MA – L2 – Q72 – Performance Analysis

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.

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.