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 which performs in the fishing supplies industry is looking towards getting a loan from Terra Firma Bank. For this a financial analysis of the company has been conducted through ratio analysis which highlights that Ocean Paradise has grown over the years and to ensure similar performance needs to look towards improving various aspect of the business. Ocean Paradise has a sound profitability, financial stability and liquidity ratio and being able to work on some areas will help to bolster the performance. The overall performance of Ocean Paradise seems sound and has a good chance of getting a loan for $250,000 from Terra Firma Bank as the organization has been able to perform well. Contents Introduction Background: Peter Burgess, the owner of Ocean Paradise is looking towards getting a loan for $250,000 for its business as securing the loan will help the organization to perform effectively and ensure that they are able to work towards better opportunity to earn. Terra Firma Bank for this purpose looks to evaluate the financial statement so that the performance can be measured and evaluation made regarding the future prospects of the business (Finance, 2011). Estimating the financials will help to ensure better forecast and ensure that the organization is able to perform better in the future Purpose of the report: To find out whether Terra Firma Bank should look towards providing a loan of $250,000 to Ocean Paradise after analyzing the financial statement through the various ratios so that the understanding regarding the future prospects and safety of funds can be identified. Scope: The report presents the manner in which Ocean Paradise has performed over the years but doesn’t consider the changes in price level, change in technology and uses historical figures to stimate the future without considering the changing business environment. Profitability This ratio will help Terra Firma Bank to understand the ability to generate revenues through the daily operations and ensure profits for the business. The ratios are as Return on Assets: This ratio signifies the manner in which assets have been used to generate revenues. The ratio indicates improvement in performance as the ratio has grown from 27.5% in 2009 to 37.2% in 2011 thereby ensuring better use of assets. The fact that Ocean Paradise has been able to use the assets properly and ensure consistency in performance has ensured an asset base matching the requirements of the busiess. The trend and horizontal analysis states the same as there is consistency in growth Gross & Net Profit Margins: Gross profit refers to the profits that a business earns while producing the services or product and net profit is the actual profit which denotes the final bottom line (Gross Profit Margin, 2011). The ratio confers to the industry avrage of 53% and 29% which states improved performance. The trend analysis thereby demonstrates the same through improved performance and consistency. Price Earnings ratio: This ratio refers to the market price of the share of the company in comparison to the earnings. The ratio is sound as it is twice the earnings highlighting that the business has been able to generate sufficient revenue and ensure good return for the shareholders. Dividend Ratio: Ocean Paradise has been able to provide dividend regularly which has ensured that the shareholders have been compensated properly for holding the shares of the company. This ratio indicates soundness and shows proper earning avenues which has helped to generate sufficient revenues The overall profitability is very good which increases the likelihood of Ocean Paradise getting a loan for $250,000 as the sound position denotes that the firm will be able to pay for the interest on loan and ensure that the final payment of the loan is made at the appropriate time. Liquidity This ratio denotes short term soundness and the ability of the business to meet their short term liabilities out of it. The ratios are as Current & Quick Ratios: The current ratio stands at 4.83:1 and 2.54:1 for quick ratio which indicates a very high proportion of current assets (Current Ratio, 2011). Having a ratio around 2 will be sound but having it very high has resulted in more assets of short term duration than required. Also the quick ratio indicates huge inventory due to the dip seen from the current ratio to quick ratio. This increases the risk as the chances of inventory becoming obsolte is high. Account Receivable: This ratio denotes the manner in which Ocean Paradise collects money from the market (Kennon, 2010). The ratio shows that Ocean Paradise is able to revolve the debtors effectively which is seen by the fact the Ocean Paradise collects money in 65 days which has reduced the likelihood of bad debts and will ensure safety of investment made in the company. Inventory Turnover: This ratio denotes the manner in which Ocean Paradise is able to revolve its inventory. The findings shows concern as the ratio has fallen to 3.3 times in 2011 from 3.8 in 2010 which increase the risk of inventories becoming obsolete in the near future. This makes it important that Ocean Paradise looks towards improving the inventory holding so that the quick ratio and current ratio also improves Overall, the liquidity is sound and shows safety of funds. Ocean Paradise needs to slightly reduce the quick ratio and current ratio so that the performance further gets enhanced and will also help to ensure that the short term assets as per the requirements of the organization. Financial Stability This ratio denotes the organization equity and debt holding and the soundness in relation to the holding between assets and debt. The ratios are as Debt Equity Ratio: This denotes the percentage of debt and equity holding (Kennon, 2011). The findings denote that Ocean Paradise has an equal mix of dbt and equity. This shows soundness and the ability of the business to be able to generate loan for the future. This also increases the chances of raising money through equity and will help the company to save on taxes in the future. Equities and liabilities: Ocean Paradise has ensured that the growth in assets is matched with a growth in liability though the increase in asset is more which shows that the business is able to generate more assets in comparison to its liabilities. Interest Earned ratio: Ocean Paradise has shown improved performance as the ratio has moved to 10 showing that the firm is able to pay interest easily. This increases the likelihood of getting the loan as the firm has the interest paying ability which will make it easy for the firm to get loan. Asset Turnover ratio: Ocean Paradise has revolved its assets effectively which has resulted in the increase in sales (Asset Turnover Ratio, 2011). The firm has been able to ensure that they are able to generate revenues in proportion to the increase in assets signifying consistency and proper use of assets in generating the revenues. The financial stability shows improved performance and the ability of Ocean Paradise to pay interest has ensured that the firm will get a loan of $250,000 from Terra Firma Bank to be able to operate effectively. Conclusion The performance of Ocean Paradise shows consistency over 2009 to 2011. The performance has increased which is seen from the profitability, liquidity and financial stability which have ensured that the business is able to generate adequate revenues from its business. The manner in which Ocean Paradise has been able to grow has increased the chances of getting a loan of $250,000. There are certain areas which Ocean Paradise needs to work on. Improving the current, quick and inventory ratio will help to improve the performance of the organization and will help to bring about a check in the performance of the organization. The performance presently has improved drastically and will provide the chances of getting a loan of $250,000 as there is consistency in performance. This has thereby helped to ensure safety of funds and a mechanism which will develop the performance of the business. Recommendation Ocean Paradise needs to work on the quick and current ratio as it is very high. It is imperative that the ratio is brought under control so that the assets are managed effectively and the business is able to ensure proper maintainence of assets. Ocean Paradise also need to reduce the inventory holding as it increases the chances of the stock becoming obsolete The overall performance is sound and the organization has been abel to ensure consistency which will ensure that Ocean Paradise gets the loan of $250,000. Ocean Paradise needs to look towards shaping the performance of the entire organization so that cost are reduced and profits increased which will further facilitate the chances of delivering a better performance. Appendix – Part C The financial analysis provided important findings and results but is limited to the following Firstly, changes in the price level haven’t been looke dinto. The growth in sales could have been due to the fact that the price level has changed. This is an important consideration and considering it will help to gauge the performance of Ocean Paradise in a better way Secondly, changes in technology and method of production haven’t been looked into. This will further help to ensure that looking and including it in the manner the performance has changed will help to understand the performance better and identify different parameters which will further help to enhance the performance of Ocean Paradise Lastly, the nalaysis looks into historical figures and looking into the changing market environment hasn’t been cinsidered. Considering the manner in which the external environment has evolved the performance will help to understand the picture better and will thereby help to build strategies which further bolster the performance. Reference List Asset Turnover Ratio. 2011. Asset Turnover Ratio. Retrieved on December 23, 2011 from http://www.financeformulas.net/Asset_Turnover_Ratio.html Current Ratio. 2011. Current Ratio. Retrieved on December 23, 2011 from http://www.bizwiz.ca/liquidity_ratio_calculation_formulas/current_ratio.html Finance. 2011. Why business needs finance. Retrieved on December 23, 2011 from http://tutor2u.net/business/gcse/finance_why_needed.htm Gross Profit Margin. 2011. Gross Profit Margin. Retrieved on December 23, 2011 from http://financial-dictionary.thefreedictionary.com/Gross+Profit+Margin Kennon, J. 2011. Debt to equity ratio. Retrieved on December 23, 2011 from http://beginnersinvest.about.com/cs/financialratio/g/debttoequity.htm Read More