Comparative Balance Sheet and Income Statement of David Jones - Example

Executive Summary The report which carries out a financial analysis of David Jones highlights the different areas which they need to focus on. The comparative and horizontal analysis brings forward the absolute changes in the value of the financial statement whereas ratio analysis highlights the important focus area for the business. It is seen that decreasing profits, reducing sales and rising indirect cost is one of the major areas which they need to focus on. In addition to it the short term liquidity position is an area of concern which might result in a liquidity crunch and needs to be addressed immediately. The leverage is good and provides an opportunity for better investment in the future. Overall the performance is good but they need to focus on some core areas so that better results are achieved Table of Contents Chapter 1: Profile of the Company 3 Chapter 2: Introduction 4 Chapter 3: Project Overview 6 Chapter 4: Analysis & Interpretation 7 Chapter 5: Findings & Suggestions 18 References 19 Chapter 1: Profile of the Company The financial analysis is being carried out on David Jones which works in the retail segment and deals in different products like clothes and so on. The industry which David Jones work is the textile sector and looks to cater to the different needs of the people. David Jones has stores throughout Australia and has been continuously striving to increase its store to different regions of the world. This has given them a global presence and has multiplied the overall methodology of carrying out business. The financial profile of the business denotes strength as their bottom line has continuously improved which has matched by improvement in assets and decrease in liabilities. The manner in which David Jones has grown has ensured that the financial implication highlights better opportunities and would thereby help to improve their business in the future. Chapter 2: Introduction This report looks to carry out a financial analysis for David Jones where the financial statement is being analyzed. Purpose of the Study: The purpose for carrying out the financial analysis will help to understand the manner in which the organization worked, the future plans and the overall measure through which the different resources were used by the organization. Scope of the Study: The study looks to cover the financial statement and includes the balance sheet, profit and loss statement, changes in cash flow statement and other associated statement. The study has its relevance for shareholders and others related to the organization as it provides a bird view regarding the performance and helps to take important business decisions based on it. Objectives of the Study: The objective of the study is to provide the stakeholders with real time information about the past performance so that decisions to invest in the organization can be taken. It will also help to understand the manner in which the different resources were used and will chalk down a path for the future. Methodology: The report uses financial statement of David Jones and analyzes the financial statement based on different ratios, comparative statements so that the manner in which the organization performed in the past year can be understood Data Collection: The data is collected from the official website of David Jones by visiting the financial sector Tools: The tools which are used are previously identified and established ratios which has relevance and will help to understand the manner in which business performed Limitations: The study uses past data so forecast about the future performance might not be correct. In addition to it fluctuation or changes in prices and inflation is not accounted for which thereby limits the findings. Chapter 3: Project Overview Financial Statement helps the user to provide useful information regarding the performance of the organization and the manner in which the different resources were used. It also helps to understand the risk involved in the organization and the manner in which investors need to take different decisions before investing in an organization. Financial Analysis: is converting the data into meaningful information by comparing one data with another so that it provides detailed and better information as number otherwise would not help investors to take useful business decisions Type of financial analysis: There are two type of financial analysis i.e. vertical and horizontal analysis. Financial Statement Analysis: The financial statement analysis gives relevance to different denomination. Horizontal analysis is a tool for analyzing the financial statements which reflects the absolute change and percentage change in the value of each separate line item of the financial statements which is calculated for one or more accounting period. Vertical analysis is a financial analyzing tool which acts as a comparable tool of different items to a single line item in the same accounting period concerned. Ratio Analysis: It is an analysis which is sued to evaluate the firm financial performance based on different key parameters. This helps to track the performance of the business with its own past performance or with the competitors so that appropriate strategies can be taken to ensure better results. Chapter 4: Analysis & Interpretation Comparative Balance Sheet & Income Statement This section looks to provide the comparative balance sheet and income statement for David Jones for 2014 and 2013 in the form of horizontal analysis. Horizontal Analysis of Balance Sheet for the period 2014 and 2013 BALANCE SHEET 2014 2013 - ---------- ---------- ASSETS Current Assets: Cash and Cash Equivalents 67.57% 100.00% Non Current Assets Held For Sale - 0.00% Receivables 116.49% 100.00% Inventories 90.13% 100.00% Financial Assets 3920.83% 100.00% Other Current Assets 92.63% 100.00% ---------- ---------- Total Current Assets 91.17% 100.00% Long-Term Assets: Property, Plant and Equipment 102.19% 100.00% Intangible Assets 101.52% 100.00% Financial Assets 100.00% 100.00% Deferred Tax Asset 111.75% 100.00% Other Assets 167.51% 100.00% ---------- ---------- Total Long-Term Assets 102.77% 100.00% Total Assets 99.75% 100.00% LIABILITIES AND EQUITY Current Liabilities: Accounts Payable 98.96% 100.00% Interest Bearing Liabilities 3.27% 100.00% Current Tax, Provision and Financial Liabilities 127.65% 100.00% Other Liabilities 282.29% 100.00% ---------- ---------- Total Current Liabilities 98.54% 100.00% Long-Term Liabilities: Interest Bearing Liabilities 80.00% 100.00% Reserves 103.37% 100.00% Provisions 119.02% 100.00% Other Long-term Liabilities 99.23% 100.00% ---------- ---------- Total Long-term Liabilities 90.77% 100.00% Total Liabilities 95.18% 100.00% Shareholders' Equity: Common Equity-incl. Ret. Earning. 103.26% 100.00% ---------- ---------- Total Equity 103.26% 100.00% Total Liabilities and Equity 99.75% 100.00% The balance sheet has been prepared by keeping 2013 as the base year and then looking towards the fluctuations which are taking place. The cash and cash equivalent has decreased on account of payments made towards interest on long term debt which will have a negative impact on the short and long term liquidity position (Finance, 2011). In addition to it receivables have increased and inventories have decreased highlighting increase in credit sales. The short term financial assets are witnessing a growth due to increase in speculation activities. Reserves and retained earnings show decent accumulation to ensure long term sustainability and feasibility of the business. Horizontal Analysis of the Income Statement for the period 2013 and 2014 INCOME STATEMENT 2014 2013 Revenue from Sale of Goods 98.78% 100.00% Less: Cost of Goods Sold 98.29% 100.00% ---------- ---------- Gross Profit 99.60% 100.00% ---------- ---------- Operating Income 99.60% 100.00% Less: Interest Expense 80.89% 100.00% (no capitalized interest) Other Income (Expenses) 102.15% 100.00% ---------- ---------- Income before Taxes 91.31% 100.00% Less: Taxes Related to Operations 84.62% 100.00% ---------- ---------- N.I. before Non-contr. Inc 94.15% 100.00% Non-controlling income (loss) 0.00% 0.00% ---------- ---------- N.I. before Nonrecurring Items 94.15% 100.00% ---------- ---------- Net Income (Loss) 94.15% 100.00% The horizontal analysis for income statement shows a decrease in sales along with cost of goods sold which is a concern for the business. The growth in indirect expenses which has decreased profits is another concern as the gross profit has increased but the overall final profits have decreased. Common Size Analysis The analysis will help to identify the relationship between different items in the financial statement which is expressed as a percentage of total amounts and is as Vertical Analysis of Balance Sheet for the period 2014 and 2013 BALANCE SHEET 2014 2013 ASSETS Current Assets: Cash and Cash Equivalents 1.12% 1.65% Non Current Assets Held For Sale 0.21% 0.00% Receivables 1.54% 1.32% Inventories 20.32% 22.49% Financial Assets 0.08% 0.00% Other Current Assets 0.54% 0.58% --------- --------- Total Current Assets 23.81% 26.05% Long-Term Assets: Property, Plant and Equipment 67.49% 65.87% Intangible Assets 3.61% 3.54% Financial Assets 0.00% 0.00% Deferred Tax Asset 5.04% 4.50% Other Assets 0.05% 0.03% --------- --------- Total Long-Term Assets 76.19% 73.95% Total Assets 100.00% 100.00% LIABILITIES AND EQUITY Current Liabilities: Accounts Payable 21.15% 21.32% Interest Bearing Liabilities 0.03% 0.89% Current Tax, Provision and Financial Liabilities 3.14% 2.45% Other Liabilities 0.07% 0.02% --------- --------- Total Current Liabilities 24.38% 24.68% Long-Term Liabilities: Interest Bearing Liabilities 8.08% 10.07% Reserves 6.21% 5.99% Provisions 0.59% 0.50% Other Long-term Liabilities 2.22% 2.23% --------- --------- Total Long-term Liabilities 17.11% 18.80% Total Liabilities 41.49% 43.48% Shareholders' Equity: Common Equity-incl. Ret. Earning. 58.51% 56.52% --------- --------- Total Equity 58.51% 56.52% Total Liabilities and Equity 100.00% 100.00% The analysis highlights a decrease in current assets which is on account of decrease in inventories. Further, financial assets have been added in the financial statement which highlights increase in speculation activities which will ensure long term profit realization. Fixed assets reflect a growth which highlights expansion of business in a successful manner (Lyroudi & Lazaridis, 2000). The interest bearing liabilities have decreased increasing the risk from creditors which might result in liquidity crunch in the future. Vertical Analysis of the Income Statement for the period 2013 and 2014 INCOME STATEMENT 2014 2013 Revenue from Sale of Goods 100.00% 100.00% Less: Cost of Goods Sold 62.22% 62.53% Gross Profit 37.78% 37.47% Operating Income 37.78% 37.47% Less: Interest Expense 0.46% 0.57% (no capitalized interest) Other Income (Expenses) -30.20% -29.20% Income before Taxes 7.12% 7.70% Less: Taxes Related to Operations 1.96% 2.29% N.I. before Non-contr. Inc 5.16% 5.41% Non-controlling income (loss) 0.00% 0.00% ---------- ---------- N.I. before Nonrecurring Items 5.16% 5.41% ---------- ---------- Net Income (Loss) 5.16% 5.41% The concern for David Jones is a decrease in net profit which is primarily due to increase in indirect expenses and decrease in sales. The gross profit has increased but the net profit is low due to indirect expenses which needs to be controlled for better functioning of the business. Ratio Analysis This will look at finding out meaningful interpretation from the financial statement by carrying out different ratios and comparing the same with the previous year to understand the actual performance. The calculations of ratios are as Profitability Ratios Particulars Formula 2014 2013 Rate of Return on Net Sales Net Income After Tax/Net Sales (95184/1845012)*100 5.16% (10103/1867817)*100 0.54% Rate of Return on Total Assets Net Income/Total Assets (95184/ 1237785)*100 7.69% (10103/1240897)*100 0.81% Asset Turnover Ratio Sales Revenue/ Average Total Assets (1845012/1237785) 1.49 (1867817/1240897) 1.51 Rate of Return on Ordinary Shareholder's Equity Net Income / Shareholder's Equity (96650/801096(*100 12.06% (101167/775704)*100 13.04% Earnings Per Share Net Income- Dividend on Preferred Stock/ Average Outstanding Shares 18.00 19.04 Liquidity Ratios Particulars Formula 2013 2012 Current Ratio Current Assets/ Current Liabilities 294705/301830 0.98 323249/306298 1.06 Working Capital Current Assets-Current Liabilities 294705-301830 -7125.00 323249-306298 16951 Acid Test Ratio (Current Assets- Inventory)/ Current Liabilities (294705-251543)/301830 0.14 (323249-279099)/306298 0.14 Inventory Turnover Ratio Cost of goods sold/ Average Inventory 1147968/ 251543 4.56 (1167987/ 279099) 4.18 Days in Inventory (Inventory/ Cost of Goods sold)*365 (251543/1147968)*365 79.98 (279099/1167987)*365 87.22 Gross Profit Percentage (Gross Profit/sales)*100 (697044/ 1845012)*100 37.78% (699830/1867817)*100 37.47% Accounts Receivable Turnover Net Credit Sales/ Average Receivables 1845012/19092 96.64 1867817/16389 113.97 Days sales in Receivable (Accounts Receivable/ Net Credit sales)*365 (19092/1845012)*365 3.78 (16389/1867817)*365 3.20 Gearing Ratios Particulars Formula 2013 2012 Debt Ratio Total Liabilities/ Total Assets 436689/1237785 0.35 465193/1240897 0.37 Debt to Equity Ratio Long Term Debt/ Equity (134859/801096) 0.17 (158895/775704) 0.20 Times Interest Earned EBIT/ Interest (140388/9057) 15.50 (154760/10938) 14.15 The rate of return on net sales has decreased from 0.54% in 2012 to 5.16% in 2014 on account of indirect expenses which is an area of concern for the business (Saleem & Rehman, 2011). The rate of return on assets have improved to 7.89% despite decrease in profits indicating better efficiency in the use of assets The asset turnover ratio shows consistency highlighting efficiency in the use of assets and generating revenue from them The return on equity shareholders have decreased to 12% on account of lower sales which is a concern as the return for shareholders is decreasing and might result in shareholder to move away from the company (Padachi, 2006). The earnings per share has decreased to 18 cents from 19.04 which means lower returns for investor is an area of concern as it might refrain investors from investing in the organization The current ratio has decreased to 0.98 times from 1.06 times in 2013 which is a concern as it might create a liquidity crunch and is an area which needs to be worked on so that short term obligations can be easily met (Deloof, 2003). The working capital is negative which is worrying as the short term obligations won’t be met which will result in a liquidity crunch and hamper the manner in which business is carried out (Deloof, 2003). The acid test ratio also brings forward the situation of liquidity crunch and highlights the inability of the business to meet its short term obligations which is a concern for the overall business prospect The inventory turnover ratio shows efficiency as inventory is rotated properly and will thereby reduce the chances of obsolete stock and ensure better opportunities for growth in the future (Gandy, 2011). Further the days in inventory has decreased which is a good sign for the company which will ensure better supply in the market The gross profit has increased showing reduction in direct cost and will thereby ensure that the direct resources are used in a better way (Eljelly, 2004). The only concern is decrease in sale which needs to be looked at The receivable ratio has decreased which shows improvement and will thereby help to ensure better credit collection and improvement in the process of carrying out business (Filbeck & Krueger, 2005). The debt ratio has decreased indicating that the business has an opportunity of external financing in case it needs it in the future (Antony, 2004). Debt to Equity ratio has decreased showing better management of debt and having more opportunities in the near future Times interest earned has increased from 14.15 times to 15.50 times in 2014 which shows favourable position which would thereby ensure that the interest will be paid off at the correct time (Antony, 2004). Chapter 5: Findings & Suggestions The report thereby highlights the critical analysis for David Jones and brings forward the different areas which need to be focused on. The areas of concern are decreasing sales and rising indirect expenses. This needs to be controlled as the business could otherwise become unprofitable. In addition to it liquidity in the short run is another concern which needs to be stressed on and ways to improve it has to be found. The leverage of the company is strong and provides an opportunity to be successful in the long run but needs to work on different core areas so that business productivity improves 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 Finance. (2011). Why business needs finance. Retrieved on September 21, 2015 from http://tutor2u.net/business/gcse/finance_why_needed.htm Filbeck, G., & Krueger, T. M. (2005). An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Gandy, M. (2011). Is a low current ratio bad? Retrieved on September 21, 2015 from http://www.markgandycfo.com/2011/03/is-a-low-current-ratio-bad/ Lyroudi, K., & Lazaridis, Y. (2000). The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens Padachi, K. (2006). Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Saleem, Q. & Rehman, R. (2011). Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 Read More