Financial Analysis of Elite Commercial Furnishings Pty Ltd - Assignment 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 Elite Commercial Furnishings Pty Ltd for Jackson [Enter the date of submission] prepared by [Enter your name] Executive Summary Elite Commercial Furnishings Pty Ltd deals in furniture through whole sellers in Australia are looking towards expanding its business and are looking to get a loan for the same. This has made the company look into its financial and ensure better understanding of its performance over the years so the decision regarding the loan can be taken. This report thereby looks into the liquid, profit and financial stability for Elite Commercial Furnishings Pty Ltd. The report shows that Elite Commercial Furnishings Pty Ltd has a sound liquidity position which will ensure that the interest on loan and the loan will be paid on time. The report also shows that the business has been continuously able to generate profits which will ensure that the business is able to meet its dues easily. Further, the stability ratios highlight a proper mix of debt and equity and shows that the company has scope of taking further loan. This will ensure that the investment made in the business is safe. Thus, the overall financial positions depicts a sound position for Elite Commercial Furnishings Pty Ltd and shows that the company has the required potential to take a loan for expanding its business Contents Introduction Background: Elite Commercial Furnishings Pty Ltd deals in furniture equipments and looks towards selling furniture through whole sellers in Australia. Jackson is looking towards identifying whether the company can get a loan for future projects thereby wants to understand the financial viability before deciding his actions. For this purpose Ian is looking towards a financial analysis of Elite Commercial Furnishings Pty Ltd 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 Elite Commercial Furnishings Pty Ltd which will help them grow. Purpose: The purpose is conduct a financial analysis and look at the performance of Elite Commercial Furnishings Pty Ltd. Based on the performance and the changes Jackson is looking to bring in the company suggest Ian whether the loan is beneficial or not 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 This aspect helps to understand the manner in which the business has been able to earn profits from their routine business. 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 shows a growth of 28% compared to the base year 2009 whereas the revenues has grown by 26% highlighting that the business has become efficient and has reduced their expenses but a look from 2010 shows that the performance has dipped and the company has been able to earn lower profits. 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 that is directly attributable to the product and is calculated after meeting the direct expenses (Gross profit Margin, 2010). A high gross profit of 35% throughout out the three years indicates soundness in manufacturing process. It also shows that the strategies are well managed. “Net Profit is the profit that is calculated after meeting both the direct and indirect expenses. (Net Profit margin, 2010) It is seen that the net profit has decreased in both the year after 2009 suggesting that the indirect cost has grown. A comparison with the gross profit margin shows a huge dip signifying the fact that the company incurs a lot of indirect expenses which needs to be looked into and reduced. Price Earnings Ratio: The ratio indicates that Elite Commercial Furnishings Pty Ltd has sound P/E ratio. The value of the share is more than 8 times its earnings. It highlights that the market has positive sentiments regarding the performance of the company which has been reflected in the share price of Elite Commercial Furnishings Pty Ltd. (Estrada, 2005) Dividend Ratio: The dividend payout for Elite Commercial Furnishings Pty Ltd is very high in 2011 showing that the company has paid strong dividends. This shows that the company has looked towards declaring dividend so that the shareholders get an appropriate return for the risk and money invested by them The overall profitability situation for Elite Commercial Furnishings Pty Ltd is sound. With better management policies in relation to creditors and different marketing mechanism which Jackson 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: This helps to find out the firms ability to meet its daily expenses in the short duration (Ward, 2010). The ratio shows a strong liquidity position. This might make investors and suppliers invest in the company. The quick ratio highlights the same and shows that the company is sound in liquidity as the ratio is more than 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. This makes it important that Elite Commercial Furnishings Pty Ltd looks towards reducing the ratio further so that the financial position strengthens Trend Analysis of Current Assets & Liabilities: The trend analysis shows that current assets have increased whereas current liabilities have come down. This is a good sign as it ensures that Elite Commercial Furnishings Pty Ltd is able to ensure better strategies and proper management of assets and liabilities. Receivable Turnover: Elite Commercial Furnishings Pty Ltd has shown vast improvement in the receivable turnover ratio and collects its money from the market in 10 days. Also, the fact that Elite Commercial Furnishings Pty Ltd looks to pay its creditors after 1 month highlights that the company recovers money from the market and then pays its creditors. This shows efficiency on the part of the management to control the financial. Inventory Turnover: The ratio indicates that Elite Commercial Furnishings Pty Ltd has shown improvement and matches the industry requirements. This has ensured that Elite Commercial Furnishings Pty Ltd has inventory which the market requires and has ensured that there is neither more nor less inventories ensuring that the stock is within limits and has ensured proper management of investment in the inventories. The overall liquid position is sound as shown by current and quick ratio along with the receivable and inventory ratios. The overall performance is very sound for Elite Commercial Furnishings Pty Ltd and highlights proper strategies by the management. 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: This measures the amount of debt in relation to equity (Debt to equity, 2010). The analysis shows that Elite Commercial Furnishings Pty Ltd has scope to raise finance through external source the debt nearly matches the equity component held by the company. A consistency in the debt and equity ratio shows that Elite Commercial Furnishings Pty Ltd has an scope to take further loan and grow their business Trend Analysis: The trend analysis of assets and liabilities over the years suggest that equity has grown increase in other liabilty instead of profits. This is an area that Elite Commercial Furnishings Pty Ltd needs to improve so that the bottom line grows. Interest Earned Ratio: The ratio shows that Elite Commercial Furnishings Pty Ltd has decreased its interest earned. The decrease has been due to fall in interest bearing securities and Elite Commercial Furnishings Pty Ltd needs to increase it to match industry standards. Asset Turnover Ratio: The ratio indicates improvement in 2011 over 2009. It suggests that Elite Commercial Furnishings Pty Ltd has been able to use its assets better in 2011. Despite the improvements Elite Commercial Furnishings Pty Ltd needs to look towards improving its asset ratio so that it matches the industry averages and will further help Elite Commercial Furnishings Pty Ltd to ensure better use of its assets The financial stability looks sound for Elite Commercial Furnishings Pty Ltd. Elite Commercial Furnishings Pty Ltd 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 Elite Commercial Furnishings Pty Ltd shows strong liquid position equally matched by profitability and financial stability. There are certain areas where Elite Commercial Furnishings Pty Ltd needs to work upon like the asset turnover ratio, quick ratio, dividend ratio, and P/E ratio. This will help to shape the performance and will make Elite Commercial Furnishings Pty Ltd present even strong financials for the next year. The overall findings shows Jackson can look towards a loan for the business as the business has been continuously improving and working on certain areas will ensure better productivity in the future. Also the fact that the loan will be safe as seen from the financials will also ensure timely payment of interest and the amount which makes it very likely for the loan to be granted to Elite Commercial Furnishings Pty Ltd. Recommendation Elite Commercial Furnishings Pty Ltd needs to improve the asset turnover 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. Elite Commercial Furnishings Pty Ltd can expect to bring the necessary changes in 2-3 years time by bringing necessary changes in the policies. Providing a loan to Elite Commercial Furnishings Pty Ltd is a good option as the financial of the company highlights that the investment made in the company is safe. Further having a sound liquidity position ensures timely payment of interest and the original amount which ensures safety and proper return for the loan provider. Jackson can should evaluate the performance of Elite Commercial Furnishings Pty Ltd 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 Elite Commercial Furnishings Pty Ltd. Appendix – Part C The financial analysis looks into various ratios but ignores the following Firstly, id doesn’t look into the human aspect as the business could perform better due to proper management of its resources. There could be situation that the business is able to use the resources effectively which has improved the performance and is ignored under this analysis Secondly, the analysis doesn’t consider inflation. The improvement in the performance could be due to rising prices and might have reflected the same which hasn’t been looked into Thirdly, the analysis doesn’t consider the changes in technology. The business due to changing technology has benefitted and requires efforts to ensure the actual picture which hasn’t been looked into and needs to be analyzed further Lastly, the analysis looks into historical aspect so it might present the scenario based on past performances. This makes it difficult to judge the future performance and requires the manner in which the environmental factors have been affected their performance and needs to be looked into so that the performance of the organization is ascertained correctly. Reference List Debt to equity, 2010, “Debt to equity ratio”, retrieved on May 8, 2012 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 May 8, 2012 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 May 8, 2012 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