Pestel Risk Analysis for Botswana

1533 WordsJun 15, 20127 Pages
Case Study: Tech Ltd Introduction In deciding whether Tech Ltd is a company that we would buy, we evaluated the profitability, liquidity, efficiency, financial leverage and market ratios of the company. Profitability The profitability ratios of Tech Ltd tells the story of an improving company with healthy profitability. The gross margin has been fairly steady at a return of around 16% for the past 2 years, and the net margin is showing that the business has become more efficient at generating profits from sales, increasing from 4.8% in 20x3 to 5.4% in 20x4, showing an increase of 15%. Assets are being used more efficiently in the generation of profits, having increased by 18% in 20x4 meaning that they are now being utilised at their…show more content…
The increasing rate of inventory turnover is also seen as a negating factor to this liquidity concern. The company shows good existing financial control as has been mentioned with regards to creditors and debtors along with positive cash flows for the past 2 years after a negative cash flow in 20x2, and there has been sustained growth of the fixed asset base showing that this is an expanding business. What happened in 20x2? The main changes in 20X2 were the levels of inventory levels as well as inventory turnover time. This affected mainly operating cycle. The operating cycle changed from 20.7 days in 20X1 to 35.9 in 20X2. Interest bearing liabilities increased by R5million in 20X2, yet the asset base grew by less than R3million showing that debt was used to fund operations, and not for securing assets. This in turn affected the cash flow, for instance debtor collection and creditor settlement periods were about the same, meaning the company had to draw money out of the bank to pay creditors, and this affected revenue negatively as it reduced income from interest. This also resulted in the increase of finance costs, these were 4.7% of gross profit in 20X1, and rose to 11.8% of gross income in 20X2. Based on the reduction in the net margin, stemming from reduction of the gross margin we can deduce that either the revenue has decreased or the costs have increased. Option 1: Revenues from sales were lower than projected in 20x2, possibly due

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