R Riggs and J & B Associates Financial Performance - Assignment Example

CASE STUDY R RIGGS AND J & B ASSOCIATES ANSWER R Riggs is a operating as a sole proprietorship business type. Sole proprietorship is a kind of business that is owned by a single person. This single person is entitled for the entire net profit from business and is also solely responsible for the debts. Owner of the firm also has unlimited liability for the losses. From the financial statements, business type of R Riggs being sole proprietorship has been concluded with following justification: Source of capital for the business provide information that implies capital is generated from a single source. No additional information is present that is required to be produced in case of partnership. Profit is directly credited to the single capital account. This also implies that firm is operating under sole proprietorship because in other forms of business, profit is distributed among partners or shareholders and information regarding the same is presented in financial statements. Drawing of the sole proprietorship is also mentioned separately and no information regarding interest on drawings has been provided. J & B Associates is a partnership firm. Partnership firm is a kind of business conducted by small group of people making their respective contribution. This contribution can vary from amount of capital or partners contributing their capital and/or skills etc. It depends on the mutual understanding between/ among partners. Partners share profit as well as are liable for the debts according to rate mutually agreed upon. Justifications for claiming J & B Associates to be partnership firm are as follows: Capital contribution information is provided separately for the two partners which implies that operations of firm are under two partners. Profit is also shared between two partners. The profit sharing ratio between two partners is 60-40 as extracted from the information provided in the income statement. Drawings from partners, interest payable on drawings and interest paid to partners on capital as provided in balance sheet confirm that firm is operating under partnership mode of business. ANSWER #2 PROFITABILITY ANALYSIS Profitability measures provide mixed results. J & B Associates is operating profitably from operating perspective whereas R Riggs is more efficient in using their assets and capital employed. These results have been concluded in on the basis of following ratios:   PROFITABILITY ANALYSIS   RATIOS   R Riggs J & B Associates           1- GROSS PROFIT MARGIN   40%     45%     (GROSS PROFIT / SALES)   (=62,805/157,165)   (=164,581/363,111)                 2- NET PROFIT MARGIN   15%     24%     (NET PROFIT / SALES)   (=23,937/157,165)     (=86,065/363,111) 3- RETRUN ON ASSETS   1.002     0.29     (NET INCOME / TOTAL ASSETS) (=23,937/(5,020+18,874)) (=86,065/(158,400+140,490))                     4- RETURN ON CAPITAL EMPLOYED 1.31   0.44     (NET INCOME/ CAPITAL)   (=23,937/18,237) (86,065+3900)/206,365                     Profitability ratios are relative measure and provide insight in respect with comparison. On the basis of the given comparison, gross profits generated by both businesses are almost similar with J&B Associates performing better. However, J&B Associates has been managing operating expenses quite efficiently as it is visible from net profit margin. J&B has less operating expenses which increases its net profitability far above than R Riggs. R Riggs needs to review its operating expenses component to improve net profitability of its business. The biggest component of R Riggs operating expenses is its salaries which constitute almost 82 percent of it. Considerations on this aspect would improve overall net profitability of business. For the last two ratios that provide information about the efficiency in usage of resources and capital employed, R Riggs is in a better position. Return on assets provides information about how efficiently company is using its resources to generate net profit. Return on capital employed provides information regarding about investment decision is being made by management. R Riggs has employed better strategies for generating benefit from its resources. For every pound invested, it has generated almost an equal pound return from its assets. Return On Capital Employed (ROCE) R Riggs also reflects appreciable return generated for every pound invested. J & B Associates has considerable space for improvement in this regard. 0.44 ROCE refers that for every dollar capital invested, firm is generating benefit which is less than 50% of its value. For improving firm needs to find more worthwhile opportunities for investment. Similarly, ROA of J & B Associates is 0.29 which requires J & B Associates to look into which assets are not contributing in generating profit and sell them off. This will improve its ROCE as well as ROA. ANSWER #3 LIQUIDITY ANALYSIS         LIQUIDITY ANALYSIS           RATIOS     R Riggs J & B Associates             1- CURRENT RATIO     3.336397384     5.104087     (CURRENT ASSET/CURRENT LIABILITIES) (=18,874/5,657)     (=140,490/27,525) 2- QUICK RATIO    2.912144246   2.407993     ((CURRENT ASSET - INVENTORY) / (=(18874  (=(140,490-74,210)/27,525)   CURRENT LIABILITIES)   -2400)/5657)   3- DEBT TO EQUITY   -     0.314976     (LONG TERM DEBT / EQUITY)       (= 65,000/206,365) Liquidity ratios provide information regarding the ability of firm to pay off its liabilities both in short and long term (Besley, & Brigham, 2007). It is a measure based on its position on that particular date as items constituting these ratios are balance sheet components. Liquidity ratio analysis of the two companies also shows some mixed picture. For current ratio which measures the ability of firm to pay off its current liability (Brealey, Myers, Allen, & Mohanty, 2007), J & B Associates is in a better position and R Riggs has room for improvements. This does not refer that the position of R Riggs is not good. For every one pound of current liability, R Riggs has 3 pound of current assets. This reflects quite sound position of company. Similarly, J & B Associates has 5 pound of current assets to pay off every pound of its current liabilities. At this stage, J & B Associates is in better position as compare to R Riggs; however, when looked from the quick ratio perspective, R Riggs is in a better position. Quick ratio is called asset test ratio. It identifies how quickly firm will be able to pay off its current liabilities without depending on the sale of its inventory. This is important to know as some stocks are not easily saleable. The ratio highlights that J & B Associates has considerable amount of money invested in stocks. It is difficult to comment on this strategy of J & B Associates as it depends on the industry norm. However, in comparison of two firms, R Riggs has better results. Finally, J & B Associates is in a position of paying-off its current liabilities without depending on its inventory sale. Considerable investment in inventory, if not according to industry norm than J & B Associates shall try to improve its inventory investment. For long term debt, J & B Associates has 0.30 cents of debts for every pound of equity employed. Ratio of J & B Associates refers that is in a position of clearing off its debts, hence, the company has no issues in this regard whereas, R Riggs has no such long term debts. Overall, the two companies have been doing well. It has been found that R Riggs is more efficient in managing its resources as evident from quick ratio, return on assets and return on capital employed. However, its operating expenses or more precise to mention salary expense is affecting its net profit margin which needs improvements. On the other part, J & B Associates is though not in any difficult situation, but it has considerable room for improvements in strategies to invest in more profitable and worthwhile opportunities. CASE STUDY 2 STATON PLC. ANSWER #1: Ratios for the year 2008 and its comparison with 2007. Gearing ratios: Staton plc has reduced its overall gearing ratio by almost 3.50 percent. Companies discharge their long term debt and reduce operating expenses by the amount of interest due. Higher gearing makes company speculative as in case of any trouble, most of its assets will be consumed in paying of its long term debts. With improvement in its gearing status, Staton plc still has sizeable gearing. However, it shall also be considered in reference to industry norms as certain industries are characterized with higher level of gearing while others operate at low level gearing. Staton plc 30-Apr-07 30-Apr-08       Gearing 68.65% 64% Long-Term Debt   Total Assets     Earnings Per Share: Earnings per share is the amount earned for each outstanding share (Gitman, 2003). Staton plc has improved its earnings per share with 3 pence as compare to previous year. Comparing the two years, Staton plc has increased its earnings and it is a sign of good performance. Staton plc 30-Apr-07 30-Apr-08       Earnings per share 12p or 0.12 pound 0.15 Earning Av. To Common Stock Holders   Shares outstanding     Dividends per share: Dividends per share is the portion of earnings that is declared to be given to outstanding share holders in the form of dividends (Gitman, 2003). In year 2008, Staton plc has increased the declared dividend which reflects that firm is satisfactorily conducting its operations and is at ease in giving dividend. Staton plc 30-Apr-07 30-Apr-08       Dividend per share 3.75pence or £ 0.0375 0.040 Total dividend   Shares Outstanding     Dividend yield: Dividend yield measures how much dividend is paid out by company relative to its price (Gitman, 2003). Shareholders of Staton plc in the year 2008 has earned less based on the current market price of its share. This return was 1.25% higher than in year 2007. It may be for the reason that demand for company’s share has increased in market which has pulled price up, resulting reduction in Dividend Yield. To improve dividend yield, Staton plc shall try to control market forces driving price upward. As higher dividend yield is better for the firm. Other way to improve dividend yield is to increase the amount of dividend paid out by firm which is also done by the firm. Staton plc 30-Apr-07 30-Apr-08       Dividend yield 6.25% 5.000% Dividend per Share   Market Value Per Share     Dividend cover: Dividend covers reflects how much firm is in a position to pay out its dividends (Kaplan, and Atkinson, 1998). Higher dividend cover is better as it refers firm has capacity to pay out dividends whereas low dividend cover refers firm will have trouble in paying of dividends to its stock holder. Dividend cover for Staton plc has also improved as compare to trialing year. Staton plc 30-Apr-07 30-Apr-08       Dividend cover 3.2 times 3.75 Profit After Tax   total Common stocks Dividend   Price/Earnings ratio: Price to earnings ratio is the measure that provides information regarding the multiple of price that is prevailing with respect to its earning. Higher PE reflects shareholders expectation of growth earning in the coming times. PE ratio for Staton plc has also improved as compare to 2007 which reflects that shareholders are expecting further improvements in the performance and earnings of Staton plc for the next period. Staton plc 30-Apr-07 30-Apr-08       Price/Earnings Ratio 5 5.33 Market Value Per Share   Earnings Per Share     ANSWER #2 INVESTMENT DECISION Decision to invest in share is directed by many factors. Mainly two broad domains are considered; first, type of return investor is looking for. Some investors are more concerned with continuous stream of cash flows. For such type of investors firms that constantly pay out dividend are better options. Some investors require capital gain and are not concerned with dividends. Initially, Jane must consider on this front before making any investment decision. Secondly, investors analyze the position and performance of company before making their decision. Staton plc is an attractive avenue of investment. Comparison of two years of the company reflects that the firm has made improvements in its overall operations. Financial ratios calculated above provide positive results. In year 2008, Staton plc earned higher, paid higher dividend, improved it capacity to pay and reduced gearing. Dividend yield of Staton plc has reduced for 2008 as compare to 2007. The decline in this measure with respect to trailing year, is because of the increase in the price of the stock of the company. This can also be identified from the increased PE ratio, and hence it can be concluded that market expectation with firm’s performance has improved. It has increased demand for the company share in the market. This is very critical stage in making investment decision. Jane before investing in shares of Staton plc shall consider if the firm’s share is trading in speculative range (high rise in price due to speculation). If it is so, then after waiting for correction in price, Jane shall make positive investment decision of buying Staton plc shares and if Jane believes that the company would further improve its performance then it is the correct time to make an investment and thus, I feel that this is the right time for the investment in the company and Jane should invest in the company as it is showing signs of improvements and would further improve. References Besley, S., & Brigham, E. (2007). Essentials of Managerial Finance, 14 edn. USA: Thomson Higher Education. Brealey, R., Myers, S., Allen, F., & Mohanty, P. (2007). Principles of corporate finance, New York: McGraw-Hill. Gitman, L. (2003). Principles of Managerial Finance. Boston: Addison-Wesley Publishing. Kaplan, R., and Atkinson, A. (1998). Advanced Management Accounting. New Jersey: Prentice-Hall. Read More