Accounting for Decision-Making - Assignment Example

Accounting for Decision Making Name Course Instructor College Date of Submission Table of Contents 1.0Executive Summary 3 2.0 Introduction 4 3.0 Profitability 5 4.0 Efficiency 5 5.0 Financial Stability 6 5.1 Short-term Financial Stability 7 5.2 Long-term Financial Stability 8 6.0 Additional Information 9 7.0 Limitations 10 8.0 Conclusions and Recommendations 11 9.0 List of References 12 10.0 Appendices 13 10.1 Assignment Planner 13 10.2 Mark Sheet 15 1.0 Executive Summary This paper is focused on the activities and the financial reporting of two companies based in Australia. The companies are Fantastic Holdings Ltd and Super Retail Group Ltd. The paper describes an in-depth financial ratio analysis of both Fantastic Holdings Ltd and Super Retail Group Ltd. Additional information is also provided to present a broader picture of each of the company’s operations. Other sections touch on limitations of ratios, conclusions and recommendations and the references. Fantastic Holdings profitability was generally high owing to better management over price discounting. Super Retail Group’s profitability is influenced by stiff competition and was therefore low. Fantastic Holdings recorded improved efficiency in 2012 as a result of various cost reduction measures. Super Retail Group had a low efficiency level. Both companies recorded poor financial stability. Financial ratio analysis can supply us with vital insight into a company’s performance; however, there are various limitations that have to be acknowledged when making use of financial ratios as an investigative means. Of the two companies, Fantastic Holdings looks more appealing to any investor. 2.0 Introduction This paper is focused on the activities and the financial reporting of two companies based in Australia. The companies are Fantastic Holdings Ltd and Super Retail Group Ltd. Fantastic Holdings is the parent company for more than 125 stores spanning 5 furnishings retail chains together with, Fantastic Furniture, Plush and Dare Gallery, National Retailers and Le Cornu in South Australia and the Northern Territory plus the Original Mattress Factory in NSW.  In addition, Fantastic Holdings is Australia's leading couch maker, has the single country's top mattress manufacturer and manages a nationwide supply chain to service all Fantastic Holding's trading products. Super Retail Group Ltd started operating in 1972. The group became publicly listed in the ASX in 2004; the Group has developed into one of Australasia’s foremost specialty retailers with more than 585 stores in addition to a turnover of over $1.9 billion per year. Super Retail Group is operates up to 8 selling brands. Its operations span across Australia, New Zealand and China. The Group’s mission is to provide solutions and engaging experiences that enable our customers to make the most of their leisure time. Its vision is to become Australasia’s most highly regarded specialty retailer. The rest of the paper describes an in-depth financial ratio analysis of both Fantastic Holdings Ltd and Super Retail Group Ltd. Additional information is also provided to present a broader picture of each of the company’s operations. Other sections touch on limitations of ratios, conclusions and recommendations and the references. 3.0 Profitability Profitability ratios review earnings performance relative to sales or investment. The ratios try to gauge management’s abilities and company’s actions thus assess performance for diverse aspects of the business (Drake). Fantastic Holdings recorded a 48.18 percent gross profit margin in 2012, a 1.5 percent increase in profitability. After tax net profit margin and return on assets also went up to 4.71 percent and 12.18 percent in 2012 respectively. On the other hand, Fantastic Holdings profitability as measured by return on equity reduced from 19.3 percent in 2011 to 19.26 percent in 2012. Super Retail Group, however, reported a decline in profitability as gross profit margin reduced by 2.94 percent to 43.92 percent in 2012. After tax net profit reduced marginally by 0.76 percent to 5.05 percent in 2012 as return on equity and return on assets lost a bigger portion by declining from 18.31 percent to 12.14 percent and 11.06 percent to 7.15 percent in 2011 to 2012 in that order. Generally, Fantastic Holdings adduced a higher level of profitability than Super Retail Group. Fantastic Holdings profitability generally went up owing to better management over price discounting. Super Retail Group’s profitability is influenced by stiff competition owing to superior competitor discounting leading to lower profit margins. 4.0 Efficiency Efficiency ratios are measures of how well assets are made use of by a company. The ratios can be used to assess the gains produced by specific assets such as inventory, assets or debtors or all a company’s assets together. The measures generally assist parties to evaluate how successfully the company is engaging its investments (Bajkwoski). Fantastic Holdings reported a decline in asset turnover from 2.6 times in 2011 to 2.5 times in 2012 also Super Retail Group’s asset turnover declined from 1.9 times in 2011 to 1.2 times in 2012. Inventory turnover for Fantastic Holdings reduced from 66.3 days in 2011 to 61.9 days in 2012 same for Super Retail Group, inventory turnover went down from 97.9 days in 2011 to 92 days in 2012. Debtors Turnover as well went down for both Fantastic Holdings and Super Retail Group from 2.6 days in 2011 to 2.3 days in 2012 and from 4.3 days in 2011 to 3.9 days in 2012 respectively. Creditors Turnover followed the same course as it reduced from 25.3 days to 21.7 days for Fantastic Holdings and from 40.9 days in 2011 to 43.7 days in 2012 for Super Retail Group. Fantastic Holdings recorded improved efficiency in 2012 as a result of recuperating supply chain along with manufacturing efficiencies, firm discount controls as well as currency exchange enhancements. The actions led to reduction in its costs. Super Retail Group has the operational risk of establishing new stores profitably exclusive of flooding the market for their merchandise. As a result the company’s efficiency goes down. 5.0 Financial Stability Indeed current operational performance is imperative, but to stay in survival companies have to be able to meet up all future duties. The closing part of assessing financial performance of Fantastic Holdings and Super Retail Group is to look at their financial stability. The anxiety is whether the companies are generating a sufficient amount cash to not only run current operations, but also to meet up future obligations such as loans, bond payments, guarantees and capital improvements. Financial stability ratios are used to weigh up this aspect of financial performance (Drake; Loth). Fantastic Holdings recorded a 39.02 percent debt to asset ratio in 2012, a decline by almost 1 point from 2011. Super Retail Group had a higher debt to asset ratio at 50.3 percent in 2012, an increase from 46.9 percent in 2011. Super Retail Group also reported a marginal increase in debt to equity ratio hitting 56.3 percent in 2012 up from 32.7 in 2011 whereas Fantastic Holdings had a lower debt to equity at 18.2 percent in 2012 and 17.9 percent in 2011. Times interest earned was quite high for Fantastic Holdings in 2012 at 81 times up from 35.1 times in 2011. Super Retail Group recorded a low times interest earned ratio at 6.8 times in 2012 a decline from 8.9 times in 2011. 5.1 Short-term Financial Stability Super Retail Group recorded a very high debt to equity in 2012 at 56.3 percent. The debt to asset ratio was also high at 50.3 percent in 2012 with the times interest earned being low at 6.8 times in the same period. A combination of all this indicates a poor financial stability at the short-term. Fantastic Holdings had relatively lower debt equity and debt asset ratios and a very high times interest earned ratio. The ratios show a better but not so good financial stability in the short-term. Super Retail Group is carrying a sensible amount of debt owing to the acquirement of Rebel Sport in October 2011 resulting to the low level of financial stability in the short-term. 5.2 Long-term Financial Stability Both companies have a record of low financial stability at present. However, for Fantastic Holdings, the ratios reveal an improved financial stability from the preceding year as opposed to Super Retail Group which indicates a poorer financial stability from the prior year. In future, Fantastic Holdings has the aptitude of showing a stronger financial stability as it does not have much debt obligations. Super Retail Group is highly indebted, an indication of a poor financial stability in coming times as the company strives to pay off its debts. 6.0 Additional Information Fantastic Holdings reported a 34.7 percent boost in after tax net profit to $13.2m, and sales growth of 3.2 percent up to $227.6m weighed against to the prior equivalent period. The company moreover announced a 30 percent increase in its interim dividend to 6.5 cents. The market undoubtedly enjoyed the outcome with the share price moving up 17 percent from the time when the announcement was made. The results evidently demonstrate that Fantastic has sprung back after reporting a 24 percent plunge in net profit in the first half of 2011, compared to the first half of 2010, and a descend in like-for-like sales of 2 percent (Fool 2013a). Even as David Jones Limited as well as Myer Holdings Limited demonstrated declining sales and descending share prices, Super Cheap reported on the 9th January 2012 that its sales had gone up by over 35 percent (counting offerings from Rebel Sports along with Amart All Sports). Super Retail’s share price dipped, but just by 23 percent, from a 52 week high of $7.49 down to $5.75 (Fool 2013b). Super Retail Group posted a 46 per cent boost in full-year profit to $1.09 billion with after tax net profit 46.1 percent higher at $44.6 million for the year to July 2. Divisional sales for its auto along with cycling ventures were 3.4 percent higher at $708.2 million, with income before interest and tax grew by 32 percent to $63.6 million. Supercheap Auto upheld its comparable-sales growth rate of the past four years to trace a sales swell of 4.8 percent. Leisure retail sales (Ray's and BCF) went up 50 per cent to $384.1 million and EBIT also gained 50 per cent, to $32 million. Sales at Ray's, which threw in its first full year of proceeds in the Super Retail Group, were lower than expected owing to stock management matters in the lead-up to its acquirement (The Age 2013). 7.0 Limitations Financial ratio analysis is among the mainly accepted financial analysis approaches for companies.  Even as financial ratio analysis can supply us with vital insight into a company’s performance, there are various limitations that have to be acknowledged when making use of financial ratios as an investigative means (Drake; Bajkwoski). Different companies might employ dissimilar accounting policies. For instance, companies may adopt different methods to value inventory or different depreciation methods. As a result the ratio of one company cannot at all times be justifiably weighed against that of another company (Loth; Bajkwoski). Financial statements merely show historical data. This exposes ratios to distortions by inflation. Price level variations make the evaluation of figures tricky over durations of time. Inflation has an effect on inventory values along with depreciation, profits are affected (Loth; Martin & Fernando 2002, p.48). Ratios are apparatus of quantitative investigation and do not take into account a number of essential qualitative factors which can be crucial in decision making. Unless you attempt to uncover the basis of the numbers you end up with, you are playing a futile fixture. Ratios are pointless with no contrast aligned with trend or industry data (Loth). Ratios may be deceptive owing to effects of window dressing by preparers of financial statements. If the financial statements for a company are not fairly appealing as they ought to be the company may use window dressing to manipulate the data in the financial statements in its favour (Martin & Fernando 2002, p.49). 8.0 Conclusions and Recommendations Fantastic Holdings profitability was generally higher than Super Retail Group. Fantastic Holdings recorded improved efficiency in 2012 whereas Super Retail Group efficiency declined. Both companies have a record of low financial stability at present. However, for Fantastic Holdings, the ratios reveal an improved financial stability from the preceding year as opposed to Super Retail Group which indicates a poorer financial stability from the prior year. Further information details that Fantastic Holdings paid out a dividend of 6.5 cents in 2012. Super Retail Group’s share price went down. From the information, Fantastic Holdings looks more appealing to any investor. I would recommend anyone to consider investing in the company. Super Retail Group is a profitable business that has grown organically and by acquisition in recent years. The business has a stable of great retail brand names in the automotive, leisure and sport markets. The business does have a relatively high level of debt as a result of the most recent Rebel Sport acquisition. Super Retail Group has a competitive advantage in the area of lower warehouse and distribution costs nationally across their brands compared to their smaller competitors. The company has experienced management and is expensive at the moment. Super Retail Group's shares are not super cheap at present. Therefore, it is not such an attractive investment at the moment (Seeking Alpha 2013). 9.0 List of References Finance Learners, 2013, Limitations of Financial Ratio Analysis, viewed 20 April 2013 Fool, 2013a, Fantastic Holdings Fabulous Results, viewed 17 April 2013, Fool, 2013b, Super Retail Group, the Super Retailer, viewed 5 April, 2013 John Bajkowski, Financial Ratio Analysis: Putting the Numbers to Work, viewed 25 March 2013, Martin, S.F and Fernando, A 2002, Financial Statement Analysis:  A Practitioner's Guide, 3 edn, John Wiley & Sons Pamela Peterson Drake, Financial Ratio Analysis, viewed 15 April 2013, Richard Loth, Financial Ratio Tutorial, viewed, 5 April 2013, Seeking Alpha, 2013, Super Retail Group, viewed 23 March 2013, Steven, M.B, 2006, Financial Analysis: A Controller's Guide, 2nd edn, Wiley Steven, M.B, 2012, Business Ratios and Formulas: A Comprehensive Guide, 3rd edn, Wiley The Age, 2013, Super Retail Group, viewed 9 April, 2013, 10.0 Appendices 10.1 Assignment Planner MAA103/MAAP103 Assignment Planner – Trimester 1, 2013 Section A STUDENT GROUP NAMES: ID No.: Class Time/Day: 1. 2. 3. Lecturer’s Name: Section B DATE: BRIEF DETAILS OF HOW WE INTEND TO PROCEED TO COMPLETE REPORT: NAME OF STUDENT(S) COMPLETING SECTION(S): 3/04/2013 Preparation of the assignment planner 4/04/2013 Look into the activities Fantastic Holdings Ltd. (FAN) is involved in 5/04/2013 Look into the activities Super Retail Group Ltd. (SUL) is involved in 6/04/2013 A narration of the purpose of our report 8/04/2013 Obtain the financial statements of both companies plus other relevant material 9/04/2013 Submission of the assignment planner 10/04/2013 Prepare the Introduction to our report 11/04/2013 Work on profitability ratios for both companies 13/04/2013 Write a report as regards the profitability ratios for both companies 15/04/2013 Work on efficiency ratios for both companies 17/04/2013 Write a report as regards the efficiency ratios for both companies 19/04/2013 Work on financial stability ratios for both companies 22/04/2013 Write a report as regards the financial stability ratios for both companies 24/04/2013 Identify and discuss any limitations 25/04/2013 Narrate any additional information we may have obtained that is relevant to our report 26/04/2013 Work on Conclusions and Recommendations 28/04/2013 Prepare the Executive summary and Table of Contents 29/04/2013 Work on a list of references and appendices 1/05/2013 Go through the report 3/05/2013 Go through the report 7/05/2013 Submit the report References 1. Pamela Peterson Drake, Financial Ratio Analysis: 2. Richard Loth, Financial Ratio Tutorial: 3. John Bajkowski, Financial Ratio Analysis: Putting the Numbers to Work< https://www.aaii.com/journal/article/financial-ratio-analysis-putting-the-numbers-to-work> 4. Martin, S.F and Fernando, A 2002, Financial Statement Analysis:  A Practitioner's Guide, 3 edn, John Wiley & Sons 5. Steven, M.B, 2006, Financial Analysis: A Controller's Guide, 2nd edn, Wiley 6. Steven, M.B, 2012, Business Ratios and Formulas: A Comprehensive Guide, 3rd edn, Wiley 10.2 Mark Sheet MAA103/MAAP103 Assignment Mark Sheet – Trimester 1, 2013 Name: ID No.: Report Comment Mark Possible Actual Introduction & Appropriate Format 2 Profitability 4 Efficiency 2 Financial Stability Short-term 2 Financial Stability Long-term 2 Limitations of Analysis 1 Recommendation 3 Evidence of wider reading and research 4 Deductions: inappropriate referencing, Failure to submit Assignment Planner ASSIGNMENT TOTAL 20 General Comments: Read More