Section A
Plummer plc (Plummer) UK.
Profitability Ratios
Profitability rations uses balance sheet assets, revenue, company equity and operational costs to measure the ability of the company to generate income. They include the following;
Gross profit ratio = gross profit / Revenue.
Figures in £000 

Year 2019 
Year 2018 
Gross profit = 28,400 Revenue = 80,000 
Gross profit = 35,600 Revenue = 98,000 
Therefore, Gross profit ratio = 28400/ 80000 = 0.36 
Therefore, Gross profit ratio = 35600/ 98000 = 0.36 
This shows that the rate of generating the gross profit in the two years is the same.
Operating profit ratio = operating income/ revenue
Figures in £000 

Year 2019 
Year 2018 
Operating income = 14,700 Revenue = 80,000 
Gross profit = 18,250 Revenue = 98,000 
Therefore, Operating profit margin = 14700/ 80000 = 0.18 
Therefore, Operating profit margin = 18250/ 98000 = 0.19 
The company was efficient in its activities in 2018 than in 2019.
ROE = Net income/ Shareholder equity
Figures in £000 

Year 2019 
Year 2018 
Net income = 11,762 Shareholder equity = 81,960 
Net income = 14,602 Shareholder equity = 90,100 
Therefore, ROE = 11762/ 81,960 = 0.14 
Therefore, ROE = 14602/ 90,100 = 0.16 
The company was able to pay better returns to shareholders in 2018 than in 2019 by 0.02
ROA = Net income/ Total assets
Figures in £000 

Year 2019 
Year 2018 
Net income = 11,762 Total assets = 127,080 
Net income = 14,602 Total assets = 129,100 
Therefore, ROA = 11762/ 127,080 = 0.09 
Therefore, ROA = 14602/ 129,100 = 0.11 
The company was more efficient in 2018 than 2019 as it was able to realise a better return on invested assets
Liquidity Ratios
They assess the ability to pay debts.
= current assets/ current liabilities
Figures in £000 

Year 2019 
Year 2018 
Current assets = 29,630 Current liabilities = 25,520 
Current assets = 27,650 Current liabilities = 18,600 
Therefore, CR = 29,630/ 25,520 = 1.16 
Therefore, CR = 27,650/ 18,600 = 1.49 
The company is capable of paying shortterm liabilities more efficiently in 2018 than in 2019 however its current position is good.
= current assetsinventories/ current liabilities
Figures in £000 

Year 2019 
Year 2018 
Current assets = 29,630 Inventories =8,700 Current liabilities = 25,520 
Current assets = 27,650 Inventories =7,500 Current liabilities = 18,600 
Therefore, CR = 29,6308700/ 25,520 = 0.82 
Therefore, CR = 27,6507500/ 18,600 = 1.08 
The company is a position to pay shortterm debts without selling inventories however the position was better in 2018.
= 1.2(A) + 1.4(B) + 3.3(C) + 0.6(D) + 1.0(E)
2019 
2018 

A = WC/ Total Assets 
= 4110/127,080 0.03 
= 9050/129,100 0.07 
B = Retained Earnings/ Total Assets 
= 14,160/127,080 0.11 
= 22,300/129,100 0.17 
C = EBIT/ Total Assets 
= 14,700/127,080 0.12 
= 18,250/129,100 0.14 
D = Market capitalization/ Total Liabilities 
= 170,000/45,120 3.77 
= 176,000/39,000 4.51 
E = Sales/ Total Assets 
= 80,000/127,080 0.63 
= 98,000/129,100 0.76 
ZScore 
1.2(0.03) + 1.4(0.11) + 3.3(0.12) + 0.6(3.77) + 1.0(0.63) = 3.47 
1.2(0.07) + 1.4(0.17) + 3.3(0.14) + 0.6(4.51) + 1.0(0.76) = 4.17 
Limitations of Altman ZScore
Reasons for different accounting practices.
Section B: Performance Measurement and Project Appraisal
Question 1 (a) Division Performance Measurement
ROI = (Net Income / Cost of Investment)*100
Net Income = £3.8m
Cost of Investment = £20m
ROI = (3.8 / 20)*100
= 19%
RI = (Controllable Margin  Required Return) * Average Operating Assets
Controllable Margin = £3.2m, (3.80.6)
Required Return = 0.05, (5%)
Average Operating Assets = £20m
RI = (3.2 – 0.05) * 20
RI = £63 million
Return on investment measures the investment return of the department which will measured as income earned in operations by the divided against the department total assets. The department return is 19% which means that it is able to generate £0.19 in every £1 invested in it.
According to the Residual Income, a representation of the excess income in the department over its opportunity cost was valued at £63 million.
Valuing the department however using ROI creates a room for the department head not to invest in projects that will reduce the department’s compound ROI however the projects might be having a return than the required minimum return, (AlMatari, et al, 2014). Therefore, RI will be useful to allocate the investment resources in the department and hence calculate manager bonuses depending to the extent of positivity of the realized RI margin.
Question 1(b) Project Appraisal
Year 
A 
B 
A 
B 

Cash flows 
Cash flows 
Present Value factor 
PV of Cash flows 
PV of Cash flows 

£m 
£m 
10% 
£m 
£m 

0 
130 
13 
1 
130 
13 
1 
90 
3 
0.9091 
81.819 
2.7273 
2 
40 
10 
0.8264 
33.056 
8.264 
3 
40 
13 
0.7513 
30.052 
9.7669 
NPV IRR Payback Period 
14.927 
7.7582 

18% 
33% 

Year 2 
Year 2 
From the above calculation, the NPV for Project A and B is £14.927m and £7.7582 respectively. Project A has therefore a hire NPV than project B. NPV method has the advantage of considering the time value of money, hence helping the management in planning. Its disadvantage is that it does consider other costs that are associated with a project and it is not useful to compare different types of projects, (Žižlavský, 2014).
The IRR of project A and B is 18% and 33% respectively. Project B has therefore a higher IRR than project A. the advantage of this method of appraisal is that it show the rate at which the investment will be generating annual returns. IRR has however the disadvantage of not showing the returns on actual pounds but percentages which may lead to poor decisions, (Götze, et al, 2008).
The Payback Period for the investment in project A and B is 2years in both cases. The projects are therefore expected to payback the initial cost of investment at year 2. The method has an advantage of finding projects that can return initial costs early enough and generate profits, (Johansson, and Kriström, 2015). However, the method has a disadvantage of not considering the time value of money and the cash flows after the payback period.
Therefore, considering Payback Period constant, the company should invest in project A since it has a far way large NPV B by almost double.
References.
AlMatari, E. M., AlSwidi, A. K., & Fadzil, F. H. B. (2014). The measurements of firm performance's dimensions. Asian Journal of Finance & Accounting, 6(1), 24.
Altman, E. I. (2013). Predicting financial distress of companies: revisiting the Zscore and ZETA® models. In Handbook of research methods and applications in empirical finance. Edward Elgar Publishing.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 39703983.
Dobrovic, J., Lambovska, M., Gallo, P., & Timkova, V. (2018). Nonfinancial indicators and their importance in small and mediumsized enterprises. Journal of Competitiveness, 10(2), 41.
Götze, U., Northcott, D., & Schuster, P. (2008). Investment appraisal. Methods and Models, Berlin, Heidelberg 2008.
Johansson, P. O., & Kriström, B. (2015). Costbenefit analysis for project appraisal. Cambridge University Press.
Komala, L. A. P., & Nugroho, P. I. (2013). The Effects of Profitability Ratio, Liquidity, and Debt towards Investment Return. Journal of Business and Economics, 4(11), 11761186.
Sohrabi, M. (2017). The Relationship between NonFinancial Innovative Management Accounting Tools and Risk and Return of Iranian Stock Market Listed Companies. Dutch Journal of Finance and Management, 1(2), 40.
Žižlavský, O. (2014). Net present value approach: method for economic assessment of innovation projects. ProcediaSocial and Behavioral Sciences, 156, 506512.
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