2. ELB FINANCIAL ANALYSIS 2
ELB’s Financial Performance Analysis
Financial performance of an entity refers to the measure of the effectiveness of a firm to
utilize its assets to create revenue. Usually, analysis involves comparing the financial information
of the company; balance sheet and the income statement. For ELB analysis, it will include the
contrast of the income statement and the financial position of the firm to establish its performance
in the market. It is a comparison of the performance between the 2017 and 2018 fiscal years of the
company that indicates tremendous growth over the two years. ELB's financial performance is
higher in 2018 than it was in the previous year.
Income Statement
Horizontal Analysis
Even with the excellent financial performance that ELB reported, the net profit in 2018
dropped from $ 3.5 million to $ 3.26 million. The difference in profit was brought about by the
subsequent rise in the cost of goods sold together with the high cost and expenses as compared to
2017. A rise in the revenue of the company from $ 28.9 million to $ 34.2 million represented an
improvement in the financial performance of the company. It shows an increase in the total sales
sold by the company resulting in a high income, thus an improvement in the financial performance
of the entity.
Cost of sales rose to $ 24 million in 2018 as compared to $ 20.25 in 2017. As a result, it
influenced the net profit of the firm — the increase was as a result of the higher cost of operations
in 2018 than in 2017. Even with the high expenses gross profit of the ELB Company was higher
in 2018 than in 2017, thus showing the improvement of the financial performance of the firm
(Johnson, 2018). A gross profit of $ 10.2 million was realized in 2018 while in 2017, it was
reported to be $ 8. 65 million; all attributed to the high sales achieved in the subsequent year.
3. ELB FINANCIAL ANALYSIS 3
There was a $ 1.82 million raised in the cost related to administration. In 2017, the
organization incurred a total of $ 3.3 million as an administrative expense in 2017 while in the
following year it rose to $ 5.12 million. The rise in the expenditure contributes significantly to the
drop in the net profit in 2018. Other expenses that contribute to the decline in net profit are the
finance costs. The cost rose from $ 0.45 million in 2017 to $ 0.52 million in the subsequent year.
This implies that besides spending more money on the pertains and other forms of expenses, ELB
still used more funds on facilitating its financial obligations in 2018 than 2017. The tremendous
increase in the company's costs in 2018 led to $ 0.34 million declines in the profit before tax. The
enterprise reported a total of $ 4.9 million profit before taxation in 2017 and $ 4.56 million in 2018,
thus resulting in high losses in 2018. Jagels et al. (2016) argue that there is a need for the
management of ELB Company to come up with strategies to ensure low expenses to realize high
and substantive profits in the future.
Tax imposition is calculated on the profit before tax (Rivera, 2014). Therefore, a rise or
fall always make a significant impact on the tax charges of the company. In this case, a decline in
the profit before tax in 2018 resulted in a lower tax charge of $ 1.3 million, which was a $ 1.1
million drop from $ 1.4 million in the previous year. Generally, despite the rise in the revenue in
2018, the subsequent growth in the costs led to a fall in the net gain of the company by $ 0.24
million from $ 3.5 million profit in 2017.
Vertical Analysis
In 2018, ELB experienced several percentage changes on the components of the income
statement hence the positive or negative changes. The 18.3 % rise in revenue in 2018 ways as a
result of high sales in the year as compared to 2017. The 18.5% growth in the expenses of the
company were caused by an increase in the operation and other costs like administration and
4. ELB FINANCIAL ANALYSIS 4
finance costs. They can also be as a result of adverse economic conditions in the year that led to
high production cost. The rise in gross profit from 2017 to 2018 was 17.9%, which eventually
dropped after subtracting high expenses. ELB's net profit in 2017 decreased by 6.9% in 2018.
Balance Sheet
The current and non-current assets of the company increased in both the 2017 and 2018
financial years, thus a significant positive change in the financial position of the enterprise. Among
the factors that influence to the improvement of the financial position include the rise in the worth
of the property, plant, and equipment from $ 17.88 million in 2017 to $ 25.93 million in the
following year. Additionally, there was a rise in the value of ELB investments from $ 5.4 million
in 2017 to $ 6.2 million in 2018. Increase in PPEand investments of the firm influenced the overall
rise in the financial position if ELB in 2018.
The non-current assets also added to the growth of the financial position of the company.
In 2018, ELB reported an increase in the current assets while others decrease. The company's stock
increased from $ 3.6 million in 2017 to $ 4.5 million in 2018 hence a higher financial position. A
high inventory is an indication of higher business activities that the firm aim at accomplishing by
selling out the stock (Post & Byron, 2015). Again, the number of debtors reduced significantly
from 2017 to 2018. Receivables moved from $ 5.2 million in 2017 to $ 4.3 million in 2018. ELB
was made the customers and other stakeholders who owed the enterprise to settle their debts, thus
reducing the receivables. Nonetheless, the difference was quite small, the insignificance on causing
a decline in the financial position of the entity.
Other elements like the cash and cash equivalent changed from $ -.12 million in 2017 to
zero. This reduced the liquidity of the firm, thus influencing its ability to address the short-term
responsibilities when they are due (Muthee et al., 2016). With the decline, it contributes to a
5. ELB FINANCIAL ANALYSIS 5
decrease in the total current assets of the entity in 2018. The reduction of the receivables and cash
equivalents, the total assets of ELB Company, there was still a growth in the assets of the company
in 2018 as compared to 2017.
The shareholder's equity, together with liabilities are also a significant part of the financial
position of a company. In ELB, the share capital was maintained at $ 10 million during the two
years. The per capita was 1$ per ordinary share. For the retained earnings, there was a tremendous
growth from $ 3.26 million in 2017 and $ 7.46 million in 2018. In 2018, the shareholders did not
receive profits in the form of dividends hence a high retained earning drawn from the net profits.
Another gain was regarding the revaluation of the company's reserves. In 2017, the reserved were
at $1.1 million, which rose to $ 4.2 million in 2018. An increase in the value of the PPE
significantly led to higher revaluation, thus a stronger financial position. Besides, the investments
available for sale increased from the rise in reserve. The value changed from $ 1 million in 2017
to $ 1,8 million in 2018.
ELB’s source of capital is from share capital, loans, and borrowings. During the two years,
the long-term of the entity was constant; implying that it did not acquire more loans to facilitate
the liquidity of the business (Hilton & Platt, 2015). Debt to equity ratio grew because of a rise in
the 6% bond that is payable in 2020. The bond was $ 5.2 million in 2017, which became $ 5.4
million in 2018. Lastly, trade and payables of ELB Company increased from $ 4.7 million in 2017
to $ 5.8 million in 2018. Increase in the current liability enhanced the liquidity position of the
company. The firm may be at risk of solvency due to higher obligations that might not be settled
using the current assets of the enterprise (Nuhu, 2014). Higher current liabilities lower both the
current and quick ratios of the firm.
6. ELB FINANCIAL ANALYSIS 6
Liquidity ratios
i. Quick ratio demonstrates the capacity of a firm to resolve its short-term obligations
when they are due.
Quick ratio = (Total current asset – inventories)/ current liabilities
Quick ratio = ($ 8.8 - $ 4.5 m) / $ 6.07 m
Quick ratio = 0. 7
ELB may be at risk of not settling short-term responsibilities due to a high value of liability
compared to assets (Hales, 2017). 0.7 indicates that the organization’s current assets are below the
current liabilities
ii. Current ratio
Current ratio shows the ability of an entity to address its short-term responsibilities when the
time comes.
Current ratio = current assets/ current liabilities
Current ratio = $ 8.8 m / $ 6.07 m
Current ratio = 1.45
A high current ratio indicates that the company can use its current assets to settle its short-
term debts fully (Ego, 2018).
iii. Gearing ratio
Gearing ratio is a portion of the debts in a capital showed as a percentage of the equity.
Therefore, gearing ratio of EBL Company = debt / equity
Gearing ratio = ($ 11.4 m / $ 23.46) x 100 %
Gearing ratio = 0.485 x 100 %
Gearing ratio = 48.5 %
7. ELB FINANCIAL ANALYSIS 7
ELB uses small portion of debts to finance its operations as compare to equity. This implies
that the business operations of the business can continue without the borrowings.
Recommendations
There are few issues that ELB's management need to consider to ensure improvement in
financial performance.
1. First, they should reduce the amount of borrowed finances to improve the leverage ratio
and eventually minimize the risks of liquidity.
2. Second, they should develop a way to minimize expenses from administration and
distribution activities to realize substantial net profits.
3. Lastly, ELB should change its operational strategies to reduce expenses and costs that
reduce the gross profits of the entity.
8. ELB FINANCIAL ANALYSIS 8
References
Ego, C. I. (2017). Liquidity and the Market Share Ratios as Indicators of Fraud (Doctoral
dissertation, Northcentral University).
Johnson, G. (2018). An Investigation into Why Not All Net Operating Losses Reported are Net
Operating Losses(Doctoral dissertation, Northcentral University).
Kariyawasam, A. H. N. Analysing the Impact of Financial Ratios on a Company’s Financial
Performance.
Hales, J. (2017). Accounting and Financial Analysis in the Hospitality Industry: The Use of Reason
in Argument. Pearson Education, India.
Hilton, R. W., & Platt, D. E. (2015). Managerial accounting: creating value in a dynamic business
environment. McGraw-Hill Education.
Jagels, M. G., Jagels, M., & Ralston, C. E. (2016). Hospitality management accounting. John
Wiley and sons.Pletzer, J. L., Nikolova, R., Kedzior, K. K., & Voelpel, S. C. (2015). Does
gender matter? Female representation on corporate boards and firm financial performance-
a meta-analysis. PloS one, 10(6), e0130005.
Muthee, B., Adudah, J., & Ondigo, H. (2016). Relationship between Interest Rates and Gearing
Ratios of Firms Listed on the Nairobi Securities Exchange. International Journal of
Finance and Accounting, 1(1), 30-44.
Nuhu, M. (2014). Role of ratio analysis in business decisions: A case study NBC Maiduguri
Plant. Journal of Educational and Social Research, 4(5), 105.
Post, C., & Byron, K. (2015). Women on boards and firm financial performance: A meta-
analysis. Academy of Management Journal, 58(5), 1546-1571.
9. ELB FINANCIAL ANALYSIS 9
Rivera, M. (2014). RevPAR-Adjusted Budgets: The Only One's Worth Looking at. VHS Asset
Management & Advisory.
