Financial analysis - Assignment Example

Financial Analysis Question Supermarkets and pharmaceutical companies would have a high asset turnover, of which supermarkets would have a higher one. Supermarkets have a high business volume, as most of the foods there are perishable, while products are differentiated by freshness, which forces a specific amount of turnover of inventory (Rodgers 23). In addition, stores and warehouses are the largest assets for supermarkets and they are constructed to be relatively inexpensive. Therefore, high volumes of sales result in high rates of asset turnover.

On the other hand, the jewelry retailer and steel company have low asset turnover. The steel company will have the lowest because steel production is very asset intensive, meaning the company will have to invest billions in equipment, plants, and property required for steel manufacturing. Additionally, equipment used will have a long lifetime. As a result of this high investment and its long lifetime, the sales for a steel company will be relatively low, leading to low asset turnover (Rodgers 23).

Question #2 While supermarkets have low sales margins, pharmaceutical companies, jewelry retailers, and software companies have high sales margins. Supermarkets have low sales margins because of the high intensity of competition in the sector. In addition, there is minimal product differentiation because they mainly carry similar brands. Consumers also have a high sensitivity to price changes and switch costs tend to be low. As a result, competition in the sector is mainly based on pricing, which results in extremely low margins (Rodgers 48).

On the other hand, software companies have the highest sales margins because consumer-switching costs are high, while production costs tend to be relatively low. Finally, most costs for initial development of software are previously expensed. Thus, the sales margins are higher than for the rest.Question #3 I disagree with James Broker’s assessment. While earning numbers and operating cash flow are essential in the evaluation of a company’s prospects, they will differ because of long and short-term accruals.

Some current accruals like credit sales lead to higher earnings than operating cash flows. On the other hand, other current accruals like unpaid expenses result in lower earnings than operating cash-flows. Non-current accruals like deferred taxes and depreciation also result in differences between operating cash-flows and earnings. Understanding the difference between earnings and operating cash-flows, in this case, is more important than the fact that earnings are higher than operating cash-flows (Rodgers 55).

There are various reasons why operating cash-flows may be lower than earnings, which suggest differences in the future investment prospects and performance of the firm. For instance, companies introducing new products have higher earnings than operating cash-flows because receivables and inventory affect cash-flows, rather than earnings. However, as long as receivables are collected and inventory is sold, the difference indicates growth in sales, as well as the fact that the company has good prospects for investment (Rodgers 56).

On the other hand, declining firms have lower earnings compared to cash-flow due to diminishing working capital needs.Question #4 Joe Investor’s assertion is false. Sustainable growth is referent to how much a company can expand sans altering financial policies or profitability levels. From the equation sustainable growth rate=ROE x (1-dividend payout ratio), the funds that remain with the company and are available to enhance its growth are determined by the dividend payout ratio and the ROE (Rodgers 63).

Firms that seek to exceed SGR can reduce the dividend payout rate to increase re-investment funds, or increase ROE by increasing leverage, increasing asset turnover, or improving profitability. Question #5 Working capital from operations differs from cash from operations because of operations-related current accruals. The latter could be lower than the former if current assets increase, while the current liabilities decrease. Inventory and accounts receivable could increase as the company grows to meet demands of the market.

Contrastingly, inventory and accounts receivable could be growing when a company finds it difficult to pay for products or if inventories increase due to slowing sales (Rodgers 59). A decrease in accounts payable could occur if the financial position of the company improves and suppliers are paid sooner than usual.Work CitedRodgers, Paul. Financial Analysis. Oxford: CIMA, 2012. Internet resource.