NeuFash Ltd Sustainable Fashion Finance Case Study
Question 1
“Global sustainable fashion market to hit 33 billion dollars by 2030
The global sustainable fashion market, valued at 7.8 billion dollars in 2023, is on a trajectory of rapid expansion, with projections indicating it will soar to 33.05 billion dollars by 2030”
Coherent Market Insights, April 8, 2024
The above article highlights the potential growth of the sustainable fashion sector, which can further exploit opportunities in sustainability, supply chain resilience and innovation. Theprevalenceof awareness on environmental sustainability also helps boost the growth of this sector.
NeuFashLtd, a listed textilemanufacturing group, supplies both local and global markets in more than 100 countries with clothing fashion wear for men and women. These fashion wears range from casual to streetwear. The company has three manufacturing facilities and is considering incorporating recycled textile manufacturing as part of their transition to sustainable fashion, with the objective to improve profitability. This project requires investment of an estimated $100 million for the production line to be fully operational.
Required:
Critically evaluate on the different sources of funding available to NeuFash Ltd. Your discussion should include;
- the financial institutions providing the funds,
- the forms of financial instruments issued for raising funds,
- the advantages and disadvantages of these instruments, and
- make recommendations as to how these funds are appropriate to the planned project. (30 marks)
Question 2
The Chief Executive Officer (CEO) of NeuFashLtd, a clothing brand that dedicates itself to sustainable clothing production and recycling, needs to seek further funding for expansion plan, by presenting the company’s financial performance and standing to potential investors. Presented below are the summarized accounts for the company.
NeuFash Income statement for the year ended 31December 2024
| $000 | |
| Revenue | 55,250 |
| Cost of sales | (23,500) |
| Gross Profit | 31,750 |
| Selling, Distribution and Administrative expenses | (12500) |
| Profit from operations | 19,250 |
| Finance cost | (2,500) |
| Profit/(Loss) before tax | 16,750 |
| Tax expense | (4,000) |
| Net profit for the period | 12,750 |
NeuFashStatement of Financial Position as at 31December 2024
| $000 | $000 | |
| Assets | ||
| Non-Current Assets | ||
| Other financial assets | 6,354 | |
| Property, plant and equipment | 99,546 | |
| Total non-current assets | 105,900 | |
| Current Assets | ||
| Cash and cash equivalents | 9,120 | |
| Trade and other receivables | 2,128 | |
| Inventories | 19,152 | |
| Total current assets | 30,400 | |
| Total Assets | 136,300 | |
| Current Liabilities | ||
| Trade and other payables | 16,356 | |
| Total current liabilities | 16,356 | |
| Non-current liabilities | ||
| Long term borrowings | 40,890 | |
| Total non-current liabilities | 40,890 | |
| Total liabilities | 57,246 | |
| Equity | ||
| Share capital | 51,384 | |
| Retained earnings | 27,670 | |
| Total equity | 79,054 | |
| Total liabilities and equity | 136,300 |
The opening balances of total assets. Liabilities and equities at the beginning of the year are also provided:
| Total assets ($000) | Total Liabilities ($000) | Total Equities ($000) |
| 121,500 | 51,030 | 70,470 |
a. In addition to the financial statements presented above, key financial ratios indicating the profitability, efficiency and liquidity of the company for the past year has been compiled, together with their respective industry averages for benchmarking.
Calculate the ratio values forNeuFashLtd the year ended 31 Dec 2024 as follows:
| Ratios | Historical Data | Industry Average | |
| 2023 | 2024 | 2024 | |
| Operating Profit Margin (%) | 36.5 | 35.2 | |
| Return on Total Assets (%) | 15.8 | 16.8 | |
| Quick/Acid Test ratio | 0.58 | 1.05 | |
| Times Interest Earned (times) | 6.8 | 7.9 | |
| Debt ratio | 0.4 | 0.48 | |
(5 marks)
b. Interpret the following ratios of for NeuFashLtdfor the year ended 31 Dec 2024.
- Operating Profit Margin
- Return on Total Assets
- Quick/Acid test ratio
- Times interest earned
- Debt ratio
(15 marks)
c. Critically evaluate NeuFashLtd’s financial performance over the 2023-2024 period, using the relevant ratios provided and those calculated from part (a). (35 marks)
Question 3
The Chief Executive Officer (CEO) of Fuseman Ltd would like to increase the market share of their company, so as to optimize the investment in the 3D printing additive capability. One of the strategy is through cost leadership, whereby the successful cost leader competes on the basis of low product price via maintaining low cost. His understanding of cost accounting is limited but is aware there are two approaches to costing for manufacturing firms, absorption costing and marginal costing.
Required:
As the Chief Financial Officer, explain to the CEO the difference between the two costing techniques. You should also critically assess the merits of each costing techniques discussed. 20 marks)
Accounting Assignment Answers: Experts Answer on NeuFash Case Study
Sources of finance
The sources of finance that can be utilised are equity financing which is useful in attracting investors who value sustainability. Bank loans which allows for direct access to funding at lower interest rates for eco projects. Government grants as an important source to get access to sustainability funds and crowd funding which helps in engaging eco-conscious customers and communities.
Financial ratios
The calculation of financial ratios for NewFash Ltd is performed for the year ended 31st Dec 2024. The important ratios calculated are return on total assets, quick test ratio, times interest earned and debt ratio. The details are included in the appendix section and the analysis of performance indicates that the operating profit margin declined in 2024 compared to previous year from 36.5% to 34.84%. The return on total assets also declined in 2024 whereas the acid test ratio shows a marginal improvement in 2024 compared to previous year. The time interest increases from 6.8 in 2023 to 7.7 times in 2024. The debt ratio also increased marginally. This indicates that the profitability performance of the company has declined in 2024 compared to previous year while its liquidity adequacy has improved in 2024.
Costing methods
The difference between absorption costing and marginal costing is that in absorption costing, all costs are absorbed into the cost of production, whereas in case of marginal costing, only the variable production cost is included in the product cost. The valuation of inventory in absorption costing is done by considering both the fixed and variable production overheads, whereas in marginal costing, the fixed production cost is considered as period cost and written-off in full against profit. The advantages of absorption costing includes better compliance, long term pricing and profit smoothing, whereas for marginal costing, the merits include better decision making ability, clarity and avoid stock manipulation.
In the case of Fuseman Limited cost leadership strategy, it is good to utilise marginal costing for internal decision making, and absorption costing for external reporting. A hybrid approach will help in achieving compliance and also benefit from low cost strategies in 3D printing.
| Disclaimer: This answer is a model for study and reference purposes only. Please do not submit it as your own work. |
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