Accounting and Finance - Report Example

RUNNING HEAD: Just Car Clinic Accounting and Finance - Just Car Clinic of Table of Contents Introduction ........................................................................................................................3 2. Analysis and Discussion .................................................................................................... 3 2.1 Profitability and Management Efficiency..........................................................................3 2.2 Liquidity ............................................................................................................................4 2.3 Financial Leverage.............................................................................................................5 3. Conclusion ............................................................................................................................5 1. Introduction This paper seeks to write a conclusion to interpret, comment on and evaluate the financial performance of Just Car Clinic for 2009 in comparison with 2008. Financial ratios are extracted using the financial data from 2009 Annual Report of the company. 2. Analysis and Discussion 2.1 Profitability and Management Efficiency The 2009 return on capital employed (ROCE) at 21% of Just Car Clinic decreased from 33% in 2008. See Appendix A. This lower profitability may be seen in lower net operating profit and net income in British pounds. The slightly lower profitability in 2009 is further confirmed by using return on equity (ROE), with a rate of 23% in 2008 but decreased to 19% in 2009. An average rate of return of about 19% ROCE or return on equity, when evaluated for investment decisions, definitely attracts investors, as it would mean that for every 100 British pounds, the investors expect returns of about 19 pound. The present rate is still high for a company like Just Car Clinic given the financial crisis in 2009 and 2008. It may be noted that ROCE uses the formula where operating profit is divided by capital employed or total assets less current liabilities (Helfert, 2001). Return on equity on the other hand divides net profit by the total stockholders’ equity. When compared to an average rate of 0.50% if money was invested in a bank, its present ROCE or ROE makes the finding of offering more twenty times than risk-free rate. The 0.50% is the Bank of England base rate (Housepricecrash, 2010) that could represent the risk-free-rate investment in the United Kingdom. Aside from profitability, it is also interesting to know whether the company’s management is efficient. To measure the latter, this paper uses return on assets (ROA). Just Car Clinic’s ROA for 2009 was 7% as against the same rate in 2008. While ROA may indicate profitability measure, the same indicates efficiency of management also in terms of profits in relation assets employed in business. ROE on the other hand measures how much management compensates resources invested by stockholders. Further analysis revealed that net operating margins and net profit margins for 2009 and 2008 were both at 3% and 2% respectively. See Appendix A. Since efficiency appears the same, a further comparison can be made in terms of trade receivable days, which got faster from 57 days in 2008 to 51 days in 2009. This means that the change was favourable to the company (Helfert, 2001). However at same time trade payable days deteriorated from 79 days to 70 days. See Appendix A. Therefore, the faster collection period was offset by faster payment period. However, since the company has faster collection period, the slight deterioration in efficiency was still manageable. The same deterioration in efficiency is also reflected in the increase in inventory days from 9 to 10 days and lower utilization of assets from 3.88 in 2008 to 3.69 in 2009. Thus, it could be deduced that there was light deterioration in efficiency, which may further explain the slight deterioration in profitability as stated earlier. 2.2 Liquidity Just Car Clinic’s liquidity is its ability to meet a company is currently maturing obligations. It can be measured using the current ratio and the quick asset ratio (Bernstein, 1993; Droms, 1990; Meigs & Meigs, 1995). Appendix A summarizes the information. Its computed 2009 current ratio is 1.12 in 2009 as against 1.06 of 2008. Quick ratio of the company on the other was reflected at 1.00 as against 0.98 of 2008. Both the current ratio and acid test ratio of the company therefore improved in 2009 to reach a level where the company could match its current obligations with every current or quick asset. It is generally accepted that a current ratio of at least 1.0 can be still considered liquid as current liabilities is still matched by current assets of the company. The company got more liquid in 2009 with acid test ratio reaching level of 1.0 or that its cash and cash equivalents can be used to pay currently maturing obligations for the year. See Appendix A. Just Car Clinic current assets was reduced by the amount of inventories to get quick assets for acid test ratio computation by before dividing it by current liabilities This makes quick asset or acid test ratio a finer measure than that of the current ratio. 2. 3 Financial Leverage Financial leverage of Just Car Clinic indicates its long-term capacity to keep up it stability over the long term (Brigham and Houston, 2002; Van Horne, 1992). By having a good financial leverage as measured by debt to equity ratio, the company should assure investors that the company will not just survive the short term but it must also have a long life to recover long-term investments, which may take more years to produce the needed returns. The debt to equity ratio of Just Car Clinic for 2009 was 1.52 after decreasing from 2.12 in 2008. See Appendix A. The lower the rate the less risky the company is. There is therefore an improvement in the company’s financial leverage. Despite the improvement in debt to equity ratio, the company may still be considered with highly leverage considering that in has more debts and investments from stockholders with debt to equity ratio above 1.0. 3. Conclusion This paper has found that profitability and management efficiency in 2009 decreased slightly from 2008. However, in terms of management efficiency, the slight deterioration was almost made insignificant by the similar ratios for net profit margin and ROA and the shortening of the collection period. Liquidity and financial leverage however improved in 2009 and 2008. This means that despite lower profitability and efficiency, the company was able to improve liquidity and solvency despite effects of the crisis, which was felt more in 2009. This could indicate preparedness of the company it times of crisis in order to keep the company alive, stable, and ready for the years ahead. Appendix A – Summary of Financial Data and Ratios; Sources (Just Car Clinic, 2010) References Bernstein, J. (1993). Financial Statement Analysis, Sydney: IRWIN Brigham, E. and Houston, J. (2002). Fundamentals of Financial Management, London: Thomson South-Western Droms (1990). Finance and Accounting for Non-Financial Managers. England: Addison-Wesley Publishing Company Helfert, E. (2001). Financial Analysis: Tools and techniques: a guide for managers. McGraw-Hill Professional Housepricecrash (2010). Bank of England Base Rate. Retrieved 20 Nov 2010 from http://www.housepricecrash.co.uk/base-rates.php Just Car Clinic (2010). Annual Report for 2009. Retrieved 20 Nov 2010 from http://www.justcarclinics.co.uk/pdfs/final-results-2009.pdf Meigs, R, Meigs, W., & Meigs, M. (1995). Financial Accounting. New York: McGraw-Hill Van Horne, J.C. (1992). Financial Management Policy. London: Prentice-Hall, Inc., Read More