Financial Analysis of Ocean Paradise Pty Ltd - Case Study 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 Ocean Paradise Pty Ltd for Terra Firma Bank [Enter the date of submission] prepared by [Enter your name] Executive Summary Ocean Paradise is a company dealing in fishing supplies and is looking towards getting a loan for $250,000 from Terra Firma Bank. Terra Firma Bank is evaluating the financial statement of Ocean Paradise to gauge whether providing the loan will be beneficial for the bank and also needs to consider the safety of the funds. The report looks into various analyses by concentrating on profitability, liquidity and financial stability of Ocean Paradise. The report also looks into the horizontal and trend analysis. The analysis shows that the performance of Ocean Paradise has improved over the years and the organization has been able to grow and increase their profits. Ocean Paradise has a sound liquidity along with profitability and financial stability which increases the likelihood of the getting the required loan from Terra Firma Bank as the organization has looked towards consistency and improving their performance year after year. Contents Introduction Background: Peter Burgess who is the owner of Ocean Paradise which is into fishing supplies business is looking towards getting a loan for the business. The bank is using a loan evaluation officer to identify the manner in which the business is performing and whether providing the loan for $250,000 would be beneficial for the business or not. The loan evaluation officer has been entrusted with the job of evaluating the financial statement through calculation of financial ratios so that the financial efficiency and the safety of funds can be evaluated (Micro Strategy, 2011). Proper evaluation of the financial statement will help the loan officer to evaluate the financial statement and help to forecast the future estimations in a better way. Purpose of the report: To identify and evaluate the financial statement of Ocean Paradise so that Terra Firma Bank can identify whether providing a loan for $250,000 to Ocean Paradise will be beneficial for the bank and the safety aspect in consideration to the loan along with the nature of risk involved. Scope: The report looks to analyze various financial aspect of Ocean Paradise but is limited to the fact that it doesn’t consider the inflation level, uses historical data and doesn’t considers the changes in the production, technology and change in marketing strategies. Profitability This ratio helps to understand the manner in which Ocean Paradise has been able to generate profits from their daily operations. This ratio helps to identify the efficiency and is calculated as follows Return on Assets: This ratio helps to understand the profit generated by the use of assets (Friedlob & Schleifer, 2003). The ratio shows that the return on assets has grown over from 27.5% in 2009 to 37.2% in 2011 highlighting efficiency in the use of assets. The ratio shows that Ocean Paradise has been able to revolve the assets effectively and ensure that they have assets as per the requirements of the business. Even the trend and horizontal analysis supports the fact that both assets and profits have shown consistency. Gross & Net Profit Margin: Gross profit ratio throws light on the profits which is earned from the product whereas a net profit shows the bottom line after meeting all the expenses. The ratio indicates soundness and matches with the industry requirements of 53% and 23% respectively. 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: This ratio shows the market price of the share in relation to the earnings (Summers & Smith, 2010). The ratio indicates that the market price is twice the earnings highlighting positive sentiments about the company and the investor feel that the company has scope for growth in the future Dividend Ratio: The ratio indicates consistency and shows that Ocean Paradise has given dividends out of its profit consistently showing the concern for the shareholders and the ability of the business to sustain sound profits over longer period of times The overall profitability seems sound. The trend analysis demonstrates the same and Ocean Paradise by ensuring better management will be able to ensure higher prices of the stock. The profitability analysis shows soundness and makes the company looks as a prospective one to get a loan for $250,000. Liquidity This ratio is of prime importance to the banks as it will help to understand the safety of the funds in the short run and the ability of the business to generate short term revenues (Financial Modelling Guide, 2010) The ratios are as Current & Quick Ratios: The current ratio is good as it is above 2. In fact the ratio is very high and stands at 4.83:1 for current ratio and 2.54:1 for quick ratio (Mehar, 2005). This highlights the fact that Ocean Paradise has more short term assets than required. This has resulted in unnecessary holding of current assets for Ocean Paradise and need to look towards devising a strategy to control it. The quick ratio also shows a huge dip in comparison to current ratio highlighting very high inventories which needs to be looked into as the business deals in fishing supplies which has the chances of becoming obsolete. Account Receivable: This ratio helps to understand the manner in which money is collected from its debtor (Kennon, 2010). The ratio highlights efficiency for Ocean Paradise as they collect their money in 65 days and revolve the debtors in around 5.5 times thereby reducing the chances of bad debts and ensuring proper management with the external bodies Inventory Turnover: This ratio helps to understand the manner in which inventory is being rotated by the business (Summers & Smith, 2010). The ratio shows a dip which is a concern as it has fallen to 3.3 times in 2011 from 3.8 in 2010 which shows increasing risk and holding more inventories than required. This increases the chances of the inventory becoming obsolete and having more current assets than required which needs to be looked into The overall liquid position of the company is sound and shows consistency. Ocean Paradise needs to improve the inventory holding which will further enhance the performance and ensure that Ocean Paradise is able to gain efficiency in their operations. Financial Stability This ratio helps to understand the manner in which the business has been able to generate long term equity and debts and use it effectively for the business (Transtutor, 2010). The ratios are as Debt Equity Ratio: This ratio shows the equity and debt holding of the business (Transtutor, 2010). The ratio shows that Ocean Paradise has been able to manage the debt and equity efficiently. The company has an equal mix of debt and equity which will enable the company to save on taxes at the same time ensure more funding in the form of debt for the future Equities and liabilities: The analysis highlights growing equity for the business which has been matched with increase in liability ensuring that Ocean Paradise has been able to keep a match between the two which will help in the long run. Interest Earned ratio: The ratio indicates consistency and is around 10 in 2011 which shows slight increase from 2010. This is a good sign and Ocean Paradise needs to improve it further so that it is able to attract for people and investors towards the company. Asset Turnover ratio: The ratio shows consistency highlighting that Ocean Paradise has been able to use its assets effectively and the growth in sales has been matched appropriately with the increase in assets highlighting better forecast techniques used by the organization. The financial stability for Ocean Paradise looks sound and being able to have a good match between equity and debt makes the company a good prospective one for the future. This also increases the likelihood of getting additional fund for the future. Conclusion Ocean Paradise has been able to perform consistently over the period 2009 to 2011. The financial analysis shows that Ocean Paradise has been able to consolidate its position and ensure better profitability, liquidity and financial stability for the business. The manner in which Ocean Paradise has been able to develop its business model and ensure efficiency forecast better growth in the coming years. Ocean Paradise has to look towards improving its ratios like current ratio and quick ratio as it is substantially high and has resulted in having more current assets than required. Also looking towards improving the management will help Ocean Paradise. Overall, the performance for Ocean Paradise looks sound and presents a bright opportunity for Ocean Paradise to get a loan for $250,000 due to the financial stability being demonstrated by the company. The company has ensured safety of funds and makes the company a god one to invest in. Recommendation Ocean Paradise needs ensure that the quick and the current ratio are controlled as the ratio is very high resulting in having more assets than warranted. Also, the inventory turnover ratio needs to be considered as it high and increases the risk of the inventory becoming obsolete. Ocean Paradise should look towards controlling the ratio in the next 2 years so that the performance further gets enhanced. Ocean Paradise is a good company which has demonstrated strong financial performance thereby increasing the likelihood of being granted a loan for $250,000 by Terra Firma Bank as the organization has shown consistency in performance. Ocean Paradise needs to improve the management aspect so that the overall performance gets enhanced and it becomes easy for the organization to get a loan for $250,000. Appendix – Part C Ocean Paradise has been able to ensure proper management and financial performance as seen from the financial analysis but the analysis lacks the following Firstly, inflation hasn’t been encountered. There can be a situation where the sales might have gone up due to inflation and considering the inflation rates will further help to understand whether the business has been able to perform efficiently or the growth has been merely due to inflation. Secondly, the manner in which technology has influenced the business has not been considered. There could be a situation where the same financial analysis is demonstrated but the change in technology has helped to gain efficiency which has not been considered in the financial analysis Lastly, the analysis considers historical data and gauging the future performance based on it could be incorrect due to changes in market conditions which will thereby result in the actual performance to be incorrect. This makes it important that different factors having an effect on financial performance are looked into and the performance for the future evaluated accordingly. Reference List Financial Modelling Guide. 2011. Liquidity ratios. Retrieved on December 24, 2011 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. 2011. Financial Analysis. Retrieved on December 24, 2011 from http://www.microstrategy.com/financial-analysis/ Mehar, A. 2005. Impact of financing on liquidity position of firms. Journal of Applied Financial Economics, 15 (6), pp 425-438 Summers, J. & Smith, B. 2010. Communication skills handbook, 3rd edition, John Wiley & Sons Ltd, Brisbane Transtutor. 2011 Capital Structure Ratios. 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