2. ELB FINANCIAL ANALYSIS 2
ELB Financial Performance Analysis
The analysis entails a comparison of the performance between two financial years of the
company: 2017 and 2018. Judging by the financial information presented in the two years, the
financial effectiveness of the ELB has significantly improved. For example, the financial position
of ELB rose from $ 32.2 million in 2017 to $ 40.93 million in 2018; this can be attributed to the
excellent performance of the company's business activities.
Analysis of the ELB Income Statement
In 2018, ELB experienced an increase in revenue of $ 34.2 million as compared to $ 28.9
million in 2017; and an indication of excellent performance. The company also reported a rise in
the cost of sales; leading to a decline in net profit in 2018. The rise in the cost of sales is as a
consequence of an increase in the cost of operations. Nevertheless, even with the high cost of
purchase, the gross profit of the company was still higher than the previous one. In 2017, the gross
profit of ELB Company as $ 8.67 million while in the subsequent year it rose to $ 10.2 million
hence showing an increase in the financial performance of the firm. Another reason attributed to
the rise in gross profit is the rise in net sales that led to the rise in the value of revenue in 2018.
Also, ELB reported an increase in the administration cost from $ 3.3 million in 2017 to $
5.2 million in 2018, thus leading to a decline in the net profit. Another expense that increased was
the finance cost that rose from $ 0.45 million in 2017 to $ 0.52 million in the following year. This
implies that the entity spent more on meeting financial obligations in 2018 as compared to 2017.
There was a tremendous decline in the profit before tax from $ 4.9 million in 2017 to $ 4.56 million
in 2018. ELB experienced a substantial loss in 2018. For that reason, it is necessary for the
management to ensure minimal expenses and increase the net profits in the following years
(Burgstahler & Sawers, 2017).
3. ELB FINANCIAL ANALYSIS 3
Usually, the tax imposed on a company is determined by the profit. In this case, a decline
in the value of profit before tax led to a lower tax imposition. A rise in the administration and
distribution costs and finance cost led to a decrease in the profit before tax in 2018. Tax charges
in 2018 were $ 1.3 million while in 2017 was $ 1.4 million. The net profit of the firm dropped by
6.9%.
Vertical Analysis
Comparing the percentage change in the various components of the income statement, the
total revenue of the firm increased by 18.3% as compared to 2017. Possibly, the rise in revenue
was attributed to the increase in total sales in 2018. In 2018, ELB reported 18.5% rise in the cost
of sale, which may be as a result of economic conditions that influence the production. Despite the
rise in the cost of production, the firm still experienced a rise in the gross profit, which was 17.9%
rise. Generally, the rise in different expenses led to a 6.9% decline in the net profit of ELB in 2018.
Balance Sheet
The financial position of the ELB increased in 2018 as compared to 2017. In 2018, the
value was $ 40.93 million, which is $ 8.73 million higher than the $ 32.2 million of 2017. The rise
is attributed to the excellent performance of the company's business activities. Increase in assets;
both the current and fixed led to a substantial rise in the financial position of ELB in 2018. The
values of assets went high due to the rise in the amount of PPE from $ 17.88 million in 2017 to $
25.93 million in 2018. Besides, the value of the investments available for sale also increased from
$ 5.4 million to $ 6.2 million hence raising the overall financial position.
There was also a rise in the current assets that significantly raised the financial position of
the company (Situm, 2014). Inventory rose from $ 3.6 million in 2017 to $ 4.4 million in the
following year. In the case of the cash and the cash equivalent, there was a drastic fall from $ 0.12
4. ELB FINANCIAL ANALYSIS 4
million in 2017 to zero in 2018. This would have led to the incapability of the organization to
address its short-term commitments. Again, the decline in the worth of cash and cash equivalents
significantly contributed to the decrease in the number of total assets in 2018.
Nevertheless, despite the fall, the total assets were higher in 2018 than in 2017. It portrays
a current ratio of above 1, thus the ability to serve the short-term responsibilities (Kariyawasam).
The number of debtors reduced from $ 5.3 million in 2017 to $ 4.8 million. The company can
make its customers and stakeholders repay their debts. Change in the number of debtors did not
affect the financial position due to the increase of the fixed assets and other elements like the
inventory.
The financial position of ELB is also strengthened by the liabilities and the stakeholders'
equity as well. In both years, there was no significant difference in the value of ordinary shares.
During the two years, share capital remained constant at $ 10 million while the ordinary share had
per value of $ 1. The retained earnings increased in 2018 becoming $ 7.46 million from $ 4.2
million in 2017. In 2018, the net profit was not distributed to the shareholders; thus, the drastic
rise in the value of retained earnings in 2018.
In 2018, ELB’s reserves were revalued, leading to rising by $ 3.1 million to $ 4.2 million
as related to $ 1.1 million in 2017. The rise in the value of reserved was due to the increase in the
amount of PPE. It contributes significantly to the rise in the economic position of the company.
Other reserved also has a significant rise of $ 0.8 million from $ 1.0 million in 2018 to $ 1.8 million
in 2018, which also led to a growth in the financial position of the company. The positive change
was as a result of the rise in the sale of investments in ELB. ELB’s source of capital includes
equity, loans, and the long-terms borrowing. For both 2017 and 2018, ELB’s long term borrowings
remained constant; it does not borrow more debts to enhance its liquidity (Johnson, 2018). The 6%
5. ELB FINANCIAL ANALYSIS 5
payable bond which is due 2020 increased rose to $ 5.4 million in 2018 from $ 5.2 million in 2017.
The debt-equity ratio of the entity did not rise.
Lastly, there was a rise in the trade and other payables of ELB. In 2017, the value was at
$ 4.7 million, rising by $ 1.1 million in 2018 ($ 5.8 million). The current liabilities of the company
rose hence affecting the financial position of the company negatively (Nuhu, 2014). A rise in the
liability diminishes the capability of the enterprise to address its short-term commitment as it leads
to a lower quick and current ratio. The short-term debts of the corporation also increases from zero
in 2017 to $ 0.27 million in 2018 — the capacity of the company to effectively meet its obligations
declines with an increase in the current liability.
Financial Ratios
The primary ratios that will be discussed include the quick ratios, current ratio, and the
gearing ratios of ELB Company.
Quick ratio
The quick ratio also known as acid ratio is the extent of the capacity of the firm to address
its current debts when they are due (Ego, 2017).
Quick ratio = (current assets – inventory) / total current liabilities.
Total current assets = $ 8.8 million
Inventory = $ 4.5 million
Total current liabilities = $ 6.07 million
Quick ratio = ($8.8 m - $ 4.5 m) / $ 6.07 m
ELB Quick ratio = 0.7
6. ELB FINANCIAL ANALYSIS 6
Borhan et al (2014) asserts that the ratio indicates the possible problems with the liquidity
of the company. The company may fail to rise out the downtown that faces its business in the form
of meeting the short-term obligations.
Current ratio
The liquidity ratio shows the capability of a firm to part its short-term responsibilities when
requires; usually within a year (Bešlić Obradović, et al., 2018).
Current ratio – total current assets / total current liabilities
Total current assets = $ 8.8 million
Total current liabilities = $ 6.07 million
Current ratio = $ 8.8 m/ $ 6.06 m
Current ratio = 1.45
The current assets of ELB can meet the near-term obligations hence the minimal chances
of liquidity issues. The value indicates that the firm has more current assets as compared to current
liabilities.
3. Gearing Ratio = debts / equity
The ratio compared the portion of the company that is financed by debts and one financed by the
equity (Durrah et al., 2016)
ELB debts = $ 11.4 m
ELB Equity = $ 23.46
Gearing ratio = ($ 11.4 m / $ 23.46) x 100 %
Gearing ratio = 0.485 x 100 %
Gearing ratio = 48.5 %
7. ELB FINANCIAL ANALYSIS 7
Section of the business activities financed using debts less as compared to equity funds. The
company can operate without borrowing finances (Muthee et al., 2016). Most funds in ELB comes
from the shareholders' equity and not borrowings.
Recommendations
For ELB to improve its performance, the management needs to deal with the debt finance,
cost of operations, and the administrative cost. Therefore, the company needs to:
1. Come up with a way to reduce the administrative and distribution expense for the company
to realize substantial net profits.
2. Minimize the amount of bowed finance to enhance the leverage ratio of the organization
and minimize the risk of liquidity.
3. Last, the management should develop operational techniques to ensure minimal
operational expenses that result in reduced gross profit.
8. ELB FINANCIAL ANALYSIS 8
References
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financial performance of a chemical company: The case of LyondellBasell
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Operating Losses(Doctoral dissertation, Northcentral University).
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Performance.
9. ELB FINANCIAL ANALYSIS 9
Muthee, B., Adudah, J., & Ondigo, H. (2016). Relationship between Interest Rates and Gearing
Ratios of Firms Listed in the Nairobi Securities Exchange. International Journal of
Finance and Accounting, 1(1), 30-44.
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