- 15 Marks
MA – L2 – Q72 – Performance Analysis
Question
The financial performance of Nexus Enterprises is summarised below. ‘Now’ is the end of Year 3.
| Year 1 | Year 3 | Year 4 (forecast) | |
|---|---|---|---|
| Cost of sales/Sales | 63% | 70% | 70% |
| Marketing costs/sales | 9% | 6% | 5% |
| Distribution costs/sales | 13% | 8% | 6% |
| Administration costs/sales | 2% | 2% | 2% |
| Interest charges/Sales | 0% | 4% | 8% |
| Operating profit/sales | 13% | 10% | 9% |
| Loans/Sales revenue | 0% | 50% | 67% |
| Inventory/Sales | 10% | 14% | 18% |
| Sales/Non-current assets | 4.7 times | 1.9 times | 1.2 times |
| Average sales per employee | 600,000 | 1,032,000 | 686,000,000 |
| Average sales per product | 281,000 | 185,000 | 234,000 |
| Average sales per supplier | 750,000 | 726,000 | 651,000 |
Required:
Use this information to evaluate the financial performance of Nexus Enterprises.
Answer
Analysis
The decline in operating profit margin is a key issue.
Higher costs of sales (63% in Year 1 to 70% now) and interest charges are clearly a problem.
The fall in marketing and distribution costs as a percentage of sales is very substantial: does this mean that the entity is putting fewer resources into these operations? If so, what might be the consequences?
The large increase in borrowing must be a matter for concern. High interest costs are reducing profit margins.
Why is the large increase in investment in non-current assets and inventory necessary? These increases seem to explain the need to increase borrowing.
The projected increase in employee numbers next year is large, but possibly reasonable if employees are currently over-worked (see the average sales per employee figures).
The growth in the product range is not unreasonable (see the average sales per product figures) but the number of suppliers is increasing at a faster rate, and this may eventually lead to operating difficulties in the value chain.
- Topic: Performance Analysis
- Uploader: Salamat Hamid