Financial Analysis of Boomaloo Pty Ltd - 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 Pty Ltd deals in fishing equipment and is up for sale. Ian Scott is looking towards purchasing the company after analysing the future growth potential the company has. Ian is looking towards a detailed analysis which highlights the profitability, liquidity and financial stability of Boomaloo. Ian decision to purchase it will be based on the analysis and the manner in which the changes he is propagating in the policies will affect his return on investment. The report thus presents the liquid, profit and financial stability for Boomaloo. The report then presents recommendation which says that bringing the necessary changes in certain rations like asset turnover ratio, debtors’ receivable ratio, quick ratio, dividend ratio, and P/E ratio will benefit Ian. This in addition to the changes Ian is looking forward presents a bright opportunity for Ian to invest. Ian needs to bring necessary changes in the management policies and ensure that they match industry standard to be able to grow. The report finally highlights the areas like inflation, human resource, technology which has not been considered and plays a crucial role while deciding an investment. Finally, Ian Scott should inculcate this in his study to be able to arrive at a conclusive decision for purchasing Boomaloo though the financial analysis presents a strong case towards the purchase of Boomaloo as it has a bright future prospect. Contents Introduction Background: Boomaloo Pty Ltd deals in fishing equipment. Ian Scott is looking towards purchasing the company but wants to understand the financial viability before deciding his actions. For this purpose Ian is looking towards a financial analysis of Boomaloo so that the future can be predicted. Financial analysis helps a business unit to understand the manner in which it has performed and also helps to “plan, forecast for the future so that the company is able to deliver on the promises”. (Lee A, Lee C & Lee J, 2009) It helps Ian to identify the strengths and areas of Boomaloo which will help them grow. Purpose: The purpose is conduct a financial analysis and look at the performance of Boomaloo. Based on the performance and the changes Ian Scott is looking to bring in the company suggest Ian whether purchasing the company will be beneficial for him. Scope: The report looks into the financial angle but doesn’t look into inflation, comparing with other organization and neither does it look into developments in the field of marketing, selling, distribution, and production. Profitability It helps to understand the profit which can be attributed to the different factors which work in tandem to achieve the desired results. Comparing it with the previous years and the competitors’ helps to evaluate the shortcomings, and shows area which needs to be improved. (Summers & Smith, 2010) The ratios are Trend Analysis: The profitability ratios show growth in 2010 as compared to 2009 where the performance had dipped. This is true for areas other than dividend. This is also substantiated with the trend analysis of the financial statement which shows improvement in performance. Gross & Net Profit Margins: “Gross profit is the profit which is calculated after all the direct expenses has been accounted for and is based on the sales achieved by the organisation”. (Gross profit Margin, 2010) A high gross profit of 30% throughout out the three years indicates soundness in manufacturing process. It also shows that the strategies are well managed. “Net Profit is the profit which is calculated after all the expenses has been accounted for and is based on the sales achieved by the organisation”. (Net Profit margin, 2010) It is seen that the net profit has decreased is strong and matches industry standards. When we compare it to the gross profit margin it shows a huge dip signifying the amount of indirect expenses like marketing, distribution and other expenses the company incurs thereby presenting an opportunity for improvement. Price Earnings Ratio: The ratio indicates that Boomaloo has strong P/E ratio. It shows the value of share is around 6 times the earnings. This highlights the positive sentiments prevalent in the market and presents a bright future for the company. (Estrada, 2005) Dividend Ratio: The dividend has seen a drop in 2010 which has affected the payout ratio. This is on the backdrop that the company is looking to strengthen the equity capital for future projects. Boomaloo needs to improve it as it affects the earning of the owners and also the expectations. The overall profitability situation for Boomaloo is sound. With better management policies in relation to creditors and different marketing mechanism which Ian Scott is proposing would improve profits. Thus, improving the efficiency of working will act as a measure to improve performance. Liquidity This ratio plays an important part and helps “to find the short term strengths and obligations”. (Ward, 2010) The ratios are as Current & Quick Ratio: It helps to whether the firm is able to meet its current liabilities out of its current assets”. (Ward, 2010) The ratio shows a strong liquidity position. This might make investors and suppliers invest in the company. Quick ratio indicates the inefficiency of the company to meet its immediate debt as the ratio is below 1. The ratio when compared to current ratio also indicates huge inventories. This is seen from the financial statement which shows inventory has fallen over the years but still is high. When we look at the industry average Boomaloo is below par which makes it important to bring the necessary changes. Trend Analysis of Current Assets & Liabilities: The trend analysis shows that current assets and current liabilities have come down. This is not much of a worry because both have decreased which could be due to proper management and ensuring that they are kept within limits. Receivable Turnover: Boomaloo has shown consistency in the collection period from debtors and is a good sign but it is below industry average. The company needs to continually improve it to provide good sign and reduce the chances of bad debts. It is important that policies are changed which will improve it. Inventory Turnover: The ratio indicates inefficiency to match industry standards which has resulted in more inventory than warranted. The company needs to reduce it to ensure less money in inventory and help to ensure that the funds are not blocked. The overall liquid position is sound as shown by current and quick ratio but measures need to be taken to improve receivable and inventory ratios. This will improve the performance and will help Boomaloo to be able to develop better policies. Change in the framework and policies will help Boomaloo to make the necessary changes. . Financial Stability This ratio “identifies the debt constituent in the total finance of the company”. (Debt to equity, 2010) the ratios are as Debt to Equity Ratio: “It helps to find how much percentage long term debt is in proportion to equity fund”. (Debt to equity, 2010) The analysis shows that Boomaloo has scope to raise finance through external source as the debt constituent is low. This will help the company and ensure financing for future projects. Also having a proper match between the two is helping Boomaloo to save on taxes. This also shows consistency over the years as seen by trend analysis and matches the industry requirement to a certain extent. Trend Analysis: The trend analysis of assets and liabilities over the years suggest that equity has grown due to profits which have been compensated by decrease in liability. This is a good sign and presents a bright future. Interest Earned Ratio: The ratio has improved but needs to be improved further to match industry averages. The decrease has been due to fall in interest bearing securities and Boomaloo needs to increase it to match industry standards. Asset Turnover Ratio: The ratio indicates improvement in 2010 over 2009. It suggests that Boomaloo has been able to use its assets better in 2010. This has made the ratio to improve. It needs to continue similarly to match industry average. Change in policies will favour this and help Boomaloo to match the requirements. The financial stability looks sound for Boomaloo. Boomaloo has a scope of investment through external source. It needs to improve its interest earning ratio and asset turnover ratio to improve the stability position but overall the position is sound and projects a bright future. Conclusion The financial analysis for Boomaloo shows strong liquid position equally matched by profitability and financial stability. There are certain areas where Boomaloo needs to work upon like the asset turnover ratio, debtors’ receivable ratio, quick ratio, dividend ratio, and P/E ratio. This will hlp to shape the performance and will make Boomaloo present even strong financials for the next year. The overall findings shows that Ian Scott can purchase Boomaloo as it has a strong financial and based on the changes in policies which Ian is looking to bring about the profits will further sore. Boomaloo has a good prospect and slight changes in the mechanism of working and matching the industry averages will help Boomaloo post strong performances. Recommendation Boomaloo needs to improve the asset turnover ratio, debtors’ receivable ratio, quick ratio, dividend ratio, and P/E ratio. This will make the company has more takers and will project a bright future for the company. Boomaloo can expect to bring the necessary changes in 2-3 years time by bringing necessary changes in the policies. Purchasing Boomaloo is a good option for Ian Scott as with the policies of paying creditors early will help Boomaloo earn cash discount. Also changes in the policies with regard to hiring services will provide add to the profits. The financial figures shows that the company has done well and with the changes Ian looks to bring about will present a bright future. Ian Scott can should evaluate the performance of Boomaloo on other factors and compare with organization in the same field. It should also look towards the growth potential the segment has and look at the external factors while making a final call for the purchase of Boomaloo. Appendix – Part C The financial analysis looks into various ratios but ignores the following Firstly, it doesn’t consider the human factor involved. It could be a reason that performance of an organization improves due to better management but is not reflected in the financial analysis. Thus an important aspect of management is not looked into which could shape the financial performance of the organization. Secondly, the analysis doesn’t consider inflation. The improvement in performance could be just due to inflation but in the real sense the performance might have dipped or remain the same. It is important to consider inflation as it could decide a long way in how an organization performs. Thirdly, the analysis doesn’t consider the changes in technology. This is a crucial factor and can shape the performance of an organization. Special attention needs to be laid to it to arrive at a decision so that every aspect of management is looked after. Lastly, the analysis looks into historical aspect so judging the future based on it creates doubt as the actual scenario could be something different. It is important that the present situation and future is predicted after finding more information regarding the growth opportunities. Reference List Debt to equity, 2010, “Debt to equity ratio”, retrieved on October 17, 2010 from http://www.valuebasedmanagement.net/methods_debt_to_equity_ratio.html Estrada J, 2005, “Adjusting P/E ratio by growth and risk”, International Journal of Managerial Finance, Volume 1, Issue 3, page 187-203 Gross profit Margin, 2010, “Gross Profit Margin”, retrieved on October 17, 2010 from http://www.bized.co.uk/compfact/ratios/profit3.htm Lee A, Lee C & Lee J, 2009, “Financial Analysis, Planning & Forecasting”, 2nd Edition, World Scientific Publishing Company Ltd Net profit Margin, 2010, “Net Profit Margin”, retrieved on October 17, 2010 from http://www.bized.co.uk/compfact/ratios/profit4.htm Summers J & Smith B, 2010, “Communication skills handbook”, 3rd edition, John Wiley & Sons Ltd, Brisbane Ward S, 2010, “Is Your Business Sick: Current Ratio”, about.com Guide, The New York Times Company Read More