Myer Holdings Ltd and Harvey Norman Holdings Ltds Financial Analysis - Case Study Example

Executive Summary The financial comparison of Myer Holdings Ltd and Harvey Norman Holdings Ltd shows that Myer Holdings Ltd is better placed than Harvey Norman Holdings Ltd. This will help investors and others in taking important business decisions. The financial analysis shows that both Myer Holdings Ltd and Harvey Norman Holdings Ltd have seen a dip in profits. The analysis shows that Myer Holdings Ltd needs to improve their liquidity position so that investors feel safer of their investment and will impact the performance of the company positively. Harvey Norman Holdings Ltd on the other hand has to look towards improving the manner in which the resources are used and will have to ensure that they reduce their asset base. In addition to it Harvey Norman Holdings Ltd has to review their credit policies and will have to develop ways through which the performance gets enhanced. Working and developing on both the areas will help both Myer Holdings Ltd and Harvey Norman Holdings Ltd to project better performance and will thereby impact the performance of the company positively Table of Contents Introduction 3 Financial Analysis 3 Profitability Ratios 3 Efficiency Ratios 6 Liquidity Ratios 10 Financial Leverage Ratios 11 Recommendations 13 Conclusion 13 Limitations 13 References 15 Appendix 16 Introduction Financial analysis determines the long term and short term prospects of the business as it helps to identify the manner in which the company has performed and provides an opportunity through which the past performance can be compared with others in the market. This helps the user of the financial statement as they are able to draw a relationship between risk and return which thereby helps to find out the required finance through which the business will be able to grow. This report thereby looks to present the financial analysis of Myer Holdings Ltd and Harvey Norman Holdings Ltd which looks to concentrate on the profitability ratio, efficiency ratios, asset utilization and debt situation. Comparing will help to understand which company is performing better and will also help the investors understand the manner in which the different areas through which better performance can be achieved can be monitored. Financial Analysis Financial analysis helps in decision making as based on the past performance and facilitating comparison investors are able to decide the company they are looking to invest. It also determines the future potential as it helps the companies to understand the mindset of the people and helps to find out whether the business will be able to generate the required funds for the future project (Finance, 2011). Decisions which are taken based on the financial performance are more accurate and correct. This thereby helps to establish long term determination of the performance and guides the management as well as the investors to ensure better efficiency in the system. Profitability Ratios This ratio can be considered as the blood of the business as it helps the investors and the management along with other people associated with the company to understand the manner in which the company has performed over the past few years. It also helps to determine the manner in which the business has been able to use its assets and liabilities to generate the required profits and determines the long term viability of the company. A comparison of the profitability of Myer Holdings Ltd and Harvey Norman Holdings Ltd is further presented below Return on Assets (ROA): This ratio identifies the manner in which organizations have been able to use their assets in generating profits. This helps to determine whether the business has been able to use their assets efficiently and generate adequate profits which will help to ensure appropriate use of assets over a longer period of time (Eljelly, 2004). The return highlights that both Myer Holdings Ltd and Harvey Norman Holdings Ltd have seen a dip on their return on assets which has been primarily due to the fact that the profits for the company has decreased. This is a concern as it shows that both the companies haven’t been able to use their assets properly which has resulted in more assets than required. A further comparison between both the companies’ shows that Myer Holdings Ltd is slightly better placed than Harvey Norman Holdings Ltd as the return for Myer Holdings Ltd is better which also highlights that Harvey Norman Holdings Ltd is overburdened with more assets than required. Net Profit Margin: This ratio determines the final profit which the business has earned after deducting all the expenses. This helps to determine the manner in which the business has been able to use its resources and ensure efficiency so that the business is able to generate profits which will ensure that the stakeholders feel safe and ensure that their investments are properly utilized. A comparison of the net profit for Myer Holdings Ltd and Harvey Norman Holdings Ltd is as under The ratio shows that the net profit for both the players has decreased in 2012 which could be true for the entire industry and could be due to external factors. This requires introspecting the factors and finding out a mechanism through which profits can be improved. A comparison suggest that Harvey Norman Holdings Ltd has a higher net profits suggesting that the company has been able to use its resources better and is an area which Myer Holdings Ltd needs to work out so that they are able to stay with competition Gross Profit Margin: This ratio determines the profit which the business has earned after deducting all the direct expenses. This helps to determine the manner in which the business has been able to use its resources and ensure efficiency so that the business is able to generate profits which will ensure that the stakeholders feel safe and ensure that their investments are properly utilized. A comparison of the net profit for Myer Holdings Ltd and Harvey Norman Holdings Ltd is as under The ratio shows that the gross profit for Harvey Norman Holdings Ltd has decreased in 2012 whereas the gross profit for Myer Holdings Ltd has increased which could be true for the entire industry. This requires introspection of the factors and finding out a mechanism through which profits can be improved. Return on Equity (ROE): This ratio identifies the manner in which organizations have been able to use their equity in generating profits. This helps to determine whether the business has been able to use their equity efficiently and generate adequate profits which will help to ensure that the investments made by the stakeholders receive the appropriate reward. The analysis highlights that the return has decreased for both Myer Holdings Ltd and Harvey Norman Holdings Ltd which is a concern. This shows that the business is unable to provide adequate return for the risk that the shareholders have taken and has misused their resources. This makes it important that the management takes some tough decisions which help to improve the profit so that the shareholders are provided adequate return over their investments. Efficiency Ratios This ratio helps to identify the manner in which the business was able to use its resources and ensure that they had the required resources through which better performance was delivered. This ratio helps to identify the different areas which are of concern and prepares the organization to be better placed in ensuring maximum efficiency. The calculation of the efficiency ratio of Myer Holdings Ltd and Harvey Norman Holdings Ltd is as Inventory Turnover Ratio: This ratio identifies the investment which has been made in inventories and helps the business to determine whether they have the adequate inventories or not. This ratio also helps to understand the chances of the inventory becoming obsolete and would result in additional funds to be parked in inventories The ratio highlights that Myer Holdings Ltd is able to revolve its inventories better in comparison to Harvey Norman Holdings Ltd. This will ensure that less investment is made in inventories and will also reduce the chances of the inventory becoming obsolete. Harvey Norman Holdings Ltd on the other hand needs to develop strategies through which better control is exercised over inventories and the business is able to manage its investments in this direction in the most efficient manner Receivable Turnover Ratio: This ratio identifies the manner in which the company is able to recover the dues from the market and helps to understand the chances of a business facing some bad debts (Lyroudi & Lazaridis, 2000). This helps to understand the credit management policies and helps to ensure that the business gains efficiency in managing its liquidity. The ratio is a concern for Harvey Norman Holdings Ltd as they nearly take a year to recover its money which makes the company provide excess credit in the market. This also increases the chances of some money becoming bad debts and is a major concern which could impact the performance of the company drastically. Myer Holdings Ltd sells most of their products on cash which has thereby ensured little or no debt in the market and will ensure that the business requires little finance or money to finance their business as the company is cash driven. Asset Turnover Ratio: This ratio determines the investment which has been done in assets and helps to determine the appropriate mix which will help the business to ensure that they have the required assets through which the normal operations of the business can be carried out. The ratio shows that Myer Holdings Ltd has a better ratio and is able to revolve its assets more than once in a year. This shows that they are able to gain efficiency and will be able to measure better performance. Harvey Norman Holdings Ltd on the other hand will have to work towards improving its assets base as they have more assets than required which has resulted in additional finance being made in assets which could have been elsewhere to improve the performance of the company Payable Turnover Ratio: This ratio identifies the manner in which the company is able to pays its dues in the market and helps to understand the reputation regarding the credit policies (Lyroudi & Lazaridis, 2000). This helps to understand the credit management policies and helps to ensure that the business gains efficiency in managing its liquidity. The ratio is a concern for Harvey Norman Holdings Ltd as they nearly take a year to pay its dues which makes the company spoil its image in relation to the payment being made to the creditors. This also increases the chances of some creditors will stop doing business with the company and is an area of concern which has to be addressed. Myer Holdings Ltd on the other hand pays its dues within 2 months which is a good sign and shows that the company has developed its credit management policies in such a manner that the brand name doesn’t gets affected and the business is able to garner maximum efficiency. Liquidity Ratios This ratio helps to understand the manner in which the business is able to manage its finance and helps to understand both the short and long term liquidity position. A sound financial business also helps to ensure that the business has adequate cash flows and is able to manage its resources in a manner which will ensure growth and help to develop a structure where the business is able to get the financial requirements in the future easily. Current Ratio: This ratio helps the investor to understand the safety of their funds over a short period of time and helps to find out the manner in which liquidity is maintained (Filbeck & Krueger, 2005). While calculating this ratio inventories are included along with other assets that can be converted into liquid cash at a short duration. The ratio shows that Harvey Norman Holdings Ltd has a better ratio compared to Myer Holdings Ltd and highlights that the organization has sufficient liquidity and will be able to meet their daily expenses easily. Myer Holdings Ltd has to improve their ratio drastically as the company is not in a position to pay its short term debts immediately (Gandy, 2011). This also highlights that the liquidity position for Myer Holdings Ltd is very dicey and requires a look into so that better liquidity position can be highlighted Quick Ratio: This ratio also helps to understand the short term liquidity position of the business and looks towards ascertaining the short term liquidity after removing the inventories as inventories take time to be converted into cash (Deloof, 2003). The ratio shows that both Myer Holdings Ltd and Harvey Norman Holdings Ltd have huge inventories and the content of inventory is higher in case of Myer Holdings Ltd. The liquidity position of Harvey Norman Holdings Ltd is sound even after removing the inventories but is a worry for Myer Holdings Ltd as the company is in no position to meet its short term obligations from the short term assets. This will make it difficult for the company to raise the required finance and is an area of prime importance which has to be improved. Financial Leverage Ratios This ratio has its importance for the investors as it helps to find out the financial soundness of the business both in the short and long period of time. This ratio also helps to understand the debt and equity content and helps to understand the manner in which future decisions regarding investments will be determined. This ratio also ensures that the business is able to find out the areas through which the required finance will be raised and helps to improve the financial position. The comparison of the financial ratios for Myer Holdings Ltd and Harvey Norman Holdings Ltd is as under Debt Asset Ratio: This ratio helps to understand the amount of debt the business has in relation to its total assets. This ratio thereby helps to understand the manner in which the business will be able to get finance in the future and will help to understand the financial strength of the business (Antony, 2004). The ratio shows Myer Holdings Ltd has more debts than assets as compared to Harvey Norman Holdings Ltd. Despite difference in the holding of both debt and assets the ratios shows that both the company are well placed and can look towards improving it further which will provide the required edge and provide an opportunity through which both Myer Holdings Ltd and Harvey Norman Holdings Ltd are able to consolidate their position. Debt Equity Ratio: This ratio is used by investors, analyst and others associated with the company to gauge the earnings that they will receive on their shares. This thereby helps the business to garner more investment and provides an avenue to generate finance for the future. The ratio highlights that Myer Holdings Ltd has more debt that assets which would make it difficult for the company to be able to pay off its debts through assets in case of liquidation. Harvey Norman Holdings Ltd on the other hand has little debt and more assets signifying that the company is heavily laden with assets and needs to look towards reducing the assets base which will further help to improve liquidity and ensure more opportunities to finance new projects. Recommendations A comparison of the financial performance of Myer Holdings Ltd and Harvey Norman Holdings Ltd shows one company is placed better on one parameter and the other on another (Saleem & Rehman, 2011). The overall analysis shows that Myer Holdings Ltd is performing better than Harvey Norman Holdings Ltd and requires working on certain aspect like the liquidity ratio so that better performance can be projected. Harvey Norman Holdings Ltd on the other hand has to look towards working on their resources and has to look towards reducing their asset base. In addition to it both Myer Holdings Ltd and Harvey Norman Holdings Ltd have to improve their profits and cut down cost especially the indirect cost as it is affecting the business drastically. Conclusion The report thereby presents the comparison of the financial performance of Myer Holdings Ltd and Harvey Norman Holdings Ltd and shows the different areas which has been identified as important by both the company. It shows that Myer Holdings Ltd is slightly better placed than Harvey Norman Holdings Ltd and working on certain areas like liquidity will further help to enhance their performance. Harvey Norman Holdings Ltd on the other hand has to look towards ensuring that the resources are used in a better way and will help to devise a mechanism through which better performance is projected. Limitations The report looks into the working style of Myer Holdings Ltd and Harvey Norman Holdings Ltd but is limited to the fact that past historical data is used. In addition to it no changes in prices have been considered due to inflation which could have resulted in the performance to be somewhat different. Also the analysis doesn’t look to compare with the industry which would have presented the performance better and would have highlighted the manner in which the companies performed in comparison to the industry. Despite, the limitation the report presents the financial analysis by looking into the figures helps to understand the manner in which the performance is getting shaped up and provides the required direction for the future. 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 December 19, 2012 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 December 19, 2012 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 Appendix Ratio Calculation of International Myer Holding Ltd & Harvey Normal Holdings Ltd Read More