Evaluation Of Financial Performance: Grace Primary School

Financial Performance

The report is prepared to evaluate two years of income along with two years of the balance sheet. The evaluation will be based on four areas that are profitability, efficiency, liquidity and long-term solvency. The four mentioned areas will help in evaluating how much the profit is earned by the school and the manner in which the productivity of the school can be enhanced.

Grace primary is located in Yorkshire and the schooling caters to the children who are aged between 4 to 11 years of age. It is a co-educational school with modern facilities such as playing arena, trees, gardens and various other adventures. The annual income is derived from the Department of Education through the Education Funding Agency and it happens in the manner of a General Annual Grant. The school escalated to a new position and the planning was done in an effective manner ensuring there was a strong value of money. The funds were utilized in the best possible way. The funding that the school received in 2015-16 catered to 374 children while the school educated 295 children that rose to 200 by 2016. The school continuously made effort to generate additional income that is evident from the activities such as providing Bursar service to another local primary school. Even the Headteacher was able to generate additional income by utilization of the premises to various groups. Further, the Trust even opened a new nursery school.

Going by the very nature of the Grace Primary school it can be said that the school always strive to earn additional income. However, as per the comparison of the income statement of the school, it can be seen that the school incurred losses of £66,222 in 2016 as against a profit of £2,967,733 in 2015. This indicates that the school had a loss-making activity in the year 2016 and this can be cited due to the low-level income. As against £ 8,008,426 income in 2015 the income of the school dropped significantly at £ 1,638,263. This indicates the deficiency on the income generation part. The total expenses reduced vastly however, the school was unable to turn the opportunity into a profitable one.

Moreover, the fixed assets were in 2016 and hence, a reduction can be witnessed. The current assets increased and the current liabilities meaning the school had sufficient liquidity to meet the obligations (Petersen & Plenborg, 2012).

The total staff cost of the school increased meaning that the school will have more outflow. Moreover, there has an increment in the total number of administrative staff. However, going by the scenario of the school in 2016, it can be said that the school should eliminate few costs from the system so as to maintain the profitability similar to 2015. Additional staffs vouch for additional pressure.

Ratio Analysis

Profitability ratio can be defined as the major component of the company that helps in arriving at the profit and determine the status in the long run (Peterson & Fabozzi, 2012).  The reason can be cited is that the present performance of the company determines the long-term viability of the company. As per the profitability of the Grace primary school, it can be stated that the company had a strong position in the year 2015 while the performance dropped significantly in the year 2016. Both the ratios that are the net profit margin and the return on total assets have dropped indicating a poor show by the school in the year 2016.

This ratio indicates the ability of the company to generate profit in tune to the presence of the total assets. The ratio of the past two years has been compared and contrasted. ROTA projects the manner in which the assets are put to use by the company (Albrecht et. al, 2011).  Hence, the above computation clearly stresses that the school failed to utilize the assets effectively in the year 2016. The degrading of the ratio in the year 2016 is indicating that the school was unable to convert the money required to purchase assets into profits. A Higher ratio is always needed because it denotes better management of the assets.

There is a vast difference when it comes to the year 2015 and 2016. In 2015, Grace primary school operated with ROA of 44.5% in 2015 while it slipped to a negative of -1 in 2016. It is a deficiency on the part of the school authority as the assets were not utilized to an optimum level.

The net profit margin declined in the year 2015 indicating that the school has faced several issues in the year 2016.   A higher net profit is always the main priority because it reflects that the school will be able to transform the profits when the period gets over.  The net profit margin of different industries varies and a lower margin for one does not mean a lower margin for another.  The net profit margin of the school declined as the school was able to post a very low level of income that ultimately led to a downfall considering a good control over the expenses. Hence, a drop has been witnessed from 37.06%$ to -4.04$. If the two years are compared then a big dent in the profit-making ability can be reflected. One of the prominent reasons lies in the fact that the school has catered to educate more children as compared to the funding that is received by the Education Funding Agency. Hence, an additional stress on the school is witnessed that has led to lower revenue. The higher the increment in the net profit, the better would be the chances of meeting the expenses (Deegan, 2011).

Profitability Ratios

The liquidity ratio projects the ability of the company to discharge the obligation when they are due and when the long-term liabilities materializes. The liquidity ratio projects the level of cash of the company and the manner in which assets can be transformed so that the liabilities can be repaid (Davies & Crawford, 2012).

When the current ratio is high, it is a favorable message to the organization because the liquidity is present with the organization. It reflects that the organization is able to meet the obligations and repay the current debt (Melville, 2013). From the computation of the ratio of Grace primary school, it can be said that the school has a strong current ratio that is more than 1:1 indicating it contains more current assets as compared to the current liabilities (Choi & Meek, 2011). This projects that the school is having enough from operations to support the activities. Hence, the school is not losing money.

Further, the ratio enhanced in the year 2016 indicating that the school is moving towards closer to the ideal ratio of 2:1. Thereby, it can be commented that the liquidity problem is not present with the school and hence can perform with ease. Banks generally require a ratio of 1 or 2 and going by the computation it is evident that the school has a strong current ratio and in future can avail loans because it has liquidity present with it (Fields, 2011).

On comparison of both the years that is 2015 and 2016, it is observed that the current ratio enhanced in the year 2016 thereby enhancing the liquidity of the school.  Hence, more liquidity is observed in 2016 s the ratio peaked to 1.45 in 2016 as against 1.08 in 2015.

The quick ratio helps in measuring the skills of the company in repayment of the current liabilities when it becomes due.  Quick assets are those assets that can be converted into cash in the short term (Brigs, 2013).  If the organization contains a higher level of quick assets as compared to the current liabilities, the firm will be in a strong position to discharge the obligations without selling off any long-term assets. A higher quick ratio is a big advantage to the company because it projects the strong liquidity of the company. In this scenario, the Grace primary school has the quick ratio of 1.45 that means the obligations can be discharged by simply using the quick assets and there will be no impact on the long-term assets (Brigs, 2013). Hence, going by the liquidity factor it can be said that the liquidity position of Grace School is strong and can meet the obligations easily.

Liquidity Ratio

The graph clearly signifies that the quick ratio has enhanced in 2016 as compared to 2015 indicating that the liquidity is strong. A higher quick ratio projects higher liquidity and as compared to the year 2015, the liquidity has increased (Libby et. al, 2011). 

The debt-equity ratio is one of the potent solvency ratios that provide a comparison of the total debt of the company with that of the total equity. The debt-equity provides a percentage of finance that the company extracts from the creditors and investors. Higher debt equity projects that the company has procured more loans (Graham & Smart, 2012). From the computation of the Grace primary school debt to equity ratio it is seen that the ratio ranks higher in 2016 meaning more loans are taken by the school to fund the operations. Lower debt-equity ratio is highly favorable as it indicates that the organization has more longevity and potential (Needles & Powers, 2013).

The Debt equity of Grace Primary is 1.50 which is more than indicating a heavy reliance on debt. Such a ratio indicates that the creditors have more contributions as compared to the investors. As compared to the functioning of the company it was observed from the financial statements that the creditor component was huge considering the operations (Gibson, 2012).

The debt portion of the school increased heavily in 2016 where it touched 1.50 stressing on the fact that the financial structure is comprised of more debt and hence, a further increment will endanger the stability (Horngren, 2013).

The equity ratio is an indicator of the solvency of the firm and ascertains the assets that are financed by the investment of the owner and is done by comparing the total equity with that of the total assets. As per Guerard (2013) the equity ratio, it can be made clear how much of the overall assets of the company are owned by the investors and the second being the leverage of the organization with the debt. From the computation of the equity ratio, it can be commented that the school is getting finance from the investors and hence, is a positive sign. Higher equity ratio can be described as favorable because it projects the investment is flowing in. Moreover, going by the nature of the industry that is the education and school it can be commented that the equity ratio is a healthy ratio. It indicates that the investors are willing to invest (Horngren, 2013). The annual grant is received by the company and further going by the ratio it can avail more funds with ease and flexibility.

Efficiency Ratio

Being a school and engaged in education it is different in many aspects. Going by the overall analysis it can be said that the school had a strong year in the year 2015 whereby the profits were huge and profitability was intact. However, there is a big difference in the year 2016. The liquidity stands commendable for the school and this can be taken as one of the major factors that can shape the destiny of the school. For the school to operate on a profitable note, it is essential that the school should undergo various changes in its operations. Firstly, the school must cater to a higher age group that is it should not be restricted to the age group of 4 to 11. This will prove to be a money maker and as the school has amenities and space it will not face any problem. Further, the school has increased the staff and if that is to be considered it should have more courses so that better opportunities can be availed. Further, the school must undergo changes to the alternative income generation schemes (Penman, 2013). It is observed that the scheme is weak in nature and hence, fail to provide a strong additional income source. It should allow various training services and other educational programs at the school as it has ample space. This will lead to an income generating activity. It has larger premises and hence must cater to an innumerable local group that will change the income generating capacity.

Once the assets of the company are utilized to an optimum level, it will change the very nature of the performance. The return on assets in the year 2016 stands negative because the school failed to utilize the overall premises in a profitable manner. It should cater to a variety of group and must provide for educational purposes that will fetch huge income.

Conclusion

Going by the overall report, it can be commented that Grace primary school has the amenities and resources to make a profitable venture. However, owing to the mismanagement and lack of planning it failed to produce a significant result in 2016. Therefore, it must use the resources in an effective manner that will help in reaping funds. The school has liquidity that projects the ability to make timely payments. Hence, liquidity is not a worry. The only aspect it needs to see that the major funding is generated from debts that might hamper the function of the school in the long run. Overall, the fundamentals of the school are strong and just the revenue generation stands in 2016 that can be managed and rectified through proper planning by the management.

References

Albrecht, W., Stice, E. and Stice, J. (2011) Financial accounting. Mason, OH: Thomson/South-Western.

Brigs, A.  (2013). Financial reporting & analysis. Mason, Ohio: South-Western.

Choi, R.D. & Meek, G.K. (2011). International accounting. Pearson.

Davies, T. & Crawford, I. (2012).  Financial accounting. Harlow, England: Pearson.

Deegan, C. M., (2011).  In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill

Fields, E. (2011). The essentials of finance and accounting for nonfinancial managers, New York: American Management Association.

Graham, J. and Smart, S. (2012)  Introduction to corporate finance. Australia: South-Western Cengage Learning.

Gibson, C. (2012). Financial statement analysis. Mason, Ohio: South-Western.

Guerard, J. (2013). Introduction to financial forecasting in investment analysis. New York, NY: Springer.

Horngren, C. (2013) Financial accounting. Frenchs Forest, N.S.W: Pearson Australia Group.

Libby, R., Libby, P & Short, D. (2011)   Financial accounting. New York: McGraw-Hill/Irwin.

Melville, A (2013).  International Financial Reporting – A Practical Guide. Pearson, Education Limited, UK

Needles, Belverd E & Powers, Maria. (2013). Principles of Financial Accounting. Financial Accounting Series, Cengage Learning.

Penman, S. (2013). Financial statement analysis and security valuation. New York: McGraw-Hill Irwin.

Petersen, C., & Plenborg, T. (2012). Financial statement analysis. Harlow, England: Financial Times/Prentice Hall.

Peterson Drake, P., & Fabozzi, F. (2012). Analysis of financial statements. Hoboken, N.J.: Wiley.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order