Premier Investment of David Jones Ltd - Case Study Example

Business Report on Premier Investment Ltd and David Jones Ltd Student’s Name Institution Executive Summary The overall financial condition of an organization is often ascertained using financial ratios by management accountants, managers, creditors, and potential shareholders among others. These financial ratios also form the basis of decision making and financial analysis in comparing the strength and weakness of the company. From financial ratios, an analysis of the company’s profitability, efficiency, and short-term and long-term financial stability can be analyzed. This paper provides an interpretation of financial ratios or ratio analysis of the financial statements over a two year period (2010 through 2011) for Premier Investments Ltd and David Jones Ltd. Premier Investments Ltd (PMV) is an investment company based in Australia that generates its income from the Australian clothing and retailing industry. This company operates through two segments of business; investments and retail. The investments category carries out its functions in Australian businesses by investing in importing, retailing and distributing sectors. The retail segment on the other hand carries out its functions through the company’s seven subsidiaries. David Jones Ltd on the other hand is also an Australian based company and the oldest departmental store trading in its original name. This company is a top up-market retailer with stores all-over Australia. Keywords: profits, investment, finance Table of Contents Page Introduction ……………………………………………………………………………………….5 Analysis and Interpretation of Ratios……………………………………………………..………6 Profitability Ratios and Analysis……………………………...…………….…………….6 Gross Profit Margin…………………………………………………………….....7 Net Profit Margin………………………………………………………………....8 Return on Equity………………………………………………………………….9 Efficiency Ratios and Analysis……………………………………………………...…...9 Asset Turnover…………………………………………………………………...10 Inventory Turnover…………………………………………………..…………..10 Debtors Turnover…………………………………………..…………………….11 Creditors Turnover……………………………………………………………….11 Financial Stability………………………………………………………………..………11 Short-Term Financial Stability……………………………………......…...…….12 Long-Term Financial Stability…………………………………………………..13 Limitation of Analysis…………………………………………………………………….….….14 Conclusion and Recommendation………………………………………………………….……15 References……………………………………………………………………………………….16 Business Report on Premier Investment Ltd and David Jones Ltd Introduction Financial ratios form an integral part of financial statements analysis in the sense that they are often used in quantifying many aspects of businesses. These ratios bring to light the liquidity, profitability, efficiency and financial stability of a firm (Bull, 2008). Additionally, these ratios allow a comparison to be carried out; between companies, industries, different time periods of companies, and between corporations and their industry average. This paper reviews the financial ratios of Premier Investment Ltd and David Jones Ltd, in which it addresses the aspects of profitability, operating efficiency and financial stability. Premier Investment Ltd operates in the apparel retail sub-industry in Australia. In this sector, this firm concentrates on retailing, distributing, and importing in it bid to maximize growth in capital returns to its shareholders (Premier Investments Ltd, 2011). This company additionally runs a number of specialty retail fashion chains. It also carries out its operations through two business segments; retail and investments. David Jones on the other hand is Australia’s third largest and the world’s oldest department store company. This company is an upscale retailer stocking some of the high-end fashion brands in addition to selling furniture and home furnishings (David Jones Ltd, 2011). David Jones Ltd additionally operates online shopping facilities, food halls, and offers retail sales in jewelry, perfume and other gifts. Analysis and Interpretation of Ratios Costales and Szurovy (2004) argue that financial ratios express relationships between specific components of a firm’s financial statement. These authors further assert that these ratios when applied effectively are powerful tools for unraveling the underlying reasons for the trend of business, the condition and the financial structure of firms. Unfortunately, these ratios can also mislead the management especially when they are taken at face value on a stand-alone basis rather than being related to other ratios and existing vast array of available business information. In reviewing the financial ratios of Premier Investments Ltd and David Jones Ltd, this paper shall look at five key aspects; profitability, efficiency, short-term financial stability, long-term financial stability, and other additional information relevant to this report. Profitability Ratios and Analysis Profitability ratios demonstrate various measures of profitability applied by a specific firm, or how well the firm is using its resources to generate profit and how efficiently it is being managed (Gitman & McDaniel, 2009). These ratios also indicate the profit earning capacity of a business venture and the ability of a company to earn a satisfactory return on total assets, sales, and invested capital. The profitability ratios for Premier investment Ltd and David Jones Ltd are shown in the table below;   Premier Investments Ltd David Jones Ltd % Change KEY RATIOS 2010 2011 2010 2011 Premier David Jones Gross profit margin 59.09% 59.51% 39.73% 39.11% 0.42% -0.62% Net Profit margin 16.11% 9.54% 12.11% 12.62% -6.57% 0.51% Return on Equity (ROE) 9.24% 4.35% 22.91% 21.45% -4.89% -1.46% 1. Gross Profit Margin The gross profit margin gives the general profitability of the business and indicates the degree to which the selling price of goods per unit may decline without resulting in losses on the firm’s operations (Bull, 2008). The gross profit margin of Premier Investment Ltd has increased by 0.42% from 59.09% in 2010 to 59.51% in 2011. This increase could have been due to favorable purchases in 2011, stability of management in developing sales volume that made it possible to purchase goods in large volumes and favorable competition among others. Additionally, this increase in gross profit margin could reflect an increase in the prices of goods that Premier Investments Ltd sold without a corresponding increase in costs. David Jones Ltd, on the other hand has experienced a decrease in its gross profit margin by 0.62% from 39.73% in 2010 to 39.11% in 2011. This decrease could have been caused by excessive competition in 2011, instability of management in developing sales volume thus making it difficult to buy goods in bulk, a decrease in prices of goods with a corresponding increase in costs, and the valuation of opening stock at lower figures that it ought to be among others. In comparing these two firms, Premier Investments Ltd has a higher gross profit margin in both years than David Jones Ltd. This could be due to the fact that Premier Investment Ltd is more aggressive in its pursuits, for example it carries out retail, distribution and importation business in the Australian apparel sub-industry. This multi-market involvement gives it an ability to make more sales and bigger profits compared to David Jones which is more of a retailer of fashion ware. David Jones’ market is limited to the customers while Premier Investment’s market includes distributors, retailers, and the final consumer. 2. Net Profit Margin Net profit margin; also known as return on sales measures the percentage of every sales dollar remaining after all expenses, inclusive of taxes, have been deducted (Bull, 2008). This ratio often measures a firm’s earning power, and the ability of its management to operate its business with sufficient success to recover cost from merchandise and to leave a margin of reasonable compensation to the owners (Khan, 2004). The net profit margin of Premier Investments has fallen by 6.57% from 16.11% in 2010 to 9.54% in 2011. This decline could be caused by the decline in sales from $878,494,000 in 2010 to $875,610,000 in 2011 and decline in profits from $79,633,000 in 2010 to $40,517,000 in 2011 (Premier Investments Ltd, 2011). David Jones Ltd, unlike Premier Investments Ltd, has recorded an increase in its net profit margin by 0.51% from 12.11% in 2010 to 12.62% in 2011. This increase is attributed to the decrease in cost of doing business from $610,900 in 2010 to $568,500 in 2011 (David Jones Ltd, 2011). Premier Investments’ net profit margin is greater than David Jones’ in 2010 but far much less in 2011. This could be attributed to the decrease in cost of doing business experienced by David Jones in 2011 and the decline in sales which both companies experienced in 2011 but had adverse effects on Premier Investments. 3. Return on Equity (ROE) ROE is the ratio of net profit to the total owner’s equity. This ratio measures the return that owners of the company or shareholders receive on their investment in the firm (Bull, 2008). Both Premier Investments and David Jones ltd have recorded a decline in ROE of 4.89% and 1.46% respectively from 9.24% in 2010 to 4.35% and from 22.91% in 2010 to 21.45in 2011. This decline could be attributed to a decline in net income and earnings per share experienced in 2011 by both companies. Profits earned in 2011 by David Jones declined from $242,031,000 in 2010 to $239,322,000 and the earnings per share fell from 34 to 33 cents per share (David Jones Ltd, 2011). Profits earned in 2011 by Premier Investments also fell from $79,633,000 to $40,517,000. The earnings per share likewise fell from 52.78 to 26.13 cents per share (Premier Investments Ltd, 2011). David Jones’ ROE is at a good position of above five-percent for the two years, unlike Premier Investment’s which fell to a dangerously 4.35% in 2011. David Jones’ ROE could be high due to a number of factors like a reduction of the number of shares in the hands a of the public by management through buying them back on the open market among others. Efficiency Ratios and Analysis Efficiency ratios are typically employed in the analysis of how well a firm utilizes its assets and liabilities and how well it conducts its business internally (Gill & Chatton, 2000). These ratios also provide information about how well a firm uses its assets to generate sales. The efficiency ratios for Premier Investments Ltd and David Jones Ltd are shown in the table below.   Premier Investments Ltd David Jones Ltd Change KEY RATIOS 2010 2011 2010 2011 Premier David Jones Asset Turnover (Times) 0.61 0.60 1.72 1.62 (0.01) (0.10) Inventory Turnover (Days) 73 75 83 88 2.00 5.00 Debtors Turnover (Days) 4 3 1.5 2 (1.00) 0.50 Creditors Turnover(Days) 31 24 35 30 (7.00) (5.00) 1. Asset Turnover This ratio shows how efficiently a firm utilizes its assets in generating sales (Gill & Moira, 2000). Both Premier Investments and David Jones have indicated a decline in asset turnover ratio of 0.01 and 0.1 respectively. Premier Investment had an asset turnover of 0.61 in 2010 and 0.60 respectively while David Jones had an asset turnover of 1.72 and 1.62 in 2010 and 2011 respectively. An asset turnover of less than one like in the case of Premier Investment indicates a less-efficient usage of assets in generating sales. 2. Inventory Turnover This ratio measures how fast given merchandise is moving and how many times the initial inventory is replaced in a year (Gill & Moira, 2000). The inventory turnovers of both Premier Investments Ltd and David Jones Ltd have increased by 2 and 5 days respectively from 73 and 83 days in 2010 to 75 and 88 days respectively. A low ratio like in the case of Premier Investments’ compared to David Jones’ indicates the existence of a large inventory, a never-out-of-stock situation, poor liquidity and some possible overstocking of items among others. David Jones’ high inventory turnover could be due to; narrow selection of fast-moving merchandise or some last sales due to lack of stock. 3. Debtors Turnover Debtor turnover ratio provides a measure of how quickly the debtors or receivables of a given business are realized (Mittal, 2006). From the table above, Premier Investment Ltd has experienced a decline in its debtor’s turnover ratio from 4 in 2010 to 3 in 2011 and David Jones Ltd has increased its debtor’s ratio by 0.5 from 1.5 in 2010 to 2 in 2011. The lesser the debt collection period the more efficient a firm is in its debt collections. In this respect, David Jones’ debt turnover of 1.5 and 2 days in 2010 and 2011 shows that it is more efficient in collecting its debt compared to Premier Investments Ltd. 4. Creditors Turnover Creditor’s turnover measures the promptness with which an entity makes payments to its creditors (Gill & Moira, 2000). Premier Investments Ltd has reduced its creditor’s turnover by 7days from 30 days in 2010 to 24 days in 2011. David Jones Ltd has likewise reduced its creditors’ turnover from 35 days in 2010 to 30 days in 2011. Despite this reduction, David Jones Ltd still has a high ratio indicating it does not have its creditors in heart and in most instances delays in remitting payments to them. Financial Stability Financial stability of a firm is assessed by financial stability ratios which gauge the firm’s ability to meet its long-term obligations with just enough capital remaining to function (Gill & Moira, 2000). Financial stability can be divided into two; short-term financial stability or liquidity and long-term financial stability or solvency (Gill & Moira, 2000). 1. Short-Tem Financial Stability Short-term financial stability refers to the liquidity of the firm. Liquidity ratios for Premier Investments Ltd and David Jones Ltd are shown pin the table below.   Premier Investments Ltd David Jones Ltd Change KEY RATIOS 2010 2011 2010 2011 Premier David Jones Current Ratio 4.27 1.74 1.05 1.23 -2.53 0.18 Quick Ratio 3.48 1.40 1.29 1.18 -2.08 -0.11 i. Current Ratio This ratio measures the liquidity of the company in meeting its short-term obligations. Premier Investments have declined in its liquidity position from 4.274 to 1.74 in 201. This could be due to the increase in debtors experienced in 2011 as compared to 2010. David Jones on the other hand has increased its liquidity position by 0.18 from 1.05 in 2010 to 2011. This is due to an increase in the number of assets in the year. ii. Quick Ratio Quick ratio measures the relationship between the firm’s current liabilities and its monetary current assets. Both Premier Investments and David Jones have reduced their debt holding capacity by 0.11 from 3.48 and 1.29 in 2010 to 1.40 and 1.18 in 2011 respectively. David Jones’ quick ratio is lower than Premier Investments’ within the two years indicating a more stable position in handling debts. 2. Long-Term Financial Stability Long-term financial stability refers to the solvency position of the firm. These ratios measure the ability of the firm to survive over a long time period (Gill & Moira, 2000). Solvency ratios for Premier Investments Ltd and David Jones Ltd are shown pin the table below.   Premier Investments Ltd David Jones Ltd Change KEY RATIOS 2010 2011 2010 2011 Premier David Jones Debt Asset Ratio (Total Debt) 15.96% 18.35% 37.72% 35.33% 2.39% -2.39% Debt Equity Ratio (Total Debt) 18.99% 22.47% 60.56% 54.63% 3.48% -5.93% Time Interest Earned (Times) 17.99 8.69 35.21 31.79 -9.30 -3.42 i. Debt Asset Ratio The debt asset ratio of Premier Investment has increased by 2.39% from 15.96% in 2010 to 18.35% in 2011. This increase is attributed to the increase in the number of debtors experienced in the year 2011. The decrease experienced by David Jones is due to the increase in monetary assets in 2011. ii. Debt Equity Ratio The debt equity ratio of Premier Investment has also increased by 3.48% probably due to the increase in the number of assets in the year. David Jones on the other hand has recorded a decrease from 60.56% in 2010 to 54.63% in 2011. This decrease signifies a fall in the shareholders equity due to the amount of debts incurred in the year. iii. Time Interest Earned (TIE) This ratio measures a firm’s ability to meet its debts or honor their payments (Gill & Moira, 2000). A shorter time interest ratio signifies a stronger ability to honor debt payments within the shortest time possible. The two firms, Premier Investment and David Jones both had longer TIE ratio in 2010 of 17.99 and 35.21 respectively, meaning that the most of their assets could not be used in meeting immediate obligations since they were fixed. In 2011, the time interest earned rate declined by 9.30 and 3.42 respectively for both firms; Premier Investments and David Jones. Despite this decline, David Jones TIE still remained high at 31.79 implying a lower ability to pay debts compared to Premier Investments. Limitation of Analysis Ratio analyses are never perfect and cannot be independently relied on in making financial decisions for the firm. Some of the limitations of the ratio analysis carried out on Premier Investments and David Jones include: Lack of an adequate standard or a rule making it impossible to give an exact comment on the basis of the performed ratio analysis, Ratio analysis absorbs the inherent limitations in financial accounting data making them inherent of errors, Ratios ignore inflation effects and therefore cannot give a perfect answer in the ever changing price levels, Ratios can additionally be manipulated through application of acceptable accounting policies like LIFO Ratios just like financial statements reflect historic costs and are irrelevant for economic valuation, There are no universally agreed definitions for the terminologies and formulas used. Conclusion and Recommendation In conclusion the profitability of Premier Investment was high in 2010 as compared to 2011. This shows that the profitability of this company has declined within the span of one year. David Jones Ltd on the other hand has also experienced a decline in its profitability within the two years. Despite this decline in profitability, Premier investment Ltd is more profitable to invest in compared to David Jones. In terms of efficiency, both companies were efficient in paying their debtors and receiving payments from creditors in 2010 as compared to 2011. For a potential creditor who wants to invest in these two companies; David Jones Ltd would be the best option to invest in. in terms of short-term and long-term financial stability, the best company to invest in would be David Jones Ltd given that it appears more stable in meeting its liquidity and solvency obligations. References Bull, R. (2008). Financial ratios: How to use financial ratios to maximize value and success for your business. Burlington, MA: CIMA Publishing. Costales, S. B., & Szurovy, G. (2004). The guide to understanding financial statements. New York, NY: McGraw-Hill. David Jones Ltd. (2011). Annual report 2011. Retrieved from http://www.davidjones.com.au/images/For-Investors/Presentations-and-Reports/2011/annual-report-2011 Gill, J. O., & Chatton, M. (2000). Understanding financial statements: A primer of useful information. Boston, MA: Course Technology. Gitman, L. J., & McDaniel, C. (2009). The future of business: the essentials. Mason, OH: Cengage Learning. Khan, M. Y. (2004). Financial management: Text and problems. New Delhi: Tata McGraw-Hill. Mittak, R. K. (2006). Management accounting and financial management. New Delhi: V. K. Enterprises. Premier Investments Ltd. (2011). Annual report 2011. Retrieved from http://www.premierinvestments.com.au/PDFs/2011%20Annual%20Report.pdf Read More