $ 6.07 m
Current ratio = 1.45

7. ELB’S FINANCIAL PERFORMANCE 7
According to results from the calculation, the company can service its short term
responsibility because its current ratio is more than 1. Also, the value of the current ratio for
ELB in 2018 is closer to the targeted value set by the management.
iii. Gearing ratio
Typically, the gearing ratio of a company refers to the amount of debt expressed as a
percentage of the total equity.
Therefore, gearing ratio of ELB Company = debt / equity
Gearing ratio = ($ 11.4 m / $ 23.46) x 100 %
Gearing ratio = 0.485 x 100 %
Gearing ratio = 48.5 %
From the results of the calculation, the company's debt to equity ratio is less than 50 %,
which shows that the company most of its activities with debt finances. However, the value of
the company's gearing ratio for 2018 was less than the target of the management, which is an
indication that the can still operate without debt finances.
Recommendations
For the company to increase its performance in its industry, the management should employ
the following strategies to reduce expenses.
1. The management should reduce debt finances of the company to reduce leverage ratios
of the company.
2. The management should employ appropriate operational strategies to reduce the cost
of sale to enable the company to make enough gross profit from sales.
3. The company should minimize its administration and distribution cost to reduce net
expenses to realize reasonable net profits.

8. ELB’S FINANCIAL PERFORMANCE 8
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