9INVESTMENT DECISION

Investment Decision

Managing and Accounting for Financial Resources

Introduction

When making an investment decision, it is essential for company to determine how this investment will increase shareholder wealth (maximizing shareholders value), increase Company's efficiency and how it will reduce competition. Hence, accurate decision will increase company's profitability and worth in the market and vice versa. Beside this, if one company is acquiring another company through purchasing 100% shares, the acquirer company will need in dept analysis of that targeted company.

In this paper, a recommendation will be made either to purchase Toyco Limited shares or not and if analysis of Toyco is in favorable, how this acquisition will be funded.

Discussion

Overview of Cool Plc

Cool Plc is a UK based company that was established in 2006. Cool Plc has been involved in designing, manufacturing and selling a series of products to small and medium toy manufacturing companies. Cool Plc operations have been spread in UK as well as in EU states.

Current Scenario

Recently, Cool plc has been approached by Toyco Limited, one of the main competitors of Cool Plc. They have approached Cool Plc to purchase their 100% shares worth of £1 million. There is not much information available about Toyco; company has provided latest annual accounts which have not yet been audited. From the data given by Toyco, the following analysis has been prepared.

Financial Analysis

Ratio Analysis

Ratio analysis is considered to be one of the most important and useful technique through which financial position and trend of company can easily be interpreted. In order words, company's strengths, weakness and opportunities highlighted with respect to company's historical and current financial condition. This ratio analysis has been supported by vertical and horizontal analysis (Broadbent, Cullen, 2012, p. 405)

Liquidity position of Toyco

Liquidity Position

2012

2011

Current Ratio

1.24017

0.97578

Quick Ratio

0.71616

0.58478

Liquidity position of Toyco in 2012 has been improved as compared to 2011. Current ratio demonstrates company's ability to pay off their short term obligation i.e. short term debts. In 2012 current ratio was 1.24 which means 1.24 times, company can pay off their short term debts, while in 2011 they it was 0.975. As far quick ratio is concern which shows the most liquid asset company has to pay-off their immediate obligation, Toyco quick ratio was 0.71 in 2012 while it was 0.58 in 2011. Hence, liquidity picture of Toyco is better since it indicating an enhancing trend (Keller, 2012, p. 17)

Profitability position of Toyco

According to the finance theory, profitability measures the capacity of the company to produce profit with respect to sales, assets and equity.

Profitability Ratio

 

2012

2011

Profit Margin

8.65%

15.13%

Return on Equity

23.32%

43.21%

Return on Assets

9.34%

14.61%

Profitability position of Tyco has been deteriorated in 2012. The reason for this is reduction in net income i.e. in 2011 it was £363 million while in 2012 it reduces to £225 million. Profit in 2012 has been reduced because cost of goods sold in 2012 was 62.3% to sales while in 2011; it was 56.2% to sales. This overall has decrease net profit in ...