I am writing a report to analyse the performance of Benedon Limited Company

        “Liquidity ratios attempt to assess whether a firm is maintaining an appropriate level of liquidity. Too little liquidity raises the possibility of default and bankruptcy. Too much liquidity implies that long-term investments with greater profitability have been missed. Financial officers have to walk a tightrope to maintain enough, but not too much liquidity.” (Sytsma, S.) According to the figures in 20X3, liquidity has been worsening compared to 20X2 because Current Ratio and Quick Ratio have both decreased despite of the growth from 20X1 to 20X2. The current ratio has been decreased almost 50% from year 20X2 which was 1.78 to 0.90 in the year 20X3. On the other hand, the industrial average figure for current ratio in year 20X3 is 1.20. This means the cash is illiquid; Benedon Limited may not be able to meet the expenses and paying short debts as well.

        In activity ratios, the cash cycle has obviously increased substantially from 49 days in year 20X2 to 221 days in the year 20X3. Although the stock days have reduced from 62 days in the year 20X2 to 51 days in 20X3, the debtor days have raised significantly to 198 days in year 20X3. It is possibly due to Benedon Limited is not able to sell their goods to customer or the company is giving long term credits to customers. On the other hand, the creditor days have reduced 36 days at the end of the year 20X3 which has not given any penalty from finance facilities due to early repayment. It can be a result of illiquidity of cash flows as mentioned above. Therefore, the overall working capital management is poor.

         ‘Gearing is the ratio of long-term loans and preference shares shown as a percentage of total shareholders’ funds, long-term loans, and preference shares.’ (Frankwood, p.579) Benedon Limited is taking high gear in the year 20X3 compared to the previous year as the interest they have to cover is 3.33%. Benedon Limited with a high gearing ratio will be a company which has a high level of debt and a relatively low level of equity. The financial risk has gone up 0.31% because the company has much fixed obligation of interest. Therefore, potential or non-potential investors are not interested to invest in the company due to the high risk. As a result, new issue might not be successful in the company.

        Benedon Limited has high gearing in 20X3 which possesses 1.04, slightly lower than in year 20X1, however, these two years are higher compared to 20X2 which has a gearing of 0.73. Comparing the gearing to the industry, the figure of the average industry was 0.80. It is reasonable that in the year 20X1 and 20X3 have high gearing because Benedon Limited had issue bank overdraft from finance facilities. The company had loan of £160,000 in 20X3 due to its working capital requirements.

        The demand of the shares per earning is greater in the year 20X3 because share price per earning is £10.26 compared to previous year which was only £8.90 but it had reach £15.20 in the year 20X1. However, the share price per earning of Benedon Limited is not competent with the average industries which are £18.00 per earning. “The higher the P/E multiple investors are willing to pay, greater will be the hopes of getting the investment amount back in a shorter time horizon.” (Praveen)

        

Suggestions

In order to be able to meet the short term obligations, liquidity has to be well managed.

“To reduce the gearing in the company, Benedon Limited should issue new ordinary shares, redeeming debentures and retaining the profits.” (Frankwood p.575)

APPENDIX

Table 1.1

Workings