Corporate Finance of Noni B Company - Case Study Example

Abstract The paper provides an overview of the financial position of the Noni B Company which is a garment store. The paper includes calculations of different ratios using formulae in order to determine the financial state of the company along with recommendations within the paper as to how the company can continue to retain the position that they have. The paper appends five sources in MLA format. Outline I. Introduction to Noni B Company II. Du Pont Analysis of Noni B III. Working Capital Management of Noni B IV. Debt Positioning of Noni B Introduction to Noni B Company The company Noni B is originally a departmental store and concentrates greatly on clothes. It is an attractive boutique to all its customers. The people who come to shop at Noni B are very satisfied with the clothes that they buy there. The comments of several customers have also been provided in the annual report of the company of the year 2005. The annual report also provides the vision statement of the company which is to keep “Customers First”. The company has seemed to have achieved the vision well and has kept its customers very satisfied with their clothes line. The main objective of this assignment is to study the current financial position of the company Noni B and how it has progressed in the past year from 2004 to 2005. The assignment will include several ratios and calculations which will be used in order to provide a foundation for the argument and the description of the company’s financial statement. The assignment will also include some recommendations during the description for the company in order to retain their current position as well as work on their draw backs. Du Pont Analysis of Noni B The Du Pont Analysis is the measurement of the strengths and weaknesses of a certain company. “A method of performance measurement that was started by the DuPont Corporation in the 1920s, and has been used by them ever since. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher ROI.” The Du Pont model consists of three factors. The first is that of the net profit margin, the second is the asset turnover and the third is the equity multiplier. All these three factors have some affect on the Du Pont model and are used as part of the calculation when it is to be observed how well a certain company is doing or in what state and condition it is in. (Free Dictionary) “The Du Pont model is a technique that can be used to analyze the profitability of a company using traditional performance management tools. To enable this, the Du Pont model integrates elements of the income statement with those of the balance sheet.” (12 Manage) The formula used for this analysis is as follows: Net Income * Sales * Total Assets Sales Total Assets Share holder’s Equity The remainder of the formula becomes: Net income Share holder’s Equity Using this formula, the Du Pont measures of Noni B can be calculated for both the years, that is, of 2004 and 2005. Substituting the values into the formula, we get: For the year 2004: 4425 = 0.158 27,841 For the year 2005: 6254 = 0.214 29,184 The following results showed that the Du Pont Ratio of the year 2005 was greater than that of the year 2004 by 0.056. This means that there has been a greater increase in the net income of the company rather than the increase in the shareholder’s equity. The percentage change of the net income is greater than the percentage change in the shareholder’s equity. The net income has increased by $ (6254 – 4425) = 1829 over the past year and the shareholder’s equity on the other hand has increased by only $ (29,184 – 27,841) = 1343. Between the two changes in the net income and the shareholder’s equity, there is a difference of $ (1829 – 1343) = 486. This is a large change as compared to the company’s financial statements and even the slightest dollar change in the statements can cause the ratios to increase or decrease. With such an increase in the Du Pont ratio, it shows that the company has its strengths and has well retained them throughout the year. The company has seemed to concentrate greatly on its revenue and it has increased it with such an immense change due to the satisfaction of the customers. The marketing and the sales front of the company seems to be doing a good job in trying to attract customers and retain them. The sales persons have ensured that the customers are satisfied enough that they would want to visit the shop again. This is one of the strengths of the company. It has trained its employees well and it is due to these factors that are having a large impact on the financial statements. Another strength that has been shown in the financial statements is that the company’s share value and earnings is increasing by the year. This is also a good sign that the company is progressing well and is achieving what it has aimed towards. The earnings of the company per share has increased from $ 14 to $ 19.6 which means that there has been an increase of $ (19.6 – 14) = 5.6. The weakness of the company is that the borrowing cost expenses have been increasing. The company needs to cut done on these expenses and even though they may be in direct proportion with the revenue, the company must find better ways and cheaper method of having expenses spent against the revenue. Working Capital Management of Noni B The working capital calculation is a kind of measure of the cash flow rather than a ratio. The working capital measure provides the analyst to understand the inner working of the company and how it handles its loans and receivables. The working capital is a good measure for the assets and the liabilities that the company ahs acquired during a certain specified year. The working capital management provides the analyst with the idea as to how much of the liabilities are covered by the assets. If the assets are less than the liabilities of the company, it means that the company is in a difficult position. The result of the calculation must be a positive number in order to say that the company is in a good position. The formula for the working capital management is as follows: Working Capital = Total Assets – Total Liabilities Substituting the values into the formula, we get the following: For the year 2004: Working Capital = 42502 – 14661 = $ 27841 For the year 2005: Working Capital = 44095 – 14911 = $ 29184 Analyzing the results provided, it can be observed that the working capital has increased over the year from 2004 to the year 2005. The working capital has increased tremendously by $ (29184 – 27841) = 1343. This change is exactly equal to the change in the shareholder’s equity and it makes a complete reconciliation because any change in the assets will mean a change in the liabilities and the equity portion of the company. Working capital is usually analyzed at the time to determine the company’s ability to take crisis in the financial condition. This is necessary in the case of allowing certain companies loans. Only if the loaning party understands and believes that it will receive its payments back at the right time, will the loan be granted else the loan will not be approved. There are also other factors that are considered when granting a loan such as the credit rating etc. “A general observation about these three Liquidity Ratios is that the higher they are the better, especially if you are relying to any significant extent on creditor money to finance assets.” There are also other ratios that are involved in the working capital management such as the quick ratio and the current ratio which will also be calculated in the paper below. These ratios are used in order to measure the ratio in which the assets and the liabilities of the company lie. These ratios are extremely important to consider during a loan approval. The liquidity of the assets is the greatest impact in the decision making process. (Zero Million) The formula for the current ratio and the quick ratio are provided below: Current ratio = Current Assets Current Liabilities Quick Ratio = Current Assets – Inventory Current Liabilities The values for the year 2004 and the year 2005 have been provided below with their analyses: For the year 2004: Current Ratio = 22763 = 1.647 13816 Quick Ratio = 22763 – 12440 = 0.747 13816 For the year 2005: Current Ratio = 23902 = 1.699 14063 Quick Ratio = 23902 – 11289 = 0.896 14063 The current ratio shows the best single indicator the extent to which the claims of short term creditors are covered by assets that are expected to be converted to cash fairly quickly. Considering this, the company Noni B seems to be doing better every year. The current ratio has increased from 1.647 to 1.699 which means that for every dollar of liability that the company currently holds, the company has an asset worth 1.647 in the year 2004 and worth 1.699 in the year 2005. However, current ratio should be viewed in conjunction with inventory and receivables turnover ratios & inventory valuation method used by each company. The quick ratio, on the other hand, is conservative than the current ratio in determining the short-term debt paying ability of a company. Inventory is excluded on the assumption being slow moving, obsolete or pledged to creditors. Inventory is fast moving and constitutes a small portion of the current assets of the fertilizer industry. Any inference from this ratio must be drawn after assessing the receivable turnover ratio. On comparison the quick ratio has also increased in the year 2005 as compared to that of the year 2004. Seeing the three ratios that comprise of the working capital management, which are the quick ratio, current ratio and the working capital, it can be observed that the condition of the company in terms of its finances is becoming better in the year 2005 and that there is a steady increase in all its ratios. The current ratio and the quick ratio have seemed to increase due to the greater increase in the current assets rather than the current liabilities. However, there could be some hidden values in the financial statements which could have a great effect on the financial position of the company at the moment due to any one factor. Debt Positioning of Noni B “Debt capital divided by total assets. This will tell you how much the company relies on debt to finance assets. When calculating this ratio, it is conventional to consider both current and non-current debt and assets.” The reason why dent ratio is calculated is to realize how much of debt of the company is dependent upon the assets of the company. It means that the company must make sure that the ratio must not increase to the level that all the assets are used to cover the debt. This could cause the risk of the company to increase and decrease the credit rating of the company. (Investor Words) The company will be less risky if the assets are far greater than that of the debt that the company holds. The company needs to make sure that its liabilities such as loans are in control because if they get out of control these values can be threatening for the existence of the company and the company may have the choice to announce as bankrupt. The company needs to make sure that the loans are also associated with the taxes and the interest that is taken on them. The interest is a great part in the income statement and the lower the loan amount, the less the interest applied on the income. “However, when a company chooses to forgo debt and rely largely on equity, they are also giving up the tax reduction effect of interest payments. Thus, a company will have to consider both risk and tax issues when deciding on an optimal debt ratio.” The formula below shows how the debt ratio is calculated: Debt Ratio = Total Debt * 100 Total Assets For the year 2004: Debt Ratio = 14661 * 100 = 34.4 % 42502 For the year 2005: Debt Ratio = 14911 *100 = 33.8 % 44095 The calculations above show that the company has been doing well in the past year and that it has decreased its debt ratio by a value of (34.4 - 33.8) = 0.6 %. This progress is known to be well for the company considering the fact that the company has a lot of debt that it still needs to cover. The company needs to make sure that the assets always increase more than the debt so that the debt ratio can reduce even further. Works Cited 1. Investor Words. Debt Ratio. Retrieved on July 21, 2006 from: http://www.investorwords.com/1326/debt_ratio.html 2. Net MBA. Financial Ratios. Retrieved on July 21, 2006 from: http://www.netmba.com/finance/financial/ratios/ 3. The Free Dictionary. Du Pont Analysis. Retrieved on July 21, 2006 from: http://financial-dictionary.thefreedictionary.com/Du+Pont+Analysis 4. Zero Million. Financial Ratio Analysis. Retrieved on July 21, 2006 from: http://www.zeromillion.com/business/financial/financial-ratio.html 5. 12 Manage. Du Pont Model. Retrieved on July 21, 2006 from: http://www.12manage.com/methods_dupont_model.html Read More