# TO: The PQR Company (Current Shareholders)

TO:  The PQR Company (Current Shareholders)

FROM:  Financial Accountant

SUBJECT:  Assessment of Financial Performance and Position of PQR

DATE:  10th December 2004

INTRODUCTION

The report that will follow will outline the financial performance of PQR for the past 3 years.  The Company’s financial statements will be reviewed from 2002 till 2004 in order to obtain a picture of the company’s financial position.

The company’s performance has been illustrated via Ratio Analysis.  A detailed calculation of various ratios is obtainable from the appendix.  However a summary table has been included below for reference.

The report will be split into Profitability, Liquidity and Efficiency, under which the company’s financial statements will be analysis to some degree.  The conclusion will bring the report together.

PROFITABILITY

As can be seen from the data supplied sales have increased from £3,600,000 to £4,010,000, an increase of 11%.  Calculation based on the difference between 4,010 and 3,600, over 3,600.  At the same time cost of sales fell.  We can straight away tell the company’s gross profit has also increased.  Taking these into account, we are able to calculate the Return on capital employed (ROCE), which for 2002 is 12.1, 2003 figures are better but 2004 are even better (13.0), showing the company is making use of its assets.  An increase of 0.9 % in ROCE can be significant, especially in comparison to the amount of money the company may have borrowed.  Therefore the company needs to ask it self is the ROCE sufficient enough, if it is in need of extra funds by means of debt.

LIQUIDITY

Liquidity is just as important as profitability.  A basic definition of the term is how quickly a company can raise cash in order to settles its debt.  This can be measured in terms of the Current ratio and Quick ratio.  For a quick reference liquid funds can be referred to as cash, short term investment and trade debtors.  Based on the above calculation current ratio has fallen from 4.3 to 2.6, which can be considered to be quite significant, a fall of 1.7 can be seen.  The basic idea behind this ratio is that a company should ...

#### Here's what a star student thought of this essay

The presentation of the report is good, but this could be improved. Within each section, the student could state the numbers, such as '11% Increase In Profits' using bullet points and then discuss this in further detail below. This would make the presentation of the report more appealing to read which the exmainer will be able to read with ease.

The report states that liquidity is the ability to raise cash. Although why would the business need cash? The report doesn't mention why the business would want cash, and how this may impact upon the business. The report could include 'The buisness would want a reasonable amount of cash within the buisness to ensure that there can pay all their expenses within a timely manner, otherwise there risk going to administration. In addition, the buisness may want to generate cash quickly if it's an fashion buisness, whereby all their products will need to be sold quickly for the next season, which there need cash to invest in their next product line'.

In summary, the report is relatively a high standard. The report focuses on three areas of the buisness, and explains a little regrading each one. However some sections do not justify why the buisness may need a certain aspect or why the buisness may want to increase the amount of cash the buisness holds. The student has set out their letter out correctly, with using an 'TO', 'FROM', 'SUBJECT' and 'DATE'. This will gain the student 1 mark within the exam, and this might be small, although this is a good start. The student makes clear that there are going to be reviewing three aspects of the financial statements, these are Profitability, Liquidity and Efficiency. This allows the exmainer to understand what the student is going to state within the report, this is quite clear. The report makes clear that the efficiently of the buisness underlies with the amount of time it takes for the buisness to receive payment from their debtors. The student understands that the quicker the buisness receives money, the better this is for the company.