Analysis of Business Performance - Assignment Example

Question 1 The entity’s liquidity position has decreased slightly within the two-year period. For instance, its current ratio indicates a reduction from 1.3 to 1.1, which is not a good performance. It means that the entity’s current assets needed for covering possible short-term business commitments have been reduced thus the unfavourable position. This can also be said about quick ratio, which also decreases within the same period from 0.7 to 0.5 but still remains below the recommended standard of at least 2. All in all, the entity’s liquidity position is unfavourable altogether. Question 2 Item 2014 2015 2016 2017 2018 Income 798000 799,100/798,000 *100% = 100.14% 825,200/798,000 *100% = 103.4% 837,600/798,000 *100% = 104.96% 856,200/798,000 *100% =107.29% Gross Profit 348,000 357,200/ 348,000*100% =102.64% 362,800/348,000*100% = 104.25% 359,800/348,000*100% =103.39% 362,000/348,000*100% = 104.02% Other Expenses 252,000 264,000/252,000*100% = 104.76% 271,400/252,000 *100% =107.69% 274,200/252,000 *100% =108.81% 278,300/252,000 *100% =110.43% Question 3 Common Size Statements 2017 2016 2017 2016 Revenue (all sales) $ 450000 $390000 100% 100% Cost of sales $ 292300 $287000 64.95% 73.59% Gross profit $157700 $103000 35.04% 26.41% Expenses (including tax) $89200 $68500 19.82% 17.56% Profit $68500 $34500 15.22% 8.84% There is a significant increase in the level of profits in the two-year period and this highly attributed to the significant reduction in the amounts related to cost of sales within the period. Question 4 2012 2013 2014 2015 2016 2017 Revenue $300/300*100% = 100% $315/300 *100% = 105% $315/300 *100% = 105% $325/300 *100% =108.3% $390/300 *100% = 130% $415/300 *100% = 138.3% Less: Cost of sales 185/185*100% =100% 190/185 *100% =102.7% 185/185 *100% =100% 192/185 *100% =103.8% 215/185 *100% =116.2% 250/185 *100% =135.1% GROSS PROFIT 115/115*100% =100% 125/115 *100% =108.7% 130/115 *100% =113% 133/115 *100% =115.7% 175/115 *100% =152.2% 165/115 *100% =143.5% Expenses 82/82*100% =100% 86/82*100% =104.9% 83/82*100% = 101.2% 101/82 *100% =123.2% 113/82 *100% =137.8% 115/82 *100% =140.2% Profit $33/33*100% =100% $39/33*100% =118.1% $47/33*100% = 142.4% $32/33*100% =96.9% $62/33*100% =187.8% $50/33 *100% =151.5% 2012 2013 2014 2015 2016 2017 ASSETS Cash $18/18*100% = 100% 19/18*100% =105.6% 18/18*100% =100% 26/18*100% =144.4% 25/18 *100% =138.8% 14/18 *100% =77.7% Receivables 25/25*100% =100% 30/25*100% = 120% 28/25*100% = 112% 43/25*100% = 172% 52/25 *100% = 208% 74/25 *100% =296% Inventories 74/74*100% =100% 84/74 *100% = 113.5% 89/74 *100% =120.3% 118/74 *100% = 159.5% 150/74 *100% =202.7% 160/74 *100% =216.2% Property, plant and equipment 180/180 *100% =100% 194/180 *100% = 107.7% 208/180 *100% = 115.6% 348/180 *100% = 193.3% 343/180 *100% 190.6% 340/180 *100% =188.9% LIABILITIES Payables $64/64*100% = 100% $78/64% *100% =121.9% $84/64 *100% = 131.2% $115/64 *100% = 179.7% $140/64 *100% 218.8% $151/64 *100% = 235% Non-current liabilities 72/72* 100% =100% 69/72 *100% = 95.8% 66/72 *100% = 91.7% 150/72 *100% = 208.3% 145/72 *100% 201.4% 143/72 *100% =198.6% EQUITY Share capital 120/120 *100% =100% 120/120 *100% =100% 120/120 *100% =100% 180/120 *100% = 150% 180/120 *100% = 150% 180/120 *100% = 150% Retained earnings 41/41*100% =100% 60/41 *100% = 146.3% 73/41 *100% =178% 90/41 *100% = 219.5% 105/41 *100% = 256% 114/41 *100% = 278% Question 5 Ratio 2017 Return on Assets= profits/ average total assets 8,724/ (59,870+56,090)/2 = 8,724/57, 980 *100% = 15% Return on Ordinary Equity = profits- preference dividends/ average ordinary equity 8,724-100/ (28,430+25,210)/2 = 8,624/26,820*100% = 32.15% Current ratio = current assets/current liabilities 25,490/11,560 = 2.21 Inventory turnover= cost of sales/ average inventory balance 70,200/ (14,000+13,860) =70,200/27,860 = 2.5 times Debt ratio = total liabilities/ total assets 31,440/59,870 =0.53*100% =53% Assets turnover = revenues/ average total assets 110,000/(59,870+56,090)/2 110,000/57,980 = 1.89 times Part b The company’s profitability position is favourable especially in relation to industry averages on ROE. This means that the management of the firm has ensured to generate enough profits with the immediate level of resources availed to them within the period. The liquidity position is way below the industry averages, which means that the company is not fairly positioned to meet its short term commitments whenever the fall due. The entity’s financial gearing sits above the industry averages, which is a favourable phenomenon as it means that it has managed to strike a balance between debt and equity finance resources. Part C The limitations of ratio analysis include; first, it is conducted on historical form of data in order to forecast future performances. However, the forecast might be altered by numerous changes in such factors management changes and other economical factors. Secondly, given that the measurement based adopted for computation of all analytical measures is based on historical costs, possible failures to alter for aspects of inflation of fair values might lead to misleading information. Subsequently, the non-existence of disclosure of general purpose financial reports might prevent the possible breadth of the entire analysis. Notably, in other cases the data provided by the general purpose reports might have been manipulated, supplemented and expressed in different aspects. Question 6: Woolworths Ltd i) Current ratio = current assets/ current liabilities I selected current ratio because it allows analysts to establish the liquidity of a company in relation to whether or not it can meet its short term obligations. In fact, it is a strong ratio for analysing liquidity position. 2015: 7,660.9/9,168.6 = 0.84 ii) Profit margin = profit/ revenues 2015: 2,137.4 /60,868.4 = 0.04*100%, 4% I choose profit margin over ROE and ROA because it is a strong profitability measure and it is able to indicate the profit margins over a given period of years. iii) Earnings per Share = profits- preference dividends/ weighted averages no. of ordinary shares 2015: 2,137.4/155.9 = 13.7 I choose EPS over dividend payout because it is a strong market analysis ratio. It is able to indicate whether or not investors will be attracted to shares offered by a firm. iv) Debt ratio= total liabilities/ total assets 2015: 14,204.8/25,336.8 = 0.56 I selected debt ratio over equity-to-debt because it provides sufficient information on the underlying debt levels of a firm and whether it needs to improve on its finance gearing capacity. v) Inventory turnover= cost of sales/ averages inventory balance 2015: 44,344.8/ (4693.2+4872.2)/2 = 44,344.8/ 4782.7 = 9.3 times I choose inventory turnover over receivables turnover because it provides significant information on how the existing stock is sold to provide revenues. vi) Asset turnover= revenues/ average total assets 2015: 60,868.4/ (24,136.5+25,336.8)/2 = 60,868.4/ 24,736.65 = 2.4 times I selected asset turnover ratio because it provides enough information pertaining to the efficiency of the existing management to utilise underlying asset resource to trigger revenues. Part B In regards to current ratio; in pg 22, the annual report indicates that there was an increase in the level of closing inventories by about 3.8%, which is directly related to the opening of new stores particularly 30 new Australia-based supermarkets. Information provided in page 8 indicates that the overall gross profits increased by 39% and was entirely driven by significant changes made in relation to sales mix from petrol products to higher margin businesses that were linked to petrol product margin accretion as a result of reducing fuel prices that outweighed gross profit margin in both New Zealand and Australia. The Chairman’s report on page 2 notes that the company increased the level of dividends to only ordinary shareholders by 1.5% due to improved profits. This information is necessary in the calculation of earnings per share because it provides a glimpse of why there were no preference dividends that were paid by the company within the 2015 period. In page 22 of the Annual report, sufficient information relating to both liabilities and assets have been provided, which is important in understanding debt ratio. The report notes that the level of fixed assets and investments increased significantly due to the underlying property development as well as capital expenditures. On the contrast, the net repayable debt that includes; cash, borrowings and hedge assets decreased due to proceeds from the sale of property particularly the 54 freehold hotel sites as well as other investments. The report provides information that helps comprehend the inventory turnover ratio. In page 8, the report indicates that the cost of doing business as a percentage of sales revenues increased by at least 42 bps as a result of subdued sales growth that were impacted by the changes witnessed within the Woolworths-Caltex alliance that prevented fractionalisation of costs. On pg 8, the report indicates that there was a significant decrease due to lower fuel prices, disappointing trading results within the Australian Food and Liquor and General Merchandise section. This information has been necessary to expound on the changes of sales revenues necessary in computing the turnover level. Part C The company’s current ratio stands at 0.84 while the industry averages is positioned at 0.85, which means that its liquidity position is unfavourable (Investing.Com, 2015). The company’s profit margin stands at 4% while the industry average stands at 4.55%, which is way below the industry average hence indicating that it is not operating at a favourable position (Investing.Com, 2015). Asset turnover for the company stands at 2.4 against the industry average of 2.46, which means that it is operating within a safe margin (Investing.Com, 2015). References Investing.Com. (2015). Woolworth Ltd: WOW ratios. Retrieved from http://au.investing.com/equities/woolworths-limited-ratios Woolworth. (2015). 2015 Annual Report. Print Read More