Lavender Products Pty Ltd Financial Analysis - Assignment Example

Table of Contents Introduction 2 Financial Analysis 2 Profitability Ratios 2 Liquidity Ratios 4 Stability Ratios 5 Recommendations 6 Conclusion 7 References 8 Appendix 9 Introduction Organizations based on their performance look to set targets for the future and also determine the manner in which the finance for the future will be raised. This report looks to present the manner in which Lavender Products Pty Ltd has performed over the previous years and based on it the future potential and developments will be identified. This will thereby help to understand the manner in which Lavender Products Pty Ltd will be able to get future loan for their business and will help to understand the different areas where the company has to work. Financial Analysis This looks to present the financial comparison of Lavender Products Pty Ltd over the past few years and will help to understand the manner the company has performed. The fact that individual financial figures have no value as it doesn’t help to interpret any information so comparing it with the past performance and the peers will help to understand the actual growth and will help to formulate strategy for the future (Antony, 2004). Profitability Ratios This ratio helps to find out the manner in which the bottom line of Lavender Products Pty Ltd grew over the years and will help to find out the manner in which they were able to manage the different resources to generate the concerned profits. The ratios are as Return on Assets: The ratio highlights that Lavender Products Pty Ltd has been able to use their assets better with passing years which has helped the return on assets to improve drastically to 50.5% in 2012 from 28.9% in 2010. This has been primarily due to the fact that the bottom lines have grown and the assets haven’t grown in the same manner as the profits highlighting better use of the resources and the ability of the business to generate sufficient revenues. Return on Shareholder’s Equity: The ratio highlights that Lavender Products Pty Ltd has been able to improve their returns i.e. profits which has helped to ensure that the shareholders are adequately compensated for the risk they have taken as it has grown to 55.1% in 2012 from 27.1% in 2010. This has been primarily due to the fact that the bottom lines have grown and will make the investors feel happy as they are getting a good return for the risk taken which will thereby help to increase the future investors in the company and will help the share prices to move up. Earnings per Share: The ratio highlights that Lavender Products Pty Ltd earnings per share have grown considerably which has been possible due to increase in profits and being able to work on the industry standards which has helped the ratio to improve drastically to $3.89 in 2012 from $1.69 in 2010. This highlights that the investors are getting better return and the share prices of the company is moving up. This will act as a push and help Lavender Products Pty Ltd to be able to improve its conditions further and ensure better returns Thus, the overall profitability ratios show that Lavender Products Pty Ltd has improved their performance year after year and has a good prospect of getting the required loan if profitability is alone considered but a look at the other ratios will help to understand it further. Liquidity Ratios This ratio helps to find out the manner in which the liquidity was maintained in Lavender Products Pty Ltd and helps to understand the potential of the business to meet its short term obligations out of its short term assets (Deloof, 2003). The ratios are as Current Ratio: The ratio highlights that Lavender Products Pty Ltd has improved their liquidity as they has more current assets than required which has been brought down as seen from the change in ratio which was 8.51 in 2010 and went to 4.97 in 2012. The company still needs to improve it further as the company has more liquid assets than required which has resulted in the creation of idle funds within the organization. Quick Ratio: The ratio highlights that Lavender Products Pty Ltd has improved their liquidity as they has more current assets even after removing inventories than required which has been brought down as seen from the change in ratio which was 5.16 in 2010 and went to 2.62 in 2012. The company still needs to improve it further as the company has more liquid assets than required which has resulted in the creation of idle funds within the organization. Debtors Turnover Ratio: The ratio highlights that Lavender Products Pty Ltd collects its money from the market in around 45 days and revolves the fund around 8.1 times. A consistency is seen in this regard which shows proper credit management policies and also reduces the chances of bad debts which will further help to ensure that the company will be able to manage its credit in the market in the most efficient manner Creditors Turnover Days: The ratio highlights that Lavender Products Pty Ltd pays money in the market in around 45 days and revolves the fund around 8.1 times. The credit management policies also shows that the company receives and pays the money simultaneously which shows that the company doesn’t look to hoard money and looks towards ensuring that the policies in the market is sound. Inventory Turnover Ratio: The ratio highlights that Lavender Products Pty Ltd turns its stock within 89 days or 3 months. This increases the likelihood of the inventories becoming obsolete and has to look towards finding out the mechanism through which inventory is better managed The turnover ratios highlight efficiency on the part of Lavender Products Pty Ltd as they have sufficient liquidity to meet the short term obligations. The only concern for them is the high investment in inventories which has to be controlled to be able to manage better efficiency and to be able to gain maximum benefit from the business. Stability Ratios This ratio helps to identify the capital structure of the business and helps to understand the manner in which the business finances are managed (Eljelly, 2004). The ratios are as Debt Ratio: This ratio highlights that Lavender Products Pty Ltd has ensured consistency in managing their debt as in 2010 it was 40.3% and in 2012 it was 39.5%. The ratio shows that Lavender Products Pty Ltd has a low debt content which provides an opportunity through which the business can raise finance in the future in the form of long or short term debts Equity Ratio: This ratio highlights that Lavender Products Pty Ltd has ensured consistency in managing their equity as in 2010 it was 59.7% and in 2012 it was 60.5%. The ratio shows that Lavender Products Pty Ltd has a high equity content and has looked towards self financing in managing its resources and has thereby been able to ensure maximum growth and penetration in the market. The ratio shows strong financial position and a proper management of debt and equity which will thereby enable the business to ensure that they are able to look towards different sources of financing for the further development of their business. Recommendations The overall financial analysis for Lavender Products Pty Ltd highlights that the company has been performing well year after year. This shows a continuous improvement in the performance and better management of the resources and reduction of cost. The overall analysis shows that Bank of Ballarat can look towards extending the loan of $690,000 because of the fact that the business has been able to earn adequate profits. This will ensure that the business is able to pay the interest on time and can be easily treated as operating expenses. Further, having a proper mix of assets and liabilities shows that the business has the potential through which they will be able to ensure that the debt in finally paid off at the time when it becomes due. In addition to it the short term liquidity position of Lavender Products Pty Ltd highlights that the business has sufficient liquidity and is in a position through which they will be able to meet their obligations. This will ensure that the loan that will be provided by the bank doesn’t become bad debt and will be cleared off in time. This will thereby help to create a positive image on the company and will make the opportunities of growth to increase in the future. The fact that the company has a low debt content in comparison to equity provides an opportunity where the company can look towards additional debt as there is sufficient cushion based on which the business will be able to meet all the requirements and ensure that the normal operations are carried out in the most effective manner. Thus, the overall analysis shows that Bank of Ballarat can look towards extending the loan of $690,000 to Lavender Products Pty Ltd as the financial condition of the company is sound on most parameters. Conclusion This report thereby looks into the financial analysis of Lavender Products Pty Ltd and shows the manner in which the company has performed over the past few years. The overall analysis will thereby look towards ensuring that the business will be able to get a loan from the bank as the sound financial position of the business shows that the bank has bright prospects and can be considered for the future as a company which will perform well on different parameters. References Antony, T. 2004. Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Appendix Limitations The financial analysis conducted for Lavender Products Pty Ltd has certain limitations as the analysis is based on the comparison of the past performance but the actual situation might be different from the past which might thereby lead towards a different result. Further the financial analysis doesn’t consider the changes in prices or inflation which has a major role and the growth could be due to inflation instead of other ground realities. In addition to it the changes in technology and manner in which human behavior changes hasn’t been looked into which could have helped to understand other factors which could have lead towards the development of the business. Apart from it the comparison with the others in the market and different players haven’t been made which will thereby help to understand the performance better and based on it better decisions will be taken and the understanding of the financials will be better. Read More