Country Road Limited & Noni B Ltd Evaluation - Case Study Example

Executive Summary Country Road Limited & Noni B Ltd is successful business enterprise in the field of retailing. With their establishment in Australia both of them has shown improvement. The financial analysis for 2011 and 2010 demonstrates the performance for both the company. The different ratios like profitability, efficiency and financial stability ratios reveal special features for both this companies. The limitations present areas where the financial data doesn’t work. The recommendations presents the different areas both this companies need to work upon to improve their performance. Thus, the overall ratio analysis highlights the area where both the companies are strong and areas where they need to work on. Table of Contents Introduction 3 Trend Analysis 3 Horizontal Analysis 4 Vertical Analysis 5 Financial Analysis 5 Profitability Ratios 6 Efficiency Ratios 8 Financial Stability Ratio 11 Capital Structure Ratio 13 Limitations 17 Conclusion 17 Recommendations 17 References 19 Appendix 20 Introduction Country Road Ltd is clothing retailer in Australia. The company started its operation in 1974 and has diversified its business into footwear, accessories, home ware and furniture (Country Road Website, 2011). The company has grown over the period and the product size has aided to it. This makes the company to look developing its business by diversifying itself into other areas Noni B Ltd is a retail clothing company which aims at women in the age of 40+ (Noni B Website, 2011). The wide range of product and dispersion has made it a huge success. The company has thereby ensured that it has been able to develop more stores throughout the nation taking the number to 217. Noni B Ltd as a result is looking towards developing a team which helps them to improve their business Trend Analysis The trend analysis for Noni B Limited shows a bright picture considering the momentum the economies around the world are gathering and also the increase in spending. This will result in profits to soar up. Noni B Limited on the backdrop of it can benefit greatly by proper services and new schemes which increases investment in steel sector. The trend analysis is as follows   2011 2010 2009 2011 in percentage 2010 in percentage Revenue 117286 117368 118153 99.27% 99.34% EBIT 588 5614 2136 27.53% 262.83% Net Profit 231 3867 2296 10.06% 168.42% Noni B Limited can look forward towards increasing the customer base and cut down on expenses. This will act as a tool and will help to increase the profits. This has been further facilitated by the push provided by the government and measures taken to promote economies which will attract people from around the globe. The trend thus predicts a bright and prosperous time for the apparel industry and Noni B Limited by banking on it can improve its performance. There has a scope and an initiative in the right direction can go a long way in improving the performance. The trend analysis for Noni B Limited thus supports growth in the future. With the economy slowly coming out of recession and inflation being under control the overall trajectory shows growth in the future. This is addition to the impetus given by the government to develop the economy will help Noni B Limited. Noni B Limited on the backdrop of rising consumer confidence and with stabilizing economy can look towards a better prospect in the future. Horizontal Analysis The horizontal analysis of Noni B Limited will help to identify the pattern on growth in different areas thereby helping the user to understand the financial position better. This will also act as a guide to ensure that the different concern areas are looked after. The horizontal analysis over the years is shown below   2011 2010 2011 2010       in percentage in percentage Sales 120204 119676 100 100 Cost of Goods Sold 119149 113991 99.12232538 95.24967412 Gross Profit 224 232 0.186349872 0.193856747 Finance Cost 29 71 0.024125653 0.059326849 Impairment of Goodwill 438   0.364380553 0 Income Tax Expense 357 1747 0.296995108 1.459774725 Net Income 231 3867 0.192173305 3.231224306   2011 2010 2011 2010 ASSETS     in percentage in percentage Cash 5484 4420 12.63419804 9.839715049 Account Receivable 1453 1074 3.347463484 2.390917186 Inventory 14281 15914 32.90098143 35.42742654 Other Current Assets 23 21 0.052988066 0.046749777 Trade & Other Receivable 6 6 0.013822974 0.013357079 Property Plant & Equipment 9188 10270 21.16758052 22.86286732 Deffered Tax Assets 2384 2188 5.49232825 4.870881567 Intangible Assets 10610 11048 24.44362531 24.59483526 Total Assets 43406 44920 100 100 LIABILITIES         Accounts Payable 12833 13235 29.56503709 29.46349065 Other Liabilities 5834 6043 13.44053817 13.45280499 EQUITY         Capital 22105 22105 50.92613924 49.20970614 Reserves 440 289 1.013684744 0.643365984 Retained Earnings 2194 3248 5.054600746 7.230632235 Total Liabilities and Equity 43406 44920 100 100 The analysis shows a growth in 2011 over 2010 highlighting that the business has grown which has resulted in the assets base to grow. Vertical Analysis The comparative statement of Noni B Limited shows improvement and growth in certain quarters and decrease in others. The financial statement shows that consistency in performance and the percentage share of both the company is growing. The comparative analysis of Noni B Limited shows that the company has been able to grow and this is reflected by the growth in the total figures which has gained momentum. The future based on the comparative statements shows that Noni B Limited is posing for a growth and will result in better future. Financial Analysis Financial analysis looks into the minute aspect of business based on past performance and helps to determine the steps that the business should look towards using so that the business is able to grow. Understanding & interpreting the statement provides direction for the future and helps to understand the present situation thereby helping in decision making (Micro Strategy, 2010). The following is the ratios for Country Road Limited & Noni B Ltd. Profitability Ratios This ratio helps to understand the factors which have a role in determining the profit earning capacity of the organization and the manner in which the business was able to generate revenues from its normal course of business. Net Profit Margin: This helps to ascertain the final profit after all expenses are met. It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100”. (Kennon, 2010) It is as follows The following is the net profit percent for both the companies over the years   2009 2010 2011 Noni B Ltd 1.94% 3.29% 0.20% Country Road Ltd 4.50% 3.23% 4.30% The graph further looks as The net profit for Noni B Ltd has fallen considerably which is a worrying factor and reflects inefficiency to maintain the indirect expense. This shows that the business needs to take steps to improve it as the dip is substantial. Further, Country Road Ltd has improved its performance and reflects increasing profit. This makes it important that Noni B Ltd looks towards implementing strategies which helps to reduce cost thereby ensuring better profits. Return on Assets: It helps to understand the manner in which the assets has been utilized and steps that can be taken to improve the usage of assets (Joseph, 2010). It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). The ratio is as The graph demonstrating the return over the year for both the companies looks as   2009 2010 2011 Noni B Ltd 5.22% 8.60% 0.53% Country Road Ltd 10.92% 9.54% 12.20% The graph for the same looks as follows The financial figures shows that Country Road is better placed compared to Noni B Ltd as they have been able to maintain better use of assets. This is prevalent from the fact that the return on assets for Country Road is better than Noni B Ltd over all the years. Further, a large dip in profits for Noni B Ltd has resulted in poor utilization of assets and having more assets than required. Still, on the overall basis both the companies have high assets which is prevalent in the type of business the company is. Efficiency Ratios This ratio helps to find out the manner in which the assets were used and helps to determine the steps that needs to be taken to ensure better utilization of assets. The ratios are as follows Inventory Turnover Ratio: This ratio helps to find out the amount of inventory being holed by the company and the efficiency in maintaining stock so that there is no shortage and also dosen’t increases the chances of a stock becoming obsolete. It is calculated as “Cost of Goods Sold / Average Inventory”. (Joseph, 2010) The ratio is as   2009 2010 2011 Noni B Ltd 8.12 7.16 8.34 Country Road Ltd 3.75 4.21 3.56 The graph for the same looks as follows The above ratio indicates that Noni B Ltd has been able to revolve its inventory better over 2009 to 2011. This highlights the fact that the investment made in stock has been kept at lower levels. This increases the chances of the stock getting obsolete. An only concern for Noni B Ltd is that they have to be aware that they don’t run out of stock. On the other hand Country Road Ltd has very high inventory over 2009 to 2011 which has increased the risk of obsolete stock. This has also made the company park more money in inventories than required which thereby increases the risk for the business. Account Receivable Turnover Ratio: This ratio helps to find out the number of times that the debtors are revolved. (Transtutor, 2010) It is calculated as “Sales / Accounts Receivable”. The following is the ratios for the same   2009 2010 2011 Noni B Ltd 151.86 109.28 80.72 Country Road Ltd 103.1 51.25 55.14 The graph for the above ratio looks as follows The ratio shows that Country Road Ltd performance has improved in 2011 as in 2010. The company has ensured that it revolves its debtor but when we compare it to Noni B Ltd the risk for Country Road Ltd is high. This makes it imperative that Country Road Ltd looks towards improving the ratio. Noni B Ltd on the other hand has been able to revolve its debtors around 100 times which ensures that the company has less dues in the market and reduces the chances of the money being bad debt. Collection Period Days: This helps to find out the time required in days to recover the money from the customers (Kennon, 2010). Companies want to ensure that the ratio is sound so that the chances of bad debt reduce. It is calculated as “360 / Receivable Turnover ratio”. The ratios is as   2009 2010 2011 Noni B Ltd 2.4 3.34 4.52 Country Road Ltd 3.54 7.12 6.62 The graph for the above ratios looks as follows Here we see that Noni B Ltd has a very good rate and it recovers its chances of bad debts to be less. Noni B Ltd has also shows consistency and is a good sign but needs to look towards the fact that the ratio has grown over the years so they need to take steps to reduce it. The good sign for Country Road Limited is that it has improved drastically in 2011 as compared to 2010. If the company can continually improve it then it would be a good sign and reduce the chances of debts. Average Sales Period: This ratio helps to find out the time inventory requires to be converted into finished product and finally being sold out in the market (Kennon, 2010). It is calculated as “365 / Inventory Turnover”. The ratios is as   2009 2010 2011 Noni B Ltd 44.95 50.98 43.76 Country Road Ltd 97.33 86.7 102.5 The graph for the above ratio looks as follows It is seen that Noni B Limited has a very sound ratio and is able to convert its good into finished products easily. This has enabled the company to have low stock and ensure efficiency in operations. This is a good sign and shows that the reputation has improved with the suppliers and also ensures steady supplies. Country Road Limited on the other hand needs to ensure efficiency so that they are able to ensure better utilization of stock and selling the goods at the proper time. Financial Stability Ratios The ratios which include both the short and long term financial stability are provided below Current Ratio: This ratio helps creditors, suppliers and investor to identify the liquid position. (Financial Modelling Guide, 2010) It is calculated as “Current Assets / Current Liabilities”. The ratio is as   2009 2010 2011 Noni B Ltd 1.27 1.26 1.28 Country Road Ltd 1.11 1.33 1.44 The graph is as follows The ratio shows that Noni B Ltd has a better liquidity position as compared to Country Road Ltd. Country Road 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. Noni B Ltd on the other hand is in a better position but still needs to take it slightly up around 2. Quick Ratio: It is calculated as “(Current Assets – Inventories) / Current Liabilities”. (Financial Modelling Guide, 2010) The ratio is as   2009 2010 2011 Noni B Ltd 0.3 0.32 0.42 Country Road Ltd 0.5 0.35 0.5 The graph is as follows The ratio also indicates that Country Road is better positioned as compared to Noni B Ltd and is mainly due to the fact that the company has low inventories. The ratio indicates the inefficiency of the company to meet its immediate debt. Noni B Ltd need to improve this as it is a concern and presenting a bleak picture and needs to cut down inventories. On the overall basis the picture is very similar for both the companies and need to take steps to improve it so that the short term debt providers feel safe about their investment. Capital Structure Ratio This ratio is of prime importance to investor as it helps to identify the risk associated with the company (Transtutor, 2010). This ratio provides the investors the basic information related to the future potential based on past performance and helps to determine the investing pattern. The ratios which help to determine it are as Debt to Equity Ratio: This ratio helps to find out whether the company has been sound in mixing its debt and equity. (Transtutor, 2010) It is calculated as “Long Term Debts / Equity X 100”. The ratio is as   2009 2010 2011 Noni B Ltd 0.87 0.75 0.75 Country Road Ltd 0.9 0.52 0.56 The graph looks as follows The ratio indicates soundness on the part of Noni B Ltd as it has an equal mix of debt and equity thereby ensuring that the investors are also able to receive adequate returns on their investment. This has provided leverage but made it difficult for the company to save on taxes. County Road Ltd on the other hand has been to ensure that they are able to save on taxes and have more debt than equity thereby increasing the risk for the company. This is a good sign and shows the company has a space for future projects. Earnings per Share: This ratio is of prime importance to the investors and helps them to understand the return that the company provides us every year. The ratio is as follows   2009 2010 2011 Noni B Ltd 0.71 0.12 0.07 Country Road Ltd 0.23 0.18 0.26 The graph for the same looks as When we consider the ratios which helps to find the market value of the companies helps to understand the performance better. The Earnings per Share ratio for Country Road Ltd, shows a good earning ratio over all the years. Overall the performance of Country Road Ltd is good but Country Road Ltd further need to improve it so that the companies are more preferred by shareholders. An investor can therefore look towards investing in Country Road Ltd as they have a strong foundation and are less risky. Noni B Ltd on the other hand has shown opposite results and has made the company more risky. This calls for urgent measures to solve the rising problem so that investor looks towards the company. Dividend per Share: This ratio helps to find out the dividend declared by the company for the shareholders. This ensures that investor receives some proportion of the income and motivates the investor to invest in the company. It is calculated as “EBIT / Net Finance Expenses”. (Transtutor, 2010) The ratio is as   2009 2010 2011 Noni B Ltd 0.17 0.09 0.06 Country Road Ltd 0.09 0.08 0.09 The graph is as The ratio shows that Country Road Ltd has maintained consistency in dividend highlighting the fact that the company has been able to make profits through out the year and has ensured that the shareholders get something in return for their investment. Noni B ltd on the other hand has seen a fall in dividend which shows decreasing profits and is a worry for the investor. This makes it important that Noni B Ltd looks towards improving the profits so that the investor is able to garner better profits. Limitations The ratios doesn’t consider inflation and changes in prices which might make the final outcome of the analysis to be misleading The ratio considers historical values which might not be true due to changing times Growth in technology and advancement in marketing and production process has not been looked into which might result in different results. Conclusion The financial ratio for Country Road Limited & Noni B Ltd brings forward the fact that both the company despite performing in a similar industry brings forward different financial results. This has been primarily due to the differences in the efficiency of the management and the ability to control cost and increase profits. The analysis shows that Noni B Ltd needs to look towards increasing their profits and look towards employing cost effective methods. Thus, the analysis brings forward different directions that both the company needs to work on. Recommendations Country Road Limited & Noni B Ltd needs to develop better policies so that credit management improves which will get reflected in the current and quick ratio Country Road Limited has to take steps to reduce inventory as it increases the chances of the stock becoming obsolete. Noni B Ltd needs to look towards working on the debt policy and look towards improving the leverage of the company Country Road Limited & Noni B Ltd requires urgent steps to control the efficiency in the use of assets so that the business is able to garner efficiency and better results for the organization. Noni B Ltd needs to look towards increasing their profits by cutting down the direct and indirect cost. References Country Road Website. 2011. Country Road Limited. Retrieved on November 5, 2011 from http://www.countryroad.com.au/ Financial Modelling Guide. 2010. Liquidity ratios. Retrieved on November 5, 2011 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Little, K. 2010. Understanding Earnings per share. about.com Guide, The New York Times Company Micro Strategy. 2010. Financial Analysis. Retrieved on November 5, 2011 from http://www.microstrategy.com/financial-analysis/ Noni B Website. 2011. Noni B Limited. Retrieved on November 5, 2011 from http://www.nonib.com.au/ Poskitt, R. 2005. Disclosure Regulation & information risk. Accounting & finance, volume 45, issue 3, page 457-477 Transtutor. 2010. Capital Structure Ratios. Retrieved on November 5, 2011 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx Appendix 1. Calculation of ratios for Country Road Ltd RATIOS FORMULAS 2009 2010 2011 Net profit (operating profit)margin Net profit / Sales Revenue * 100 15649 / 347547 * 100 = 4.5% 12331 / 381219 * 100 = 3.23% 18218/ 423791 * 100 = 4.3% Return on total assets Net Income / Total Assets * 100 15649 / 141668 * 100 = 10.92 % 12331 / 129194 * 100 = 9.54 % 18218 / 149280 * 100 = 12.2% Earning Per Share Net Income / No of Shares 0.23 0.18 0.26 Dividend Per Share Dividend Paid / No of Shares 7037 / 74087 = 0.09 5614 / 74087 = 0.08 6395 / 74087 = 0.09 Dividend Payout Ratio Dividend Per Share / Earning Per Shares 0.09 / 0.23 = 0.39 0.08 / 0.18 = 0.44 0.09 / 0.26 = 0.35 Current Ratio Current Assets / Current Liabilities 70140 / 63242 = 1.11 53315 / 40223 = 1.33 73597 / 51035 = 1.44 Acid Test Ratio Current Assets - Stock / Current Liabilities 70140- 38758 / 63242 = 0.5 53315 - 39113 / 40223 = 0.35 73597 - 48085 / 51035 = 0.5 Accounts Receivable Turnover Sales / Account Receivable Balance 347547 / 3371 = 103.1 381219 / 7438 = 51.25 423791 / 7685 = 55.14 Average Collection Period 365 / Account Receivable Turnover 365 / 103.1 = 3.54 Days 365 / 51.25 = 7.12 Days 365 / 55.14 = 6.62 Days Inventory Turnover Cost of Goods Sold / Inventory 145275 / 38758 = 3.75 164789 / 39113 = 4.21 171256 / 48085 = 3.56 Average Sale Period 365 / Inventory Turnover 365 / 3.75 = 97.33 Days 365 / 4.21 = 86.7 Days 365 /3.56 = 102.5 Days Debt to Equity Ratio Total Liabilities / Stockholders' equity 66687 / 74981 = 0.9 44402 / 84792 = 0.52 51035 / 91724 = 0.56 2. Calcuation of Noni B Ltd RATIOS FORMULAS 2009 2010 2011 Net profit (operating profit)margin Net profit / Sales Revenue * 100 2,296 / 118,153 * 100 = 1.94% 3,867 / 117,368 * 100 = 3.29% 231 / 117,286 * 100 = 0.20% Return on total assets Net Income / Total Assets * 100 2,296 / 43,934 * 100 = 5.22 % 3,867 / 44,920 * 100 = 8.60 % 231 / 43406 * 100 = 0.53 % Earning Per Share Net Income / No of Shares 0.71 0.12 0.07 Dividend Per Share Dividend Paid / No of Shares 3853 / 22105 = 0.17 1926 / 22105 = 0.09 1285 / 22105 = 0.06 Dividend Payout Ratio Dividend Per Share / Earning Per Shares 0.17 / 0.71 = 0.25 0.09 / 0.12 = 0.73 0.06 / 0.07 = 0.86 Current Ratio Current Assets / Current Liabilities 18,951 / 14,839 = 1.27 21,408 / 16,948 = 1.26 21218 / 16540 = 1.28 Acid Test Ratio Current Assets - Stock / Current Liabilities 18,951 – 14,545 / 14,839 = 0.30 21,408 – 14,545 / 16,948 = 0.32 21218 – 14281 / 16540 = 0.42 Accounts Receivable Turnover Sales / Account Receivable Balance 118153 / 778 = 151.86 117368 / 1074 = 109.28 117286 / 1453 = 80.72 Average Collection Period 365 / Account Receivable Turnover 365 / 151.86 = 2.4 Days 365 / 109.28 = 3.34 Days 365 / 80.72 = 4.52 Days Inventory Turnover Cost of Goods Sold / Inventory Balance 118141 / 14545 = 8.12 113991 / 15914 = 7.16 119149 / 14281 = 8.34 Average Sale Period 365 / Inventory Turnover 365 / 8.12 = 44.95 Days 365 / 7.16 = 50.98 Days 365 / 8.34 = 43.76 Days Debt to Equity Ratio Total Liabilities / Stockholders' equity 20400 / 23,534 = 0.87 19278 / 25,642 = 0.75 18667 / 24739 = 0.75 Read More