Question:
You are provided with the selected company's financial reports from the 5 past years to be used for the analysis of past performance.You should build an analysis of the performance of the company on the past 5 years.
Answer:
Introduction:
Financial analysis forms the basis for financial decision making. Financial analysis refers to the application of different financial tools and techniques to identify the strength and weak areas in the financial statements of a company. The effectiveness of financial decisions is considered to be dependent on the accuracy of financial analysis. The current study is concerned with conducting financial analysis on the financial performance of Husqvarna group over the past five years. Last five years’ annual report of the company have been taken for this purpose. The study analyzes both the income statement and balance sheet of Husqvarna group. Ratio analysis and du-point analysis have been considered for this purpose.
Analysis of Income statement of Husqvarna group:
The financial statements of an organization comprises of three main elements which are income statement, balance sheet and cash flow statement (Doucette et al. 2012). The purpose of income statement is to reflect the incomes and payments that have taken place during a particular financial period. Here, it is vital to note that income statement reveals profits or loss for an organization during a period. Earnings per Share (EPS) is calculated on the basis of the results of the Income statement. However, there exists a significant difference between income statement and cash flow statement preparation methods. Income statement or Profit and loss account is prepared following accrual basis of accounting whereas cash basis of accounting is followed in case of cash flow statements (El Kasmioui and Ceulemans, 2013).
Interpretation:
Understanding profitability is the key objective of analyzing profit and loss statement of Husqvarna group. Profitability is the excess of revenues over the expenses incurred by a company for earning such revenues. Overall, instability in profitability is indicated by the above analysis on the financial statement of Husqvarna group. The company has been able to increase its sales revenues consistently over the last past years except in the year 2013. On the other hand, Gross profit margin has been negative for both 2012 & 2013 and then became positive in 2014 and again the growth in gross profit margin dipped in 2015. This can be mainly attributed to the sharp rise in direct costs of the company. Furthermore, consistent rise in indirect costs of Husqvarna group is yet another key issue faced by the company. The operating profit margin of the company has remained for both 2013 and 2014 and then became positive in 2015. On the other hand, significant increase in net profit is observed in 2015 whereas negative growth of net profit margin is observed in 2013 and 2014. Husqvarna group has been able to control the income tax expense in 2015 compared to the previous years. However, a good point to notice is that Husqvarna group has been able to reduce its finance costs consistently since 2011. As mentioned by Cucchiella, D’Adamo and Gastaldi (2015), reduction in finance cost in the form of interest expense reduces the financial risk of a company and improves profitability.