UTL company


The firms from different corners of the world are very much concerned with their going concern. The future of the firm depends on how well it operates with an essential interest in generating gains. Alongside profit-making, there is also a need to realize cash flows for settlement of daily obligations. Managers from different companies do not recognize the difference that exists between the cash flow and the profits of the firm. Different ratios make it easy for the organization to come up with conclusions and take up actions to solve some issues that arise from the activities of the organization. This essay explains how to go about in understanding the status of the UTL company in details (Aktas, Croci and Petmezas, 2015).












Part one: analysis of the UTL company

1.1 Fund flows and gains

In any business setting cash is the main issue of concern. Without money, nobody would ever talk of transactions in the firm. Cash flow, also referred to as funds flow is the total amount of cash and its equivalent that keeps moving in and out of the business entity. Mostly funds flow can result from sale or purchase of assets whether fixed or current. Depreciation also contributes to funds flow. Of interest is that funds can either flow into or out of the firm. The inflows are the main concern for management. The more the administration realizes an inflow, the more attractive it is to shareholders (Aktas, Croci and Petmezas, 2015, P. 99).

Gain on the other side of the coin is the revenue from the sales minus the costs of sales and expenses involved in trading. You cannot talk about the success of the business and fail to speak about the profits. The profitability of a firm measures its level of future orientation. A firm that has a considerable amount of benefits is said to have a successful life in the business world. The indicators of profit are the asset increment, decline in liabilities and incline of the shareholders’ funds (Aktas, Croci and Petmezas, 2015, P.106).


1.2 Distinction between the fund flow and the gains

The main question to answer is whether a firm can generate profit without necessarily engaging cash flows. The answer is yes; a firm can report a sizeable amount of, but in the real sense it fails to have any cash to portray. The source of the funds matters a lot when wants to classify the same under either cash flow or gain. If the funds do not originate from the sales, then this cannot be profit, but it qualifies for fund flow. For example, funds from well-wishers find their way to the company under the name of fund flow but not gain. A case where the owners of the company decide to add more cash to their shareholdings increases the funds but not the profits. A company that chooses to use a lot of funds to come up with investment has a negative cash flow, but at the same time, the books of account show a substantial amount of profits. Payment of cash to meet expenses is what tends to bring the difference between the fund flow and the gains. The payments are written down in the statement of financial position, but no records for the same find the trading, profit and loss account. The difference between these two items is the basis through which they become accounted for. Benefits get realized when either cash or accrual basis apply while cash flows get achieved when and only when the cash basis prevail (Atrill, and McLaney, 2014).

1.3 Operating resource

Going by the name working capital, operating fund is very vital for the success of a business entity; it is the amount realized after subtracting the current liabilities from the current assets. It may also go by the definition of the net commitment of funds in the current assets to earn some cash flows for the business. The scale with which the different organizations operate to spell out the amount of operating resource to have. It is not logical for a small scale venture to commits millions of funds in the petite activities of the day (Aktas, Croci and Petmezas, 2015, P.100).


For the large scale ventures, it would not sound logical to commit small amounts of funds as the operating resource. Big machines must be bought and managed in the big firms unlike in the small ones. The stock, debtors, and cash form the central elements that constitute the short-term assets while on the other hand the creditors and the overdrafts from banks and other financial institutions constitute the liabilities that are short term in nature. The primary reason for terming the difference between the current assets and current liabilities as operating resource is that it involves items that exchange hands over short periods during the operating days of the firm (Aktas, Croci and Petmezas, 2015, P.105).


1.5 Receivables

Receivables, as mentioned earlier, are items that occur in the right-hand side of the balance sheet as current assets. Debtors go by the definition of the amount expected from the customers whom the business has transacted with and sold products in credit terms. Trade receivables may at times not get realized resulting in bad debts, and this is a form of risk to the stakeholders. Administration of the debtors is another risk the firm may put itself in because they affect the amount of return negatively in case a default occurs. Forgoing the advantage of selling the products and get the cash instantly is also a challenge that comes in time the credit sales get established. Before extending credit to customers, an analysis must take place to make sure that the customer is capable of paying back (Aktas, Croci and Petmezas, 2015, P.110).

1.6 payables

Purchase of items, whether raw materials or finished goods and services, on credit, is what constitutes the payables. Therefore, payables are the monies held for others in exchange for a credit purchase. The more the payables, the less the operating resource and vice versa. Payables sometimes appear to stand as a brother to receivables in that, assuming “our” company purchases products on credit from “their” company, then “their” company would have sold to “our” company on credit and hence treat the dealing as a receivable. There exist some costs in the payable transactions in that maintaining the records of accounts is not an easy thing. Again the image created by the lender or credit seller on the company may discriminate it from the rest in the business (Atrill, and McLaney, 2014, p. 75).

1.7 Effect of changes in working capital on the cash flow

It is not a point to ignore that operating resource is good, but some demerits come with it. Working capital deals with both current assets and current liabilities. A high volume of working capital means that the firm has invested more in the current assets and therefore the cash flow may become impaired; this is solely from the fact that cash is used to acquire new assets which may up the liquidity of the firm. The lower the working capital, the better the cash flow it has; this means that less is tied up in the assets (Atrill, and McLaney, 2014, p. 78).

1.8 Analysis

It is true that the company has managed to earn profits, but the only challenge is that the increment in debts has made the company not take out much cash hence reduced cash flows. Increasing the number of investors is a good idea since the funds will flow making the company a better organization. The company has paid a lot of cash to acquire services like designs. There has also occurred the establishment of investments where some shares got bought from the design company; this is a serious action to drain the funds away from the company. Liabilities are very many for this company meaning that no matter how much profit the company is making cash always goes out. The court proceedings have also led to cash outflows since the proceedings require money to find a way to the same (Atrill, and McLaney, 2014, p. 81).

1.9 Recommendation

The management should make efforts to reduce the rate of using the debts in the capital structure since this will increase the amount of receivable as the shareholders’ funds. The investments in working capital should not be too much to carry a substantial amount of funds. The main reason as to why the managers should minimize the issue of investing in working capital is to ensure that there is a balance between the current assets and current liabilities such that the short term obligations can always come as and when they occur. Encouraging the shareholders to increase their shareholding is a definite idea and should no decline; let the number of shareholders increase so that cash can flow in to offset the liquidity problem. When selling on credit care must prevail to ensure that the customers have a good credit history and are capable of paying the principle. Issues of breaking the law should go down as much as possible with an aim to reduce amounts spent on the lawsuits.

Part two: ratio analysis and interpretation

2.1 Description and computations

Ratios are indicators of the efficiency in activities carried out by the firm. They show how effective or less effective the management is doing its duties. By definition, a ratio is a relationship between items reported in the books of accounts (Melville, 2017).



  1. Sales growth

Sales growth ratio show the rate at which the sales increase or decrease over the period under consideration. Depending on the volume of the stock held, the acceptable rate varies from firm to firm. The large firms attract at a figure that lies between 0.1 and above while the small ones can comfortably operate with a ratio lying between 0.05 and 0.1. The higher the rate, the better; this indicates how the products of the organization have a potentiality of finding demand in the coming days (Watson, and Head, 2016).

Sales growth= Sales Y2 – sales Y1)/sales Y1 2.

Sales y20x9= 360
Sales y20x8= 0
sales growth = (360-0)/0
sales growth= #DIV/0!


Sales y20x9= 360
Sales y20x0= 396
sales growth= (396-360)/360
Sales growth= 0.1


Sales y20x0= 396
Sales y20x1= 459
sales growth= (459-396)/396
Sales growth= 0.159090909


From the above calculation, the sales growth for the first period could not be correctly calculated since the previous year’s figures are missing. The denominator must be greater than zero to have the ratio calculated.in the subsequent years, the growth ration has shown an increase meaning that the company has high demand and as the days pass by the demand will skyrocket to great heights.

  1. Gross profit margin

Gross profit margin refers to the fraction of sales revenues after the costs have to get compensated for. Precisely, the gross profit margin is the gross profit divided by the sales made in the year specified. The ratio measures how profitable the firm has been in the last financial year; this also sends an implication of the probability that investing in the company will out viable (Watson, and Head, 2016, P. 70).

Gross Profit Margin = Gross Profit/Sales (%)


Gross profit y20x9= 230
Sales y20x9= 360
GPM= (230/360)*100
GPM= 64%


Gross profit y 20×0= 252
Sales y 20×0= 396
GPM= 252/396
GPM= 64%


Gross profit y 20×1= 272
Sales y20x1= 459
GPM= 272/459
GPM= 59%


The gross profit ration has remained high throughout the three years; This means that the organization has managed to cut the costs that occur alongside the sales. Also, the volume of sales has increased over the period making the firm attractive to the investors.

  1. Operating profit margin

Operating profit margin is a kind of ration concerned with the performance as well as the profitability of the entity. It deals with profits before interest and tax. It shows the amount of cash flow the entity has earned per the volume of goods sold. A company with a high operating profit margin is of great value to the stakeholders since it denotes a possibility of success (Atrill, and McLaney,2014, P. 409).

Operating Profit Margin = Operating Profit/Sales (%)

Operating profit y 20×9= 107
Sales y20x9= 360
OPM= (107/360)*100
OPM= 30%


Operating profit y 20×0 101
Sales y20x0 396
OPM= (101/396)*100
OPM= 26%


Operating profit y 20×0 101
Sales y20x0 396
OPM= (101/396)*100
OPM= 26%


  1. Gearing

Gearing ratio measures the extent to which the firm has used the borrowed funds to finance its activities. It is the total amount of the debt divided by the sum of total debt and shareholders’ funds. The ratio is good when its figures show a high percentage since the borrowed funds are tax deductible (Melville, 2017, P. 362).

Gearing = Total Debt/Total Debt + Shareholder Funds (%)


Total debt y20x9= 214
S’ holders’ fund y 20×9= 304
Gearing= 41%


Total debt y20x0= 300
S’ holders’ fund y 20×0= 347
Gearing= 46%



Total debt y20x1= 462
S’ holders’ fund y 20×1= 344
Gearing= 57%


The firm seems to have a good gearing ratio over the years since it is around 50% of the finance used. The ratio has grown over the years meaning that there is hope for a better tomorrow. Again this ratio indicates that the company is using a well-mixed capital structure.

  1. Interest cover

Interest cover can get defined as the operating profits over the expense of the finance used in the business. The ratio denotes the number of times the profits generated will meet the interest of the fund used. The higher the number of times the better the position for the firm (Melville, 2017, P. 364).

Interest Cover = Operating Profit/Finance Expense (x)


Operating profit y20x9= 107
Finance expense y20x9= 9
interest cover= ( 107/9)
Interest cover = 11.888889x


Operating profit y20x0= 101
Finance expense y20x0= 12
interest cover= 101/12
Interest cover = 8.41666667 x


Operating profit y20x1= 49
Finance expense y20x1= 16
interest cover= 49/16
Interest cover = 3.0625 x


The number of times has declined over the years meaning that the cost of finance has gone up. Again the operating profits are not steady, and this causes a need for concern by the management.

  1. Liquidity ratio

Liquidity ratios measure how the firm is capable of paying off its debts with easy as they fall due. The most agreed ration is two to one which means that for every liability, the firm should attach two assets. If the ratio is vice versa, then there is a significant problem and the firm may liquidate (Watson, and Head, 2016, P. 71).

Liquidity Ratio = Current Assets/Current Liabilities

current assets y20x9= 64
current liabilities y20x9= 28
current ratio= current assets / liabilities
current ratio= 2.285714286



current assets y20x0= 114
current liabilities y20x0= 48
current ratio= current assets / liabilities
current ratio= 2.375



current assets y20x1= 93
current liabilities y20x1= 102
current ratio= current assets / liabilities
current ratio= 0.911764706


  1. Return on equity

ROE is a fraction of net profits over the funds from the shareholders. It shows how much of the net profits go back to the shareholders (Melville, 2017, P. 365). Return on Equity = Net Profit/Shareholders Funds (%)

Net profit y 20×9 79
Shareholders’ funds y20x9 304
return on equity= 79/304*100
Return on equity= 26%



Net profit y 20×0 72
Shareholders’ funds y20x0 347
return on equity= 72/347*100
Return on equity = 21%


Net profit y 20×1 26
Shareholders’ funds y20x1 344
return on equity= 26/344*100
Return on equity= 8%



  1. Return on capital employed

ROCE refers to the amount of profits that come from the operations to the money used in the firm. It concerns itself with the total debts plus funds from the shareholders. A high percentage is good for this ratio since it shows how attractive the entity is to the investors (Watson, and Head, 2016, P. 78).


Return on Capital Employed = Operating Profit/Total Debt + Shareholders’ Funds (%)


Operating profit 20×9= 107
Total debt y20x9= 214
Shareholders fund y 20×9= 304
ROCE= 21%


Operating profit 20×0= 101
Total debt y20x0= 300
Shareholders fund y 20×1= 347
ROCE= 16%


Operating profit 20×1= 49
Total debt y20x1= 462
Shareholders fund y 20×1= 344


From the computations, it comes out clear that the company has realized a decline in the ROCE. This decline denotes the management may have relaxed in cutting down the costs of operations. The sales may also have faced a drop in demand leading to little amounts of the same.

2.2 Recommendation

The board should ensure that the overhead costs of operations are set at the lowest level to see to it that the operating profits come up. The finance used in this case has increased its cost over time; this issue should become addressed by looking for alternative sources of funds that are no so expensive. Relationships with customers should be strengthened to ensure that the sales increase the demand to get more profits from the same (Watson, and Head, 2016, P. 79).




Aktas, N., Croci, E. and Petmezas, D. (2015). Is working capital management value-enhancing?

Evidence from firm performance and investments. Journal of Corporate Finance, 30, pp.98-113.

Atrill, P. and McLaney, E. (2014). Financial accounting for decision makers. Harlow:

7th Ed. Pearson Education Limited, chapter 3 pp. 70-106, and chapter 10 pp. 408-453

Melville, A. (2017). International Financial Reporting: A Practical Guide. Pearson Education

Canada. Pp. 361-387

Watson, D. and Head, A. (2016). Corporate finance. New York, NY: 7th ed. Financial

Times/Prentice Hall, chapter 2 and 3, pp. 54-110