Finance

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Table of Contents
Task 2: Discussion Paper .................................................................................................... 2

AC 2.1 Interpretation of the financial statements of Samsung PLC to assess the current
viability of the organisation ........................................................................................................ 2

AC 2.2 Comparative analysis for Samsung PLC ............................................................ 6

2M1 make recommendations to an organisation based on the analysis and

interpretation of the financial information. ............................................................................... 10

Task 4: Capital Expenditure Appraisal ............................................................................. 11

AC 3.2 Evaluate capital expenditure proposals using the appropriate financial

techniques ................................................................................................................................. 11

Recommendation .......................................................................................................... 16

3D1 Assessment of an impact of the business proposal on the strategic direction of the
organisation ............................................................................................................................... 17

References ......................................................................................................................... 18
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Task 2: Discussion Paper

AC 2.1 Interpretation of the financial statements of Samsung PLC to assess the current viability
of the organisation

In order to assess the present viability of Samsung Plc by interpreting the financial
statements of the firm, the ratio analysis for the previous year 2018, has been done. The ratio
analysis involves all the ratios which are necessary for Samsung Plc to have an idea regarding
the present viability of the company. These ratios will assess the liquidity, profitability and
efficiency of the Samsung Plc.

 Liquidity of Samsung

These ratios will assess how liquid Samsung Plc. is, i.e. how quickly Samsung plc. can
convert its liquid assets into cash.

Current Ratio
Current Assets 158,785,744
Current Liabilities 62,789,472
2.53
The Current Ratio of Samsung is greater than 1, which means that the company is able to pay off
its short term obligations with its current assets as it has enough liquid assets. Moreover, it
represents that for every $1 of current liability, Samsung has $2.53 of current assets (Samsung
Electronics, 2018).

Quick Ratio
Net Liquidity 132,441,006
Current Liabilities 62,789,472
2.11
The Quick Ratio of Samsung is lower than its Current Ratio, which means that the current assets
of the company consist larger portion of inventories, it represents that the company is highly
investing and relying on the inventory (Samsung Electronics, 2018).
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 Profitability of Samsung
These ratios will assess how efficiently Samsung Plc. is generating profits through its
revenue.

Net Profit Margin

Net Income 40,305,867
Net Sales 221,568,382
18%
The Net Profit Margin of Samsung represents that the company is earning 18% of profit after all
the costs and expenses are being deducted (Samsung Electronics, 2018). This margin shows that
Samsung has stronger profitability.

Return on Capital
Employed
Operating Profit 53,523,191
Capital Employed 245,658,651
22%
The Return on Capital Employed of Samsung represents that the company is generating 22% of
operating profit from the capital it has employed (Samsung Electronics, 2018). The capital
employed can be calculated by subtracting the current liabilities from the Total Assets of the
firm.

 Activity/Efficiency of Samsung

These ratios will assess how efficient are the activities of Samsung plc. i.e. how efficiently it
is optimising its assets for generating revenue.

Asset Turnover Ratio

Net Sales 221,568,382
Total Assets 308,448,123
0.72
The Asset Turnover Ratio of Samsung represents that for every $1 of Assets, the company is
generating $0.72 in Sales. Since the Asset Turnover Ratio of Samsung is lower than 1, it means
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that the company is slow in turning over its assets through Sales(Samsung Electronics, 2018).
This is normal for the electronics sector since the company has large assets bases.

Receivable Turnover Ratio

Net Sales 221,568,382
Accounts Receivable 33,583,150
6.60
The Receivable Turnover Ratio for Samsung shows that 6.6 numbers of times, the company
collects its receivables from the creditors per year (Samsung Electronics, 2018).

Average Collection Period

Days 365
Accounts Receivable
Turnover 6.60
55.32
The Average Collection Period of Samsung represents that the company collects its receivables
in 55 days (Samsung Electronics, 2018).

Inventory Turnover
Cost of Sales 120,335,747
Inventory 26,344,738
4.57
The Inventory Turnover Ratio for Samsung represents that the company has sold its inventory
4.5 number of times within a year (Samsung Electronics, 2018).

No. of Days Sales in

Inventory
Days 365
Inventory Turnover 4.57
79.91
The no. of days sales in inventory represents that the company takes almost 80 days in selling its
inventory or turning its inventory into sales (Samsung Electronics, 2018)
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 Solvency of Samsung

These ratios will assess the financial leverage of Samsung Plc. i.e. how much of debt, the
company has in its capital structure.

Debt to Assets Ratio

Total Liabilities 83,260,643
Total Assets 308,448,123
27%
The debt to assets ratio of Samsung shows that 27% of the company’s total assets are financed
by the creditors. The percentage is not much higher, which means that the solvency of Samsung
is higher.

Debt to Equity Ratio

Total Liabilities 83,260,643
Total Equity 225,187,480
37%
The Debt to Equity Ratio for Samsung shows that 37% of the company’s financing is obtained
from its shareholders and investors. This ratio indicates that the capital structure of Samsung
comprises 37% of debt financing and 63% of equity financing. It means that the company is
losing out on the leverage which it can get through debt financing as compared to equity
financing.

Considering the data from the financial statements of Samsung, it can be interpreted that overall,
the company is performing well in terms of liquidity, efficiency and profitability. However, the
capital structure of the company shows that the company is highly relying on its equity for
financing as compared to the debt. This can be costly for the company as the cost of equity is
usually higher than the cost of debt (MAJASKI, 2019).
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AC 2.2 Comparative analysis for Samsung PLC

Current Ratio
Year 2018 2017 2016
Current Assets 158,785,744 129,949,219 125,039,948
Current Liabilities 62,789,472 59,390,443 48,364,643
2.53 2.19 2.59

The comparative trend for the Current Ratio of Samsung PLC between the year 2016 to
2018 shows that in 2017, the Current Ratio for the company decreased drastically as a result of
the huge increment in the current liabilities of the company. The current liabilities increased as
the trade payables and income tax payables of the company increased dramatically in 2017
(Samsung Electronics, 2017). However, in 2018, the trend for the current ratio increased
drastically as the current assets of the company increased sharply. The current assets for the
company increased due to an increment in the short-term financial instruments of the company
(Samsung Electronics, 2018).

Quick Ratio
Year 2018 2017 2016
Net Liquidity 132,441,006 107,861,091 108,813,363
Current Liabilities 62,789,472 59,390,443 48,364,643
2.11 1.82 2.25

The comparative trend for the quick ratio of Samsung between the year 2016 and 2018
reflect that the quick ratio sharply decreased in the year 2017. The reason behind this fall is an
increment of the current liabilities which increased as a result of an increment in the trade
payables and the income tax payables (Samsung Electronics, 2017). Moreover, the current ratio
increased in 2018, the reason for an increment in both the current assets and current liabilities of
the company. The current assets rose due to an increase in the short term financial instruments
and the current liabilities increased as a result of an increment in the accrued expenses of the
company (Samsung Electronics, 2018).
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Net Profit Margin

Year 2018 2017 2016
Net Income 40,305,867 37,297,884 20,092,451
Net Sales 221,568,382 211,811,887 178,473,168
18% 17.61% 11.26%

The trend for the NPM of Samsung Plc. increased sharply in the year 2017 as a result of a
drastic increase in the Net Income of the company for the year 2017. The reason behind an
increase in the net income is the higher revenue for the year which increased due to higher sales
earned from the business of semiconductors that include the products such as foundry, System
LSI and memory (Samsung Electronics, 2017). Hence, the higher sales led to a higher gross
profit that eventually led towards the higher net income for the year. However, the net profit
margin remained stable during the year 2018.

Return on Capital
Employed
Year 2018 2017 2016
Operating Profit 53,523,191 47,428,316 25,852,081
Capital Employed 245,658,651 207,392,733 183,427,285
21.79% 22.87% 14.09%

The trend for the ROCE of Samsung Plc. shows that the ROCE increased sharply in the
year 2017, as a result of a higher operating profit. The reason behind this higher operating profit
is the higher sales of the semiconductor business of the company leading towards higher sales
and eventually higher operating profit for the year (Samsung Electronics, 2017). Moreover, in
the year 2018, the margin for the ROCE slightly decreased as a result of a higher capital
employed.
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Asset Turnover Ratio

Year 2018 2017 2016
Net Sales 221,568,382 211,811,887 178,473,168
Total Assets 308,448,123 266,783,176 231,791,928
0.72 0.79 0.77

The comparative trend of Asset Turnover shows that during the year 2017, the ratio for
the asset turnover increased slightly as a result of a rise in the net sales for the year. However, in
the year 2018, the asset turnover ratio decreased in the year 2018. The reason behind this decline
is an increment in the total assets of the company, which increased mainly due to a huge
increment in the current assets as the short term financial instruments increased, whereas, the
non-current assets increased as a result of a rise in the plant, property and equipment for the year
(Samsung Electronics, 2018).

Receivable Turnover Ratio

Year 2018 2017 2016
Net Sales 221,568,382 211,811,887 178,473,168
Accounts Receivable 33,583,150 28,119,199 24,578,724
6.60 7.53 7.26

The comparative trend depicts that the Receivable Turnover ratio for the year 2017
increased as a result of an increment in the net sales of the company which increased due to the
higher business performance of the semiconductors during the year 2017 (Samsung Electronics,
2017). However, in 2016, the trend decreased drastically as a result of an increment in the trade
receivables of the company. The trade receivables increased in 2018 as a result of the higher
sales (Samsung Electronics, 2018).
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Inventory Turnover
Year 2018 2017 2016
Cost of Sales 120,335,747 114,307,653 106,339,183
Inventory 26,344,738 22,088,128 16,226,585
4.57 5.18 6.55

The comparative trend for the inventory turnover ratio shows that the number of times the
inventory was turned into sales was declined in the year 2017. The reason behind this decline is
an increment in the inventory for the year. However, the increase in the inventory is due to the
higher production during the year (Samsung Electronics, 2017). In 2018, the inventory turnover
decreased further as a result of a higher inventory, which increased as a result of higher unit
production during the year (Samsung Electronics, 2018).

Debt to Assets Ratio

Year 2018 2017 2016
Total Liabilities 83,260,643 77,148,352 61,190,655
Total Assets 308,448,123 266,783,176 231,791,928
27% 29% 26%

The debt to assets ratio for the year 2017, increased as compared to the year 2016. The
reason behind this increment is a rise in the total liabilities of Samsung Plc. The total debt for the
company increased as the debentures and long-term borrowings for the company increased in the
year 2017. The reason behind an increase in the long-term borrowings is an increment in the
LIBOR on bank borrowings and an increase in the collateralised borrowings of the company,
secured against its trade receivables (Samsung Electronics, 2017). However, the debt to asset
ratio decreased in the year 2018, as a result of higher total assets, which increased due to higher
short term financial instruments and higher investment in the plant, property and equipment for
the year 2018 (Samsung Electronics, 2018).
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Debt to Equity Ratio

Year 2018 2017 2016
Total Liabilities 83,260,643 77,148,352 61,190,655
Total Equity 225,187,480 189,634,824 170,601,273
37% 41% 36%

The trend of the debt to equity ratio represents that it increased sharply during the year
2017, as a result of increment in the total debt of the company which increased primarily due to
an increase in the LIBOR leading towards higher bank borrowings which leads towards higher
long term borrowings during the year (Samsung Electronics, 2017). However, the debt to equity
ratio for the year 2018 decreased as a result of higher total debt and higher total equity of the
company. The total equity of the company increased as a result of higher retained earnings
during the year which increased due to higher net income (Samsung Electronics, 2018).

2M1 make recommendations to an organisation based on the analysis and interpretation of the
financial information.

 As the inventory turnover ratio shows a declining trend for Samsung PLC during the
three years, due to a higher amount of inventory due to the higher production, the
company must predict the sales accurately so that it produces the units accordingly. If the
company will have a lower ending inventory at the end of the year as compared to its
sales, the inventory turnover ratio would increase.

 As the net profit margin for Samsung PLC has been increasing during the three years, the
reason behind this rise is higher sales which resulted due to an increase in the sales of the
company’s semiconductors. Therefore, the company must keep investing more on its
business of the semiconductors as it will keep resulting in increasing the company’s sales
and profitability due to the higher demand.

 In order to gain a much deeper insight on the financial performance of the company, the
ratios for the trend of three years for the company must be compared with another
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competitor of the industry. It will enable a competitive analysis for the company as it will
determine the position of the company within the industry which will reflect that whether
the firm is on par with the industry or not. This analysis will help the firm in deciding
what it needs to do in the future.

 As the company has higher debt on its equity as compared to its assets, the company must
assess the capital structure of contemporary companies within the industry, if they are
having higher debt on their assets as compared to equity, then Samsung also must get
higher debt on its assets as the debt on equity is usually costly for the companies.

 As the receivable turnover ratio for the company has decreased with a significant margin
during the year 2018, it must decrease the duration of days in which it tends to collect the
cash against its credit sales because in that way, the cash coverage cycle of the Samsung
Plc. would become efficient and availability of cash would provide opportunities to the
firm to invest the money in any short term or long term security.

Task 4: Capital Expenditure Appraisal

AC 3.2 Evaluate capital expenditure proposals using the appropriate financial techniques

It is being considered by the company to sell the old machine which possesses a capital
cost of £260,000 and in its replacement, it is considering buying a new and up to date machine
which is costing £220,000. However, if the company would sell the machines immediately, it
would receive £120,000 in the exchange allowance. However, in order to decide which machine
the company must consider, the computation of the financial techniques such as Net Present
Value, Accounting Rate of Return and Payback Period has been done for both the machines.

Current Machine
Years 0 1 2 3

Cost (260,000)
Inflows
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Revenue 450,000 250,000 150,000

Outflows

Direct Materials (162,000) (94,500) (59,400)

Direct Labour (67,500) (39,375) (24,807)

Variable Overheads (40,500) (22,500) (13,500)

Depreciation (31,500) (17,500) (10,500)

Repair &
Maintenance (7,000) (7,000) (7,000)

Net Cash flow (260,000) 141,500 69,125 34,793

Discount Factor 15% 1 0.87 0.756 0.658

PV of CF (260,000) 123,105 52,259 22,894

NPV (61,743)

New Machine
Year 0 1 2 3

Cost (100,000)
Inflows

Revenue 450,000 250,000 150,000

Outflows

Direct Materials (162,000) (99,000) (59,400)

Direct Labour (54,000) (31,500) (19,845)

Variable Overheads (27,000) (15,000) (9,000)

Depreciation (49,500) (27,500) (16,500)

Repair &
Maintenance (1,000) (1,000) (1,000)
Salvage Value
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75,000

Net Cash flow (100,000) 156,500 76,000 119,255

Discount Factor 15% 1 0.87 0.756 0.658

PV of CF (100,000) 136,155 57,456 78,470

NPV 172,081

Net Present Value: It can be defined as a difference between the discounted/present value of the
cash outflows and the discounted/present value of the cash inflows. It analyses the potential
profitability of an investment. When the Net Present Value will result in a positive value, it
would indicate that the investment will be profitable and the Net Present Value which will result
in a negative value would mean that the investment will incur a loss. However, considering the
scenario of the company, the Net Present Value for the current machine is (61,743), whereas, the
Net Present Value for the new machine is 172,081. Therefore, the company should purchase the
new machine as the Net Present Value for the new machine is positive and higher than the Net
Present Value of the older machine. This means that if the company would remain with the older
machine, it would have to incur a loss, whereas, if it will purchase a new machine, then it will be
profitable for the company.

Internal Rate of Return: It can be defined as the minimum rate that is expected by the investor
when he is investing in the project. However, in this case, the current machine has the IRR of 16
per cent, whereas, the new machine has the IRR of 89 per cent, that is much higher than the
current machine.

Current Machine
Payback Period
Full years until recovery + unrecovered cost/Cash flow at the end of the period
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Year 0 1 2 3

C.F (260,000) 141,500 69,125 34,793

NCCF (260,000) (118,500) (49,375) (14,582)

PBP More than 3 years

New Machine
Payback Period
Full years until recovery + unrecovered cost/Cash flow at the end of the period

Year 0 1 2 3

CF (100,000) 156,500 76,000 115,151

NCCF (100,000) 56,500 19,500 99,755

PBP 1+100000/156500 0.64

Payback Period

The payback period can be defined as the amount of time an investment takes in recovering its
cost. It can further be explained as the period of time the investment takes in reaching the point
of break-even. Whether the project/investment is desirable or not, it is based on the payback
period. The shorter the payback period will be, the more it will be attractive in terms of an
investment. Whenever the firm is considering the capital budgeting of an investment, it primarily
uses the payback period as it is always concerned about the time in which the company will be
covering the amount of money they have invested in an asset. However, calculating the payback
period of an investment is one of the most reliable ways of determining whether the firm should
invest in the project or not or whether the project will be profitable enough for the company or
not. Furthermore, the longer the payback period will be, the lesser it will be attractive for
investment.
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Therefore, in the case of this company, the payback period for the current machine is more than
3 years, which means that if the company would invest in an older machine, the investment will
take more than 3 years in reaching the point of break even. However, the payback period for the
new machine is 0.64 year, which means that if the company will purchase the new machine, the
amount of time the investment will take to reach the point of break-even is 0.64 year, i.e. lower
than the payback period of the older machine. Hence, the company should purchase the new
machine as it will take lesser time in covering the cost as compared to the older machine.

Current Machine
Accounting Rate of Return
Average Annual Profit/Average Investment

Average
Year 1 2 3 Profit

Inflows 450,000 250,000 150,000

Outflows (319,975) (187,344) (119,447)

Total Profit 769,975 437,344 269,447 492,255

Average Investment 260,000

ARR 1.86

New Machine
Accounting Rate of Return
Average Annual Profit/Average
Investment

Average
Year 1 2 3 Profit

Inflows 450,000 250,000 150,000

Outflows (304,300) (175,800) (109,849)

Total Profit
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754,300 425,800 259,849 479,983

Average
Investment (100,000-75,000)/2 62500

ARR 7.59

Accounting Rate of Return

It can be defined as a financial technique which is used to decide whether the firm should
proceed with an investment or not, on the basis of the expected net earnings in the future
compared to the cost of the capital. It is calculated by dividing the average annual net profit
earned by the investment with an average amount of the investment made by the firm in an asset.
Moreover, when the firms take decisions on the basis of the Accounting Rate of Return, they
consider the investment which has higher accounting rate of return.

Therefore, in this scenario, the company must purchase the new machine as it has a higher
accounting rate of return as compared to the accounting rate of return of the older machine. It
indicates that if the company will remain with the older machine, it will have lower profitability,
whereas, if it will purchase a new machine, it will have higher profitability as compared to the
older machine.

Recommendation

Overall, the company should consider the option of buying the new machine as all the financial
techniques have resulted in the favour of the purchase of a new machine. The Net Present Value
was higher for the option of purchasing a new machine, the net present value is considered as the
most reliable measuring tool of the capital budgeting. The payback period was lower for the
purchase of the new machine, which means that if the company will purchase a new machine, the
cost which the company will incur in the form of investment will be covered earlier than the
older machine. Similarly, the accounting rate of return was higher for the option of purchasing
the new machine, as compared to the accounting rate of return for the older machine. This also
reflected that if the company will purchase the new machine, it will earn a higher profit as
compared to the older machine as remaining with the older machine will make the company bear
losses.
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3D1 Assessment of an impact of the business proposal on the strategic direction of the
organisation

The business proposals contain proposals for the organisation which are aimed at
persuading the organisation to invest in them. However, business proposals tend to have a
significant impact on the strategic direction of the company. When the company would receive
different proposals, it would have to decide that in which project it must invest, for this purpose,
the organisation would conduct a capital expenditure appraisal.

When the company would use the method of capital expenditure appraisal in order to take
action on the basis of a business proposal, it would provide the company with a recommendation
that whether the company should accept the business proposal or not, in the form of Net Present
Value, Payback Period, Internal Rate of Return, etc.

There are various financial techniques involved in the method of capital expenditure.
Each of the financial technique is used by the companies in order to get a strategic direction for
the organisation. For example, when the firm will be concerned about a quicker recovery of the
investment, it will use the capital budgeting’s financial technique called the payback period. The
payback period will assist the firm in calculating the period of time an investment will take in
order to get recovered.

Therefore, if the firm would be having two different project alternatives for investment, it
would calculate the payback period for both the projects and finally it would consider the project
which will have shorter payback period. In this way, the strategic direction will be provided to
the organisation through the business proposals. Moreover, as the cost for both the project
alternatives may be different, this would also affect the firm’s strategic decision making. As the
firm would set a strategic budget according to the cost it would have to incur on the investment.
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