Accounting for Decision Making - Super Cheap Auto Group Ltd and ARB Corporation Ltd - Term Paper Example

Overview and Contents of the Annual Report USE ONLY THE 2009 CONSOLIDATED FIGURES Answer Page No. What date is the end of the financial year? State the Day, Month and Year 30 June 2009 26 How many new stores did the group open in Australia during the financial year? 21 5 Who is the company secretary of the group? D J Kelly 21 Who are the auditors for the group? Pricewatehousecoppers 1 Do the financial statements comply with International Financial Reporting Standards? Yes 37 What was the total revenue and income for Goldcross Cycles? 19,118,000 50 What was the total depreciation expense for the group? 15,688,000 53 What is the total provision for Employee Benefits? 9,347 60 What is the total number of ordinary issued shares as at the end of the financial year? 106,629,622 67 What percentage of the issued capital of Goldcross Cycles was acquired by the Group? 100% 78 How many BCF stores are located in the Northern Territory? 4 89 What was the amount of total net cash inflows (outflows) from Investing Activities? (33,146) 34 What is the total of Retained Profits as at the end of the financial year? 67,084,000 80 Where is the Group’s head office located? 751 Gympie Road, Lawton 1 What was the basic earnings per share? 30.2 cents 31 How much has the group paid in dividends during the year? 14,928 33 Content Executive Summary 3 Introduction 4 Financial Analysis 4 Liquidity ratio 5 Capital Structure ratio 6 Profitability Ratios 7 Asset Efficiency Ratios 10 Market Performance Ratio 12 Findings 13 Conclusion 14 Recommendations 15 Limitations 15 References 16 Appendix 18 Executive Summary Super Cheap Auto Group Ltd and ARB Corporation Ltd have been successful as retail players. Their market has grown which is reflected by the growth in sales. There is even scope for the company to move further as this sector is showing improvement. The financial analysis also highlights some important fact related to liquidity and capital structure. The findings shows the positives and negatives of both based on financial analysis. The ratios like liquidity ensures to find liquidity and the capital financed by the company are demonstrated by capital structure ratios. The efficiency ratio indicates the area where Super Cheap Auto Group Ltd needs to work to stay ahead of ARB Corporation Ltd. The capital market ratio indicates the companies which are favoured by shareholders and also help to look into the future prospects of the company. The recommendations highlights areas where both the companies need to improve which will help them face competition and help in proper strategy execution. The analysis shows that Super Cheap Auto Group Ltd performance has improved drastically in 2009. It still needs to work on certain areas to stay ahead of ARB Corporation Ltd as the company has shown stability and Super Cheap Auto Group Ltd need to inculcate those so that it is able to withstand competition and capture a bigger market. Introduction Super Cheap Auto Group Ltd is a company having a presence in “auto parts and accessories, tools and equipments and other fishing parts”. (Super Cheap Auto Group Ltd, 2010) The company has a wide market due to the nature of the business they are in. The company has a presence Australia and New Zealand and with the wholesale and retail of bicycle has helped them grow their business. ARB Corporation Ltd is also a manufacturing giant. The company deals in “manufacturing of motor vehicle accessories and also its distribution”. (ARB Corporation Ltd, 2010) The company with their policy to satisfy customers has grown and is able to capture a good market in Australia, US and Thailand. The policy of the company is paying reap benefits and is set for a growth in the market. The financial statement of both the companies reveals so. Even the share prices shows improvement. With more consumers moving towards supermarkets gives an opportunity to expand in overseas. Financial Analysis Financial analysis helps a business unit to understand the manner in which it has performed and also helps to “plan, forecast for the future so that the company is able to deliver on the promises”. (Petroff, 2000) It helps the business units to identify the strengths and areas which will help them grow. The following is the ratios for Super Cheap Auto Group Ltd and ARB Corporation Ltd. Liquidity Ratios This ratio plays an important part and helps “to find the short term strengths and obligations”. (Ward, 2010) The ratios for Super Cheap Auto Group Ltd and ARB Corporation Ltd are Current Ratio: “It helps to whether the firm is able to meet its current liabilities out of its current assets”. (Ward, 2010) It helps to plan for the short term. It is calculated as “Current Assets / Current Liabilities”. The current ratios for both the companies are as (appendix) The ratio shows that ARB Corporation Ltd has a better liquidity position as compared to Super Cheap Auto Group Ltd. Super Cheap Auto Group Ltd need to improve the ratio as it is a concern as the short term obligations are higher. This might make investors and suppliers stay away. ARB Corporation Ltd on the other hand is in a better position but still needs to keep it similar or bring it down a little. When we consider the two companies together it shows that ARB Corporation Ltd has better policies and strategies as compared to Super Cheap Auto Group Ltd. The positive for both is that they have improved it drastically. They need to work more and ensure that it reaches around 2. Super Cheap Auto Group Ltd a on the other hand needs immediate strategy as it is showing the business in not liquid and facing obstacle. This might make investors stay away. Quick Ratio: “It measures the ability of the firm to meet its short term obligation when inventories are removed as inventories take some time to be converted into cash”. (Ward, 2010) It is calculated as “(Current Assets – Inventories) / Current Liabilities”. The ratios for both the companies are as The ratio also indicates that ARB Corporation Ltd is better positioned. The ratio indicates the inefficiency of the company to meet its immediate debt. Super Cheap Auto Group Ltd need to improve this as it is a concern and presenting a bleak picture. The ratio when compared to current ratio also indicates huge inventories. Since, both the companies deal in products where the inventory has to be high so having a low ratio is predictable. Still, both the companies especially Super Cheap Auto Group Ltd need to improve it so that it presents a better picture. Capital Structure Ratio This ratio “identifies how much of the firm’s assets are financed through debt”. (Debt to equity, 2010) The ratios which help to determine it are as Debt to Equity Ratio: “It helps to find how much percentage long term debt are in proportion to equity fund”. (Debt to equity, 2010) It shows the soundness of the business firm. It is calculated as “Long Term Debts / Equity X 100”. The ratios for both the companies are as The ratio indicates soundness on the part of Super Cheap Auto Group Ltd. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. ARB Corporation Ltd has reduced its debt a lot by paying off is a worry and needs to raise it so that it can save on taxes. ARB Corporation Ltd need to ensure that it keeps with the industry standard. As both the companies work in a type of market where to grow large debt is needed so the ratio seems to be sound. Profitability Ratios Profitability ratios help to understand the profit which can be attributed to the different factors which work in tandem to achieve the desired results. Comparing it with the previous years and the competitors’ helps to evaluate the shortcomings, and shows area which needs to be improved. The profitability ratios are as follows Gross Profit Margin: “It is the profit which is calculated after all the direct expenses has been accounted for and is based on the sales achieved by the organisation”. (Gross profit Margin, 2010) Gross profit helps to find out the actual profit that is attributed directly to the product. It is calculated as– “Gross Profit / Sales X 100”. The ratio for both the companies are The ratio indicates consistency for Super Cheap Auto Group Ltd and ARB Corporation Ltd. ARB Corporation Ltd has a higher gross profit indicating soundness in manufacturing process. It also shows that the strategies are well managed. Both on the other hand has shown improvement but still needs to improve. Net Profit Margin: “It is the profit which is calculated after all the expenses has been accounted for and is based on the sales achieved by the organisation”. (Net Profit margin, 2010) A high ratio shows high profits for the owners. It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100.” The ratios for both the companies are as The ratio indicates ARB Corporation Ltd is better placed than Super Cheap Auto Group Ltd. It is seen that the net profit has decreased for Super Cheap Auto Group Ltd and ARB Corporation Ltd. This is a worrying factor and reflects inefficiency to maintain the indirect expense. When we compare it to the gross profit margin it shows a huge dip signifying the amount of indirect expenses like marketing, distribution and other expenses the company incurs. The ratio for ARB Corporation Ltd has improved signifying better management and control of cost. When we look at the broader picture it shows that Super Cheap Auto Group Ltd and ARB Corporation Ltd despite having a higher gross profit has a lower net profit showing the amount of indirect cost incurred. It signifies improper management and strategies to cut cost is required. Return on Assets: It is the profit attributable to assets in per dollar term”. (Cleveland & Alim, 2007) It helps business to analyze the manner in which assets are used. It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100).The ratios for both the companies are as Here we see that the return on assets for both Super Cheap Auto Group Ltd and ARB Corporation Ltd have improved in 2009 as compared to 2008. The worrying factor for Super Cheap Auto Group Ltd is that their assets are underutilized. This has resulted in having more assets that warranted. ARB Corporation Ltd on the other hand has a better return showing proper utilization of assets. The other important part to note is that players have huge assets which results in the ratio being lower. Still, on an overall basis we see that Super Cheap Auto Group Ltd need to improve their return as it is have very heavy assets and needs to improve it as compared to the competitors. Return on Equity: It is defined as the profit attributed to the shareholders after all expenses have been paid for”. (Little, 2010) It is calculated as “net profit available to ordinary shareholders / Average Equity (excluding minority interest and preference capital) X 100”. The ratios for both the companies are as follows We see that ARB Corporation Ltd has a very high return on equity as compared to Super Cheap Auto Group Ltd. The return for Super Cheap Auto Group Ltd has improved but is far beyond ARB Corporation Ltd. This is a worrying factor and shows the strategies and policies implemented hasn’t been successful. The return for Super Cheap Auto Group Ltd is very low which might lead to shareholders moving out to other companies or investing in risk free securities. Asset Efficiency Ratios Operating ratios forms a very important part as it helps to “show the efficiency of the management and also indicates the company’s efficiency to manage its capital”. (Joseph, 2010) this ratios help to find the efficiency when it comes to turnover. The following ratio helps to calculate the operating efficiency. They are as Asset Turnover Ratio: It is defined as “sales which is generated due to the manner in which assets are used”. (Asset Turnover ratio, 2010) It is calculated as “Sales Revenue / Average Total Assets”. The ratios for both the companies are as follows The ratio indicates improvement for both the companies in 2009. Super Cheap Auto Group Ltd has been able to use its assets better in 2009. This has made the ratio to improve. Super Cheap Auto Group Ltd on the other hand shows soundness in the use of assets. It needs to continue similarly. ARB Corporation Ltd on the other hand needs to improve this ratio and look towards matching Super Cheap Auto Group Ltd. Receivable Turnover Ratio: It is defined as “number of times the debtors of the company are rotated to ensure that bad debts don’t arise”. (Kennon, 2010) The higher it is the better it is. It is calculated as “Credit Sales / Average Receivable”. The ratio for both the companies are Here we see that Super Cheap Auto Group Ltd has a very good rate and it recovers its chances of bad debts to be less. Super Cheap Auto Group Ltd has also shows consistency and is a good sign. ARB Corporation Ltd on the other hand has a poor receivable rate compared to Super Cheap Auto Group Ltd. The good sign for ARB Corporation Ltd is that it has improved drastically in 2009 as compared to 2008. If the company can continually improve it then it would be a good sign and reduce the chances of debts. Payable Turnover Ratio: “It is defined as number of times the creditors of the company are rotated to ensure that reputation improves”. It is calculated as “Cost of good sold / Average payable”. The ratios for both the companies are as follows It is seen that ARB Corporation Ltd has improved its turnover ratio drastically. This is a good sign and shows that the reputation has improved with the suppliers and also ensures steady supplies. ARB Corporation Ltd has a good ratio and is consistent signifying soundness in policy. Both the companies are ensuring that the ratio is good and reckons a good future but Super Cheap Auto Group Ltd needs to improve it. Inventory Turnover Ratio: “It is defined as the rotation inventory makes in an accounting cycle”. (Little, 2010) Companies prefer it to be high. It is calculated as “Cost of Goods Sold / Average Inventory”. The ratios for both the companies are as The above ratio indicates that ARB Corporation Ltd has revolved its inventory more compared to Super Cheap Auto Group Ltd. ARB Corporation Ltd has also been consistent and shows proper management. This is a sign of a good company but it needs to be replicated so that the inventory levels come down. This will ensure less money in inventory and help to ensure that the funds are not blocked. Super Cheap Auto Group Ltd need to improve it and match ARB Corporation Ltd. Market Performance Ratio This ratios help to find the shareholders confidence in the company. A company having sound capital market ratios ensures that people prefer this companies and this is seen by the growth in share prices. The ratios which will help to find the capital market are as follows Earnings per Share: “It is the profit which is attributed to each individual share”. (Little, 2010) It is calculated as “Net profit available to ordinary shareholders / weighted number of ordinary shares on issue”. The ratios for both the companies are as follows The above ratio indicates soundness on the part of both the companies. ARB Corporation Ltd has a higher earning per share indicating that the shareholders are getting a good return. The return for Super Cheap Auto Group Ltd and ARB Corporation Ltd has increased in 2009 as compared to 2008 which shows that the profit has increased. The overall result for both the giants seems sound and is a good prospect to invest. Findings The liquidity position especially the current ratio is sound for ARB Corporation Ltd and Super Cheap Auto Group Ltd needs to improve it. Both the companies due to the nature of business have a huge inventory which are affecting the quick ratio but is according to industry standards. The long term debt ratios are sound for Super Cheap Auto Group Ltd and the company have the scope to take loan for further development. The companies have used their short term debt to finance long term assets is a worrying factor and steps needs to be taken. Super Cheap Auto Group Ltd profit has improved in 2009 as compared to 2008 but it needs to reduce its indirect expenses so that it stays ahead of ARB Corporation Ltd The operating ratio especially the receivable and payable turnover ratio for Super Cheap Auto Group Ltd has shown tremendous improvement but it needs to still work on it so that it is able to perform better The capital market analysis ratio shows wide improvement for Super Cheap Auto Group Ltd in 2009 and when we compare it to ARB Corporation Ltd it shows better performance highlighting that they have better projects and this can help them The financial analysis shows that Super Cheap Auto Group Ltd performance has improved in 2009 as compared to 2008. Super Cheap Auto Group Ltd needs to improve its strategies so that it can stand better that ARB Corporation Ltd who has been performing on a consistent basis. Conclusion Super Cheap Auto Group Ltd and ARB Corporation Ltd both have been performing on similar lines and have been successful. The financial statement even highlights similar facts. Both the companies can improve with better strategy. The financial ratios of both the companies show some demarcating things and also highlight the different strategies taken by each. This even highlights that companies similar in nature use different strategies and improve their performance. Both this companies have room for improvement and with the growth this sector is showing it gives them opportunity to capture a good market and grow. Recommendations Super Cheap Auto Group Ltd needs to improve its quick ratio so that it reflects soundness in its policies and strategies Both the companies need to reduce the amount held in inventories as it is high leading to a lot of money being invested Both the companies need to take more debt especially long term so that they are able to save on the taxes Super Cheap Auto Group Ltd needs to improve its operating ratios so that it can match its competitor Super Cheap Auto Group Ltd needs to reduce its indirect cost, improve efficiency, bring down assets and improve their management Super Cheap Auto Group Ltd need to improve the inventory turnover ratio Super Cheap Auto Group Ltd need to ensure that to stay ahead of competition it comes with new projects so that the assets are used properly and ensure better efficiency Limitations Inflation is a concern and causes the financial data to be biased Using historical cost makes it difficult to gauge the actual present performance Changes in technology for production, distribution, marketing has not been accounted for which might give different result References Ward S, 2010, “Is Your Business Sick: Current Ratio”, about.com Guide, The New York Times Company Cleveland D & Alim W, 2007, “Return on Assets”, about.com Guide, The New York Times Company Little K, 2010, “Understanding Return on equity”, about.com Guide, The New York Times Company Asset Turnover Ratio, (2010), “asset turnover ratio”, retrieved on September 5, 2010 from http://www.buzzle.com/articles/asset-turnover-ratio.html Gross profit Margin, 2010, “Gross Profit Margin”, retrieved on September 5, 2010 from http://www.bized.co.uk/compfact/ratios/profit3.htm Net profit Margin, 2010, “Net Profit Margin”, retrieved on September 5, 2010 from http://www.bized.co.uk/compfact/ratios/profit4.htm Kennon J, 2010, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company Petroff J, 2000 “Financial analysis’, retrieved on September 5, 2010 from http://www.peoi.org/Courses/Coursesen/finanal/FN501EN.html Debt to equity, 2010, “Debt to equity ratio”, retrieved on September 5, 2010 from http://www.valuebasedmanagement.net/methods_debt_to_equity_ratio.html Little K, 2010, “Understanding Inventory turnover ratio”, about.com Guide, The New York Times Company Little K, 2010, “Understanding Earning per share”, about.com Guide, The New York Times Company Appendix 1. Calculation of Current Ratio for Super Cheap Auto Group Ltd Current Ratio for 2008 = Current Assets / Current Liabilities = 221966 / 159275 = 1.39 Current Ratio for 2009 = Current Assets / Current Liabilities = 264744 / 170864 = 1.55 2. Calculation of Current Ratio for ARB Corporation Ltd Current Ratio for 2008 = Current Assets / Current Liabilities = 62966 / 35294 = 1.78 Current Ratio for 2009 = Current Assets / Current Liabilities = 66935 / 27648 = 2.42 3. Calculation of Quick Ratio for Super Cheap Auto Group Ltd Quick ratio for 2008 = (Current Assets – Inventories) / Current Liabilities = (221966 - 193975) / 159275 = 0.18 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = (264744 - 222821) / 170864 = 0.25 4. Calculation of Quick Ratio for ARB Corporation Ltd Quick ratio for 2008 = (Current Assets – Inventories) / Current Liabilities = (62966 - 33031) / 35294 = 0.85 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = (66935 - 35638) / 27648 = 1.13 5. Calculation of Debt to Equity for Super Cheap Auto Group Ltd Debt to Equity Ratio for 2008 = Long Term Debts / Equity = 71016 / 135761 = 0.52 Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 92000 / 156354 = 0.59 6. Calculation of Debt to Equity for ARB Corporation Ltd Debt to Equity Ratio for 2008 = Long Term Debts / Equity = 1139 / 77727 = 0.0146 Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 441 / 92039 = 0.0047 7. Calculation of Gross Profit Margin for Super Cheap Auto Group Ltd Gross Profit Margin for 2008 = Gross Profit / Sales * 100 = 289358 / 715657 * 100 = 40.43% Gross Profit Margin for 2009 = Gross Profit / Sales * 100 = 347838 / 829306 *100 = 41.94% 8. Calculation of Gross Profit Margin for ARB Corporation Ltd Gross Profit Margin for 2008 = Gross Profit / Sales * 100 = 81327 / 171603 * 100 = 47.39% Gross Profit Margin for 2009 = Gross Profit / Sales * 100 = 98750 / 191154 *100 = 51.66% 9. Calculation of Net Profit Margin for Super Cheap Auto Group Ltd Net Profit Margin for 2008 = Net Profit / Sales * 100 = 36806 / 715657 * 100 = 5.14% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 41886 / 829306 *100 = 5.05% 10. Calculation of Net Profit Margin for ARB Corporation Ltd Net Profit Margin for 2008 = Net Profit / Sales * 100 = 27508 / 171603 * 100 = 16.03% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 31477 / 191154 *100 = 16.47% 11. Calculation of Return on Assets for Super Cheap Auto Group Ltd Return on Assets for 2008 = Net Income / Total Assets * 100 = 25800 / 385156 * 100 = 6.7% Return on Assets for 2009 = Net Income / Total Assets * 100 = 32135 / 437771 * 100 = 7.34% 12. Calculation of Return on Assets for ARB Corporation Ltd Return on Assets for 2008 = Net Income / Total Assets * 100 = 19647 / 114160 * 100 = 17.21% Return on Assets for 2009 = Net Income / Total Assets * 100 = 22539 / 120128 * 100 = 18.76% 13. Calculation of Return on Equity for Super Cheap Auto Group Ltd Return on Equity for 2008 = Net Income / Equity * 100 = 25800 / 135761 * 100 = 19% Return on Equity for 2009 = Net Income / Equity * 100 = 32135 / 156354 * 100 = 20.55% 14. Calculation of Return on Equity for ARB Corporation Ltd Return on Equity for 2008 = Net Income / Equity * 100 = 19647 / 77727 * 100 = 25.28% Return on Equity for 2009 = Net Income / Equity * 100 = 22539 / 92039 * 100 = 24.48% 15. Calculation of Receivable Turnover Ratio for Super Cheap Auto Group Ltd Receivable Turnover Ratio for 2008 = Sales / Average Receivable = 715657/ 19282 = 37.11 Receivable Turnover Ratio for 2009 = Sales / Average Receivable = 829306/ 25113 = 33.02 16. Calculation of Receivable Turnover Ratio for ARB Corporation Ltd Receivable Turnover Ratio for 2008 = Sales / Average Receivable = 171603 / 28174 = 6.09 Receivable Turnover Ratio for 2009 = Sales / Average Receivable = 191154 / 27815 = 6.87 17. Calculation of Payable Turnover Ratio for Super Cheap Auto Group Ltd Payable Turnover Ratio for 2008 = Cost of Goods Sold / Average Payable = 426299 / 91205 = 4.67 Payable Turnover Ratio for 2009 = Cost of Goods Sold / Average Payable = 481468/116623 = 4.12 18. Calculation of Payable Turnover Ratio for ARB Corporation Ltd Payable Turnover Ratio for 2008 = Cost of Goods Sold / Average Payable = 125976 / 18442 = 6.83 Payable Turnover Ratio for 2009 = Cost of Goods Sold / Average Payable = 136871 / 17882 = 7.65 19. Calculation of Inventory Turnover Ratio for Super Cheap Auto Group Ltd Inventory Turnover Ratio for 2008 = Cost of Goods Sold / Average Inventory = 426299 / 193975 = 2.2 Inventory Turnover Ratio for 2009 = Cost of Goods Sold / Average Inventory = 481468 / 222821 = 2.16 20. Calculation of Inventory Turnover Ratio for ARB Corporation Ltd Inventory Turnover Ratio for 2008 = Cost of Goods Sold / Average Inventory = 125976 / 33031 = 3.81 Inventory Turnover Ratio for 2009 = Cost of Goods Sold / Average Inventory = 136871 / 35638 = 3.84 21. Calculation of Earning Per Share for Super Cheap Auto Group Ltd Earning per Share for 2008 = Net Income / Outstanding shares = 24.2 cents (given in financial statement) Earning per Share for 2009 = Net Income / Outstanding shares = 30.2 cents (given in financial statement) 22. Calculation of Earning Per Share for ARB Corporation Ltd Earning per Share for 2008 = Net Income / Outstanding shares = 29.52 cents (given in financial statement) Earning per Share for 2009 = Net Income / Outstanding shares = 33.86 cents (given in financial statement) 23. Calculation of Asset Turnover Ratio for Super Cheap Auto Group Ltd Asset Turnover Ratio for 2008 = Sales Revenue / Average Total Assets = 715657 / 385156 = 1.86 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 829306 / 437771 = 1.9 24. Calculation of Asset Turnover Ratio for ARB Corporation Ltd Asset Turnover Ratio for 2008 = Sales Revenue / Average Total Assets = 171603 / 114160 = 1.5 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 191154 / 120128 = 1.59 Read More