Financial Analysis of Boomaloo Pty Ltd - Article Example

Save this file under a name unique to you. Preferably start the file name with your family name and first name and the relevant year and study period. Highlight and delete this message. Financial Analysis of Boomaloo Pty Ltd for Ian Scott [Enter the date of submission] prepared by [Enter your name] Executive Summary Boomaloo is a company dealing in fishing tackle equipments and is being considered to be purchased by Ian Scott. Ian is looking towards purchasing Boomaloo after looking into the financial position and the growth opportunities based on it. The report looks into the financial performance of Boomaloo and presents a picture whether Boomaloo should be purchased by Ian or not. The report looks into various analyses by concentrating on profitability, liquidity and financial stability of Boomaloo. The report also looks into the horizontal and trend analysis over the past years to provide information regarding the performance of Boomaloo. The report shows that Boomaloo has showed consistency in performance and has improved in 2010 as compared to 2009 but needs to further improve its performance to match industry standards. The report also presents that the management needs to change its policies so that it is able to match the industry. Finally, the report suggest that Ian Scott can look forward to purchase Boomaloo as the company has a good prospects and with the changes Ian Scott is looking forward in the way the company was managed will ensure a good return on investment. Contents Introduction Background: Ian Scott is looking forward to purchase Boomaloo Pty Ltd from Marcus Markup which is into fishing business. Ian wants to look at the future prospects and the manner his investment will fetch him returns before making a financial decision. Ian is looking towards the financial analysis before deciding his future course of action. Financial analysis is very important for all business. Analyzing the statement helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decision”. (Micro Strategy, 2010It helps to identify trends and compare with competitors and industry to gain advantage. Purpose of the report: To identify and evaluate the financial statement of Boomaloo Pty Ltd with a view to provide recommendation to Ian Scott whether purchasing the company will be beneficial in the long run considering the nature and risk involved. Scope: The report looks into various aspects but doesn’t take into consideration the inflation level, the changes in technology with regard to production, marketing and distribution. Profitability The profitability ratios help to find the manner in which the company has performed in relation to its bottom line i.e. profits. Some of the ratios in that direction are Return on Assets: “It is defined as the amount of profit generated for per dollar of asset”. (Friedlob & Schleifer, 2003) It helps to identify whether the assets are utilized properly or underutilized. It shows consistency over the years highlighting that despite increasing completion the assets have been well managed. Even the trend and horizontal analysis supports the fact that both assets and profits have shown consistency. Gross & Net Profit Margin: Gross profit helps to find out the actual profit that is attributed directly to the product. Net profit is the profit after all expenses are met. Both the ratios show soundness and match the industry standard of 30% and 10% highlighting proper management. The efficiency of this ratio multiplies when we look at the trend analysis which shows that despite increasing competition the sales and profits have not dipped much. Price Earnings ratio: “It is defined as the market price of share per earning per share”. (Summers & Smith, 2010) The ratio shows soundness and is due to high EPS the company has generated. This has made the P/E ratio to be high and suggest that the company has a scope of growth in the future. Dividend Ratio: The dividend ratio shows inconsistency as it has fallen in 2010 as compared to 2009. This has been purely due to reduction in dividend which can be attributed to the decline in profits. A look over the trend shows that profits haven’t dipped so the company has decided to distribute fewer dividends to ensure growth by re-ploughing the profits. The overall profitability seems sound. Even the trend analysis presents the same as profits in comparison to 2008 has not dipped much. The same has been highlighted by the horizontal analysis. The profitability can further improve if the business pays its creditors early which will save around 3 to 5%. Further the opportunity presented by associate charter hire booking service presents a bright picture for Ian. Liquidity This ratio plays an important part and helps “to identify the firm’s ability to meet its short term obligations and plays a huge role in the performance”. (Financial Modelling Guide, 2010) The ratios are as Current & Quick Ratios: The current ratio is good as it is above 2. The ratio indicates the efficiency of Boomaloo to meet its immediate debt. This ratio will help creditors, suppliers and investor to invest as the liquid position is sound. (Mehar, 2005) Boomaloo needs to improve the quick ratio as this as it is a concern and presenting a bleak picture. Despite having high ratio it is below industry levels which are a concern. The quick ratio when compared to current ratio also indicates huge inventories. Since, the companies deal in product where the inventory has to be high still it is a concern. A comparison of the percentage of assets and liabilities over the years shows that both assets and liabilities have decreased. Account Receivable: “It is defined as the number of times the company is able to recover the dues from the customer”. (Kennon, 2010) The ratio shows consistency both in turnover and collection period over the years. The company needs to improve it as it would be a good sign and reduce the chances of bad debts. Consistency in ratio is supported by consistency in accounts receivable which shows proper management. Inventory Turnover: “It is defined as the number of times inventory is rolled over during a year”. (Summers & Smith, 2010) The ratio shows consistency but is well below industry level signalling the risk involved. The company needs to improve it so that the reputation improves with the suppliers and also ensures steady supplies. The inventory over the years has come down highlighting better management but so has the sales. The company needs to improve it and ensure better policies. The overall liquid position of the company is sound and shows consistency. The company needs to improve it slightly so that it can match the industry standards which will help the company in the long run and ensure better relation with creditors, suppliers, and employees. Financial Stability This ratio is of prime importance and provides relevant information about the company. “It identifies how much of the firm’s assets are financed through debt and includes long term debt”. (Transtutor, 2010) The ratios are as Debt Equity Ratio: It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Transtutor, 2010) The ratio indicates soundness. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. Boomaloo has decreased its debt by paying off as suggested by the percentage analysis. . Equities and liabilities: The percentage analysis shows that the equities have grown which is compensated through decrease in liabilities which is a good sign and presents a bright future for Boomaloo in the future. Interest Earned ratio: The interest earned ratio has grown over the years showing improvement but Boomaloo needs to improve it further to consolidate its functioning and ensuring proper rewards. The ratio is still below industry standards and measures need to be taken to improve it. Asset Turnover ratio: The ratio suggests that Boomaloo has been able to use its assets better. Boomaloo needs to continue so and improve to match industry standards. The assets have shown consistency and are growing which is a good sign. The overall condition looks stable from the financial perspective. There is financial stability and presents an bright picture and with proper management Boomaloo can further improve its stability and grow at a quicker pace. Conclusion Boomaloo performance over the year has shown consistency and the company has a sound liquid position. The efficiency of this multiplies by the soundness in profitability and financial stability being witnessed. The overall performance in 2010 has improved compared to 2009 and the trend analysis forecast growth for the business. Boomaloo needs to work on certain areas like the quick ratio, inventory ratio, debtors receivable and others which are below industry standards. Proper management and making some changes will benefit Boomaloo. Overall the performance seems satisfactory considering the fact that competition has grown and taken some toll on the business. The company has scope for improvement and by concentrating on core activities the company can benefit greatly. Ian Scott can look forward to purchase this company and with the changes Ian is proposing in the working environment Boomaloo performance will improve and Ian will be able to get a better return on investment. Recommendation Boomaloo needs to improve its quick ratio, collection from debtors’ ratio, inventory turnover ratio, and interest earned ratio to match industry standards. For this the company needs to bring changes in the working and ensure that these changes within a period of 3 years by bringing the necessary changes. Boomaloo is a good company for Ian Scott to purchase as the company has shown consistency and over the years. Proper management and changes in the manner the company dealt with creditors, and new methods to improve sales will bolster the performance of Boomaloo. Ian Scott needs to ensure that it brings the necessary changes in the working environment like getting discounts from creditors by paying early instead of holding cash will improve the efficiency and will required a period of 3 years to make all the necessary changes to improve the performance. Appendix – Part C The financial analysis of Boomaloo highlights certain important facts but it doesn’t take into consideration the following limitations. Firstly, no changes in inflation have been accounted for. There could be a situation where the increase in sales could have been due to inflation but actual product sales might not have improved. This could have been identified by looking at the units sold which would have provided better understanding of the financial statement. This could have garnered the improvements Boomaloo needs and could have improved their performance. Secondly, the financial analysis doesn’t look into the changes in technology. The growth in performance could have been entirely due to it. This is a concern as it shows that the management hasn’t looked into improving the efficiency. This would make Boomaloo realize the area the company has improved and highlights other areas that needs to be worked upon. Lastly, the financial analysis considers historical data so making predicting the future based solely on it is not a mere criterion. Investors and people need to look at the external environment and other factors which could influence the working of Boomaloo. This aspect has not been looked into and forms an important aspect to decide the future prospects of a company. Reference List Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on October 17, 2010 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Friedlob G & Schleifer G, 2003, “Essential of Financial Analysis”, 2nd Edition, John Wiley & Sons Ltd Kennon J, 2010, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company Micro Strategy, 2010, “Financial Analysis”, retrieved on October 17, 2010 from http://www.microstrategy.com/financial-analysis/ Mehar A, 2005, “Impact of financing on liquidity position of firms”, Journal of Applied Financial Economics, Volume 15, Issue 6, page 425-438 Summers J & Smith B, 2010, “Communication skills handbook”, 3rd edition, John Wiley & Sons Ltd, Brisbane Transtutor, 2010, “Capital Structure Ratios”, retrieved on October 17, 2010 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.as Read More