Homework SourseI need a summary for this Case study Home Range Ltd 500 Word
I need a summary for this Case study (Home Range Ltd). (500 Words)
Analyse the financial statements that have been prepared by Home Range Ltd’s financial director. In particular, comment on the following aspects of the company:
i. Areas of concern in financial performance, focusing mainly on information from the income statement
ii. Areas of concern in financial health, focusing on ratios dependent on the income statement and the balance sheet
iii. Areas of concern in cash flow management, focusing on information available from the cash flow statement.
Assess the value of Clare Lombardo’s parent’s recent concern that ‘the company has not spent its significant cash resources wisely in the past year’ (the year to 31 December 2017). What practical steps should Clare Lombardo now undertake in order to help to maximise the value of the business for resale in about 3 years?
Case study
Home Range Ltd
Clare Lombardo comes from a family that has bought, renovated and sold or rented houses as a side-line to their main forms of employment for a number of years. This family interest has proved to be a profitable small business. Her father is an electrician by trade but has developed skills in other areas such as basic plumbing and carpentry. This has greatly reduced the cost of ‘doing up’ old properties. Clare’s mother works as a part-time bookkeeper so she has enough spare time to keep proper financial records for the business.
Clare’s favourite subject at school was Art. While still at school Clare discovered a knack for helping her parents to tastefully furnish renovated properties in preparation for their sale or rent. After school Clare studied interior design while helping run her parent’s business.
About 20 years ago Clare was left money by a grandparent. She used this to open her first Home Range shop in an exclusive part of London. It sells high quality home furnishings and accessories to mainly wealthy customers who have limited time.
Clare’s luck, good taste and business acumen has proved very successful. She formed the private company Home Range Ltd 18 years ago, and it has grown to consist of a chain of 25 stores in wealthy parts of London and the south east of England. The retail outlets have been complimented by an effective and profitable website.
Clare is the majority shareholder while her parents own the remaining shares in the business. Clare has recently decided she wants to sell the business in about three years. She is conscious that her parents are growing old and she also want to spend more time with her young family.
Clare’s parents have decided to retire from formal employment in the next few months. They will still run their property business. While they are essentially passive shareholders in Home Range Ltd, Clare still relies on them for common sense advice she can trust.
Home Range Ltd has been particularly profitable since the global financial crash beginning in 2007. It appears to Clare and the financial director of the company that the luxury goods market has not been affected by cuts in government expenditure. In the year ending 31 December 2016 the company achieved a record return on equity of 35%. This has generated some media interest in Home Range Ltd as well as a number of serious offers to buy the company.
Clare now wants to invest more in the company to continue to make it grow in profitability for the next 3 years so she can maximise its value for the planned sale. On the 1st January 2017 the business took out a further bank loan of £1.2 million to expand the business with as little risk as possible. In the last year, Clare has relied mainly on advice of the company financial director to invest particularly in buying goods with a higher profit margin and to spend more on marketing. Her parents have recently challenged the views of the financial director and advised Clare that the company has not spent its significant cash resources wisely in the past year.
Clare now needs to properly understand the implications of the latest financial statements below to see if the company is on the right track, and if her parent’s recent advice is justified.
Home Range Ltd Income Statement
For the years ended 31 Dec 2017 and 2016
Year to 31 Dec 2017
Year to 31 Dec 2016
£k
£k
£k
£k
Sales revenue
106,872
88,476
Less: cost of goods sold:
Opening inventory
6,246
5,168
Purchases from wholesalers
61,256
40,626
67,502
45,794
Less closing inventory
8,792
6,246
Cost of goods sold
58,710
39,548
Gross profit
48,162
48,928
Less expenses:
Salaries and other costs
17,562
16,154
Rent and office services
636
628
Insurance
97
94
Distribution and postage costs
325
310
Marketing and advertising expenses
1,137
864
Office administration
171
164
Energy and other utilities
272
264
Depreciation
704
682
Audit, Accounting & Legal Costs
46
43
Interest on bank loan
48
12
Interest on bank overdraft
0
0
Total Expenses
20,998
19,215
Interest received
1,350
1,290
Profit before taxation
28,514
31,003
Corporation tax
5,703
6,201
Profit after taxation
22,811
24,802
Home Range Ltd Balance sheets at 31st December 2017 and 2016
Year to 31 Dec 2017
Year to 31 Dec 2016
£k
£k
£k
£k
Non-current assets
Property
13,659
14,400
Computers and equipment
412
328
Vehicles
248
234
Total non-current assets
14,319
14,962
Current assets
Inventory
8,792
6,246
Receivables
4,051
1,612
Other current assets
48
46
Cash at bank
100,158
79,188
Total current assets
113,049
87,092
Current liabilities
Payables
11,124
9,398
Corporation tax
5,703
6,201
Other tax liabilities
349
273
Bank overdraft
0
0
Total current liabilities
17,176
15,872
Net current assets/working capital
95,874
71,220
Total assets less current liabilities
110,193
86,182
Long-term liabilities
Bank loan
1,600
400
Net Assets
Total108,593
Total85,782
Equity
Share capital
1,000
1,000
Reserve: retained earnings
107,593
84,782
Total Equity
Total108,593
Total85,782
Home Range Ltd Cash Flow Statements For the years ended 31 December 2015 and 2014
Year to 31 Dec 2017
Year to 31 Dec 2016
£k
£k
Operating activity:
Operating profit
27,212
31,003
Interest paid on overdraft
0
0
Corporation tax paid
(6,201)
(6,485)
Add back non-cash expenses:
Depreciation
704
682
Loss/(Profit) on disposal of non-current assets
0
0
Changes in cash invested in Working Capital:
(Increase)/Decrease in Inventory
(2,546)
(1,078)
(Increase)/Decrease in Receivables
(2,439)
(472)
(Increase)/Decrease in Other current assets
(2)
8
Increase/(Decrease) in Payables
1,726
1,854
Increase/(Decrease) in Other tax liabilities
76
94
Net cash inflow/(outflow) from operating activities
18,530
25,606
Investing activity:
Purchase of non-current assets
(62)
(47)
Proceeds on disposal of non-current assets
0
0
Net cash generated (consumed) by investing activity
(62)
(47)
Financing activity:
New Bank Loan
1,200
0
Interest paid on bank loan
(48)
(12)
Interest received on bank deposit
1,350
1,290
Net cash generated (consumed) by financing activity
2,502
1,278
Change in Cash Balances
20,970
26,837
Opening cash balance (overdraft) at 1st January
79,188
52,351
Closing cash balance (overdraft) at 31st December
Total100,158
Total79,188
| Year to 31 Dec 2017 | Year to 31 Dec 2016 | |||
| £k | £k | £k | £k | |
| Sales revenue | 106,872 | 88,476 | ||
| Less: cost of goods sold: | ||||
| Opening inventory | 6,246 | 5,168 | ||
| Purchases from wholesalers | 61,256 | 40,626 | ||
| 67,502 | 45,794 | |||
| Less closing inventory | 8,792 | 6,246 | ||
| Cost of goods sold | 58,710 | 39,548 | ||
| Gross profit | 48,162 | 48,928 | ||
| Less expenses: | ||||
| Salaries and other costs | 17,562 | 16,154 | ||
| Rent and office services | 636 | 628 | ||
| Insurance | 97 | 94 | ||
| Distribution and postage costs | 325 | 310 | ||
| Marketing and advertising expenses | 1,137 | 864 | ||
| Office administration | 171 | 164 | ||
| Energy and other utilities | 272 | 264 | ||
| Depreciation | 704 | 682 | ||
| Audit, Accounting & Legal Costs | 46 | 43 | ||
| Interest on bank loan | 48 | 12 | ||
| Interest on bank overdraft | 0 | 0 | ||
| Total Expenses | 20,998 | 19,215 | ||
| Interest received | 1,350 | 1,290 | ||
| Profit before taxation | 28,514 | 31,003 | ||
| Corporation tax | 5,703 | 6,201 | ||
| Profit after taxation | 22,811 | 24,802 |
Solution
Some of the practical steps she can take to maximise the value of business :
She can invest the excess cash ,partly in long-term & partly in marketable securities.
Increased sales promotions will lead to more sales improving asset utilisation & gross margin
Try out cost control measures ,to check rising COGS.
As the main concern now is excess cash & its proper utilisation, she can go in for some new projects after evaluating its Net Present Value -- which will maximise value to the business.
Or she can even spend more on marketing ,as she has planned ,so that the sales are maximised.
Thus, evaluating & investing in projects , which will grow into the future & where returns are more than the cost of her capital employed, will maximise value to the firm.
| 1..Income statement Ratios | Year ended Dec. 31 | |
| 2016 | 2017 | |
| COGS /sales | 39548/88476= | 58710/106872= |
| 44.70% | 54.93% | |
| Gross profit/sales | 48928/88476= | 48162/106872= |
| 55.30% | 45.07% | |
| Net After-tax Operating expenses/sales | (19215-1290+6201)/88476= | (20998-1350+5703)/106872= |
| 27.27% | 23.72% | |
| Net profit/Sales | 24802/88476= | 22811/106872= |
| 28.03% | 21.34% | |
| Net profit margin has decreased despite decrease in operating expense % , due to increased % of COGS | ||
