Accounting and Finance

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University of Bradford

           School of Management

                 Postgraduate Full time MA

Accounting and Finance

                 Course leader: Les Chadwick

                 Tutor: Dr Mohammed Hudaib

Words count: 3243



The Lee Chew Cheng Wong Chemical Company produces high quality speciality chemicals, and it exports around 85% of its output to many countries and regions. Since the establishment in the mid 1980 this company has emphasized the shareholder value. To keep this focus, a new Chief Executive Lee Shan Loke Teo has proposed a lot of new policies.  This assignment evaluates the financial rations with Sun See Chemical Company and average industry, and presents the financial effect of the proposal that Lee Shan Loke Teo adopts. That final section shows the recommendation of costing system and capital expenditure budget.

Evaluate the financial performance    

As the profit and loss account shows, the Lee Chew Wong Chemical Company’s net sales decreased from $5.6m to $4.2m, and the gross profit reduced from $1.8m to $1.5m, while in 20x9 the retained profit of the company reached the peak of $0.4m during this period. Although the sale volumes decreased, the profits went up. From the financial statement it can be found that the difference is due to the large operation expenses which eliminate the profit between 20x8 and 20x9, and the less retained profit also results the decrease of Earning per share. Therefore, the EPS and Retained Profit in 20x9 were higher than 20x8 and 20x7.  As regards the balance sheet, in 20x9 the total asset of the company increased significantly compared to 20x8 and 20x7, because the fixed assets increased apparently but it also resulted the shortage of cash in 20x9. In the liability section, as follows as the increasing retained profit, in 20x9 shareholders equity (reserves) also climbed a lot. As far as we considered the financial ratios (Table1), from 20x7 to 20x9 the profitability ratios improved dramatically due to the less cost of sales and operating expense. The liquidity ratios become worse, because the growing fixed assets resulted in the lack of liquid asset.    

The following part is going to compare financial performance with its major rival, Sun See Chemical Industry.

Table 1

The Lee Chew Wong Chemical Performance Ratios

Firstly, the company’s profitability ratios are lower than Sun’s and also lower than average industry especially the return on capital employed ratio. Therefore, the Lee Chew Wong Chemical Company should consider how to improve the profitable ability, for example, strengthen the sales volumes, reduce the cost of sale and reduce the operating or the other expenses.      

Next, the liquidity ratios of the company are much higher than Sun’s and average industry. Maybe they can plan to use spare money to invest the other equity or debt securities. The more effective way we use or invest liquid assets, the more profit it will increase and more and more companies care about the investment and financial management, but the premise is that they should hedge risks successfully.  

Finally, the average debtors collection period of this company is longer than Sun’s in three years. The company should try to shorten the collection period from the customers to improve the efficiency ratio. The gearing ratio is lower than Sun and average industry. If the company wants to establish the new plant or buy equipments, the borrowing is a feasible way because of less financial burden.  

Dispose of unwanted fixed assets

Return on capital invested (ROCE) is a mirror of capital employed productivity, return and usage efficiency.

ROCE = OP/TA = (OP/S )* (S/TA)

It depends on operating profit and fixed assets volume. Its increase can be achieved either by increased operating profit or by fixed assets cutting. Or by both.

Efficiency of fixed assets of the LCCW is higher than within the industry; however, lower than of competitor and share of operating profit is lower than within industry and of competitor. When fixed assets would increases without growth of operating profit (or of its lower rate growth) as a result ROCE decreases (what we experiences in LCCW).

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If LCCW manages to decrease fixed assets by 200mln, than its turnover will increase till 0.913 and operating profit share must be 26.29%, that is 5% lower than the current

ROCE = 24% =  (OP/S )* (S/TA) = 26,29%* 0,913

We can see that by reducing the capital employed. (ROCE) will increase. To improve capital employment, we can look at the volume of fixed assets, current assets and investments.

        Through the off-balance-sheet analysis, we can see there are few methods to reduce the costs in our case:

  • The company could conduct reorganization and sell some ...

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