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The exercise presents a sequence of accounting income and expense annual reports for the Norne group, and it contains data gathered from 1996 to 2000. A financial analysis provides insights into the companys sustainability in the current situation (Dallocchio et al., 2011). Additionally, these reports overview the costs incurred in the same period and associated with this activity.
As can be seen from the reports, the companys sales and general income have been steadily increasing over the listed years. A significant rise in profits of over 50% occurred from 1999 to 2000. Such an increase could be considered quite high for the company, and therefore it needs analysis as to which factors contributed to the rise. Purba and Bimantara (2020) suggest that the higher the profit achieved by a company, indicating that the better the companys financial performance (p. 151). From the evidence present, it seems that the companys assets have been increasing along with its sales, which undoubtedly helped the company maintain and expand its position on the market. In 1998, the companys overall expenses held the highest rate, which can be contributed to a sudden and significant spurt in the amount of cash in the operating activities. Seeing as the previous year of 1997 showed a sizable decrease in both cash and recurring net income while sales had grown significantly, it can be concluded the company has experienced some serious expenses.
There is also another important part of the report a cash flow statement. Such a statement is highly necessary for an annual financial analysis due to the fact that the concepts of income and expenses used in the general report do not directly reflect the actual cash flow. A statement of cash flows contains information characterizing transactions associated, firstly, with the formation of sources of financial means; secondly, with the use of these means. From the statement here, it is clear that the income part of the companys cash flow has been rising steadily. However, the expenses have experienced a rise perhaps, due to the companys overall growth.
An electricity producing company would have the highest rates of amortization and depreciation, as well as EBITDA indicator, which allows to place it into sector #3. In the housing and utilities industry, costs of materials and means to keep the natural resource provision running increase gradually with each season, thus also needing constant amortization. With the costs constantly rising, however, the depreciation and amortization cannot cover the companys expenses in time, thus their rate remains quite high.
A supermarket clearly belongs to sector #1 due to the steady flow of sales. Additionally, the trading profits remain moderately low at the same time, and there are no expenses in regards to raw materials use.
A temporary employment agency should be sorted into sector #5 due to the very high expenses in the personnel costs. Seeing as such a business focuses on the temporary job offers rather than permanent, the staff turnover is quite high, causing the costs of hiring new workers to increase. Additionally, the fact that there are no expenses or incomes in the fields of production, trading profit, and raw material use, also contributes to the sorting of the company into sector #5.
A specialized retailer falls into sector #2 due to the steady income from sales and the highest rate of trading profits. Specialty stores offer a wide range of products in a specific industry or a limited range of product categories. Due to this fact, their trading profits and margins would remain higher than any other companies.
A construction and public infrastructure company should be placed into sector #4. This decision is supported by the fact that it experiences very high outsourcing costs on a constant basis, as well as significant personnel charges. Dallocchio et al. (2011) supply that by-nature format incomes such as raw material purchases, personnel cost, and other, provide a much better insight for a financial analysis than the by-function costs of sales and production. External and internal cost planning in such a business is subordinate in nature and must be consistent with the companys goals and areas of activity.
a) First requirement is to calculate the breakeven point for each year of the companys activity. Dallocchio et al. (2011) claim it crucial to establish the differentiation between variable and fixed costs first. The companys expenses consist of variable costs, which indicate the raw materials used in the production, outsourcing costs, taxes, and 50 percent of expenses for other external services. Additionally, there are fixed costs, which cover personnel expenses, depreciation, and amortization, taxes as well, and the other half of eternal services costs.
The breakeven point represents the threshold of profitability in production, where the value of costs is equal to the value of sales. Subsequently, the company has no profit and is only able to recover variable and fixed costs. In the overall assessment, the breakeven point is one of the indicators used to evaluate the financial condition of organizations.
Total breakeven point of the company had been steadily growing from year 0 to year 2, increasing from 72.7 to 133.3. Appropriately, operating breakeven point had increased as well, with a consistent rise from 69.1 to 124.1. The breakeven analysis would allow the company to identify the dependence of the amount of profit on sales volume, or changes in product prices and costs. The increase in both operational and total breakeven points might testify to the companys substantial growth.
b) Investments affect the value of a business, first of all, through the introduction of new equipment and technologies. This, in turn, affects the quality and volume of products sold, and, consequently, the final financial results and value of the business. One of the main ways to increase profits after a successful investment is to increase the production capacity, however, it should be done with caution. If the fixing costs rise at a slower pace than the production, while the profits are also increasing, it might be a good decision to treble production capacity with the use of investment.
c) In this case, there are several unwanted consequences that might arise with the exclusive use of a debt to pay off the capital expenditures. Valaskova et al. (2018) state that financial risk is often perceived as the risk that a company may default on its debt payments (p. 2144). The risk is high using debt exclusively to pay off the capital expenditure program. This method of expenses recuperation generates the most dangerous investment risks in business enterprises the potential of declining financial stability and loss of solvency. Moreover, the level of these risks increases in proportion to the increase in the specific use of borrowed capital. Subsequently, it may lead to an increase in the companys breakeven point, which would not serve the Schmidheiny company very well.
References
Dallocchio, M., Le Fur, Y., Quiry, P., & Salvi, A. (2011). Corporate finance theory and practice, third edition. Wiley.
Purba, J. H., & Bimantara, D. (2020). The influence of asset management on financial performance, with panel data analysis. Proceedings of the 2nd International Seminar on Business, Economics, Social Science and Technology (ISBEST 2019), 150155. Web.
Valaskova, K., Kliestik, T., Svabova, L., & Adamko, P. (2018). Financial risk measurement and prediction modelling for sustainable development of business entities using regression analysis. Sustainability, 10(7), 2144. Web.
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