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What happened to change in ratio?

The change in ratios will be different due to reformat of the annual report. From our case scenarios, it is evident that the income statement will depict an average sales growth of 6.2%. This will have an impact on the income statement and the balance sheet in which the ratios is derived from. The effect of ATO is that, the balance sheet will be affected in terms of the current and deferred tax asset which grows the company’s long term and current liability. This will have an effect on the ratios as depicted in the excel workbook.

Assumption of the forecast

The forecast figure in our excel workbook is based on the following assumptions

  • The effect of inflation will depict an impact on our forecast

  • The growth rate will be steady

  • The company will continue to be feasible in the future

  • Capital inadequacy will not be a major hindering in sales growth.

Reasons for optimistic and pessimistic outcomes

The reasons for our worst and good outcome form our sensitivity analysis will be based on the extent to which the external risk factors will depict an impact on our forecast., since the forecast is based on a five year analysis, it is evident that our forecast will experience some external risk factors such as the effect of inflation and fierce competition which may have negative effect on our forecast. As a result, we worked out our pessimistic and optimistic outcome in order to provide an understanding of the worst and best case scenario from our evaluation. This is ideal since, it minimizes the investment and forecast from adverse risk.

SKY CITY entertainment Analysis

From the financial statement analysis for sky city, we derive some possible opportunities for improvement in order to realize the net growth in profit for the company as well as identification of possible challenges that might hinder the attainment of the company anticipated forecasted and net profit. Our analysis was based on the sensitivity analysis as depicted in the table below.

Table of sensitivity Analysis

Base price

Trading price

Assumption

Optimistic

Optimistic price

Pessimistic

Pessimistic price

Sales growth

The sensitivity analysis for sky city limited depicts that sales growth will be more sensitivity to change. In this regards, the sales growth will be very important in appraising the company future performance since, it s very sensitivity to company future performance. The company need to ensure that appropriate measures need to be undertaken in as far as sales growth is concern.

The graph of sensitivity analysis (Albright, 2016).

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Possible opportunities for improvement

From the sensitivity analysis, it is apparent that sales growth is more sensitivity and consequently, the company must capitalize on sales growth in order to ensure that the reported net profit is improved and the equity capital is enhanced as well. The company as a result centres on increasing the efficiency of production capacity in order to meet the deemed of the product. Investment in advertisement is mandatory if the company just meets it desired target. Advertisement leads to increased customer awareness on the new product which depicts an inverse relationship with sales level growth. However, the sales growth rate have some key variables that affect it, the company must consider the following variables which have direct impact on the company sales growth (Aravossis, 2006).

Variable cost

Variable cost is cost that has an inverse relation with the sales growth. In this regards, the variable cost need to kept to optimal. This is possible where the company only incurs relevant variable cost and gets rid of unnecessary variable cost since; an increase in variable cost would to a drastic decline in reported net profits.

Fixed cost

Whether the company made sales or not, it must incur fixed cost. To ensure that the fixed cost does not depict a negative on the company’s reported net profit; there is need to sales more. This is possible where the company spend more on advertisement and commission to sales personnel which is a variable cost. In this regards, there is increased customer awareness on the product wh9hc would lead to growth in sales level due to growth in demand of the product. The increase in sales level will make fixed cost manageable (Butterfield, 2012). The company must as well initiate a process to recognize strategies with a high likelihood of achievement. The customer expanse plans are provided below

Customer-Focused Growth Strategies

The procedure of recognizing viable venture alternatives many times start with the core business. This entails the product or service, customers and business locality that creates the biggest part of income and reported net profits. An appraisal of performance of the core business entails the evaluation and benchmark assessment of profits, income growth rate and the company’s standing with its significant clients.

Another customer-centered growth plan is on the basis of the company current clients. This plant entails the creation of high impact intention for the new client’s sib-divisions. Strengthening this plan is the readiness to perceive the clients through a diverse set of lenses. A procedure might be developed to aid managers and the expert at the customer edge increase new insights into customer requirements and preference. This is appropriate step to identifying underserved clients as well as chances for growth opportunities fro the company’s sales. The main constituent of this entails the sub-division of current clients groups on the basis of latest discoveries, purchase trend as well as contribution to profits and income, creation of inventive as well as high impact value proposal for the very attractive sub division. Furthermore, the company might opt to centre on the low end clients sub-division. There are normally groups of clients for which the cost of supply and services surpass the income that the customer creates. In this way, value proposition might be planned in such a way that it will move the customers to viable positions in order to reduce the loss. The actions not merely lead to low cost of service to the customers but frequently lowers the client’s cost which will lead to more clients appreciating the new low cot value proposition (Damodaran, 2010).

Offer after sales service and discounts

After sales service and discount are some of the features for maintaining customer loyalty. In this regards, sky city limited need to provide the incentives to there’re customers in order maintain the current customer and encourage new customers to the business as well. Provision of customer incentive is one f the key tool to manage challenge of growing competition and fierce market competition. After sales service and discount makes the customer feels more appreciate and will come back again since, the service for the company is encouraging and attainable in term of pricing. The incentive depict some challenges since, there is risk of customers not seeing the real worth in paying full price if the understand they might get a discount. This makes the company’s brand cheap. Furthermore, there is risk that the company might end up at price wars which put the business out of the market.

Potential challenges for the company

Capital Inadequacy

The main hindrance to company attainment of improved net growth in profit and sales level is the capital constraint. To sales more would require funds to financing the cost of production and marketing cost as extra cost to be incurred by the company. Capital rationing is the only available remedy for the company to capitalize on the sales growth and the small capital existing. The company must therefore ensure that more capital is invested in that project that would to high return to the company within the shortest time possible. The company must as well as consider injecting more funds to the company to finance the growth in sales and net profit. Injection of new capital entail diverse approach but, consideration of the cheapest source of capital is key. Some of the c cheapest source of capital that the company might consider going for is the debt capital due to the following to key importance

Cost reduction

In comparison with equity capital, debt capital requires the least cost of financing. Many a times, the company combines the debt and equity capital in order to reduce the cost on capital and improves the value of the company. With the use of debt capital, company is legally accountable to period interest rates payment and repays the principal amount at maturity time. In this regards, debt holders bear less risk unlike the equity holders who frequently depict no option for their venture where the company fails (Jerry, 2009).

Profit Retention

Whilst the debt might increase pressure on the company current operations due to interest payments, it aids in retaining the profits within the company unlike the equity which commands the share of interest from profits. With the use of equity capital, the more the profits and hence the more the shares to equity holders.

Keeping up with the market

Market study is not a one off launch in the company. The business
situation changes frequently and hence the market study must be continuously changed or else the company will be at risk of making investment decision that is not up to date whi9hc will lead to business failures. When company grows in terms of sales and business, the competitors level grow also which make have impact on customer loyalty. Comprehension of the product positioning will aid in working the approach to capitalize the entire profitability in a competitive market whilst investing in invention to develop a stream of latest, viable products to the market (Tessa Hebb, 2015).

Planning in advance

The achievable plan this year will not be reliable next year due to change. Market situation constant change and thus there is need for revisiting as well as updating the business plan constantly. When the company sales grow, the plan requires changing to suit the changed situations. He current association frequently depicts greater potential for reported net profits as well as might provide dependable cash flows to the business. New associations might grow the sales revenue but profit margin might be low, which might not be sustainable. The company needs to keen on new investment opportunities. There is apparent risk to placing reliance on current customers. Holding diversification of customer vase will
reduce the risk.

Managing human resource

The growth in sales level would imply the growth in human resource. There is the challenge of getting the right group with the right skills to handle the job effectively. In order to meet the product standards, there is need for skillful and knowledgeable workers to under the extra sales level effectively. Managing human resource is one of the biggest challenges to sales growth expansion for sky city and consequently, the company need to ensure that there is sufficient labor force to meet the growth in business expansion (Triantis, 2015).

Conclusion

After a comprehensive review of financial performance. And undertaking sensitivity analysis for sky city, it is evident that the company is doing well in the market and it is anticipated that the sales growth will be faster but risky of either overheating the working capital of the company leading to capital inadequacy or the sales might grow drastically which
depict direct impact on reported net profits. The sensitivity analysis depict that sales growth for the company is very sensitivity and consequently there is need to capitalize on the growth opportunities as well as consider some of the challenging that impact the growth opportunities in order to ensure that business expansion is effective at minimal risk. An investor need to invest in shares of sky city limited since, there an assurance of positive return on investment. This is depicted by the positive net profit and possibility of growth opportunity for the company.

To ensure that there is minimal risk on investment, it is advisable that sky city limited to hold a diversified investment portfolio since, this will lead to improved returns at low risk. As a result, the need for more capital to fund extra growth in sales would be financed by debt capital since, this is deem an ideal investment capital due to the fact debt capital commands repayment of principal amount and the interest on debt only, the impact is that the net profit of the company will not be affected by debt funding.

Bibliography

Albright, C. (2016) Business Analytics: Data Analysis & Decision Making — Page 230, London : Cignage Learning.

Aravossis, K. (2006) Environmental Economics and Investment Assessment, Londion: Cingage Learning.

Butterfield, J. (2012) Problem-Solving and Decision Making: Illustrated Course Guides, New York: Cingage Learning.

Damodaran, A. (2010) Applied Corporate Finance — Page 552, New York: Cingage Learning.

Ehrhardt, M. (2008) Corporate Finance: A Focused Approach — Page 554, london: Cingage Learning.

Jerry, W. (2009) Managerial Accounting: Tools for Business Decision Making, London: Jonh Wiley.

Schuster, U.G.‎.N.&.‎. (2015) Investment Appraisal: Methods and Mode, New York: Cingage Learning.

Tessa Hebb, ‎.P.H.‎.G.F.H. (2015) The Routledge Handbook of Responsible Investment.

Triantis, J. (2015) Navigating Strategic Decisions: The Power of Sound Analysis , London.