Financial Performance of Myer Holdings Ltd and Harvey Norman Holdings Ltd - Case Study Example

Executive Summary A comparison of the financial performance of Myer Holdings Ltd and Harvey Norman Holdings Ltd highlights that Myer Holdings Ltd is slightly better placed on certain parameters as compared to Harvey Norman Holdings Ltd. Investors based on the financial information can decide the company to invest as both the companies i.e. Myer Holdings Ltd and Harvey Norman Holdings Ltd have witnessed a decrease in profits. The liquidity position highlights that Harvey Norman Holdings Ltd has been able to maintain proper liquidity by having better short term assets as compared to short term liabilities. Both the companies also have to devise strategies to improve the manner in which the resources are being used and have to focus on improving the use of assets. Harvey Norman Holdings Ltd also has to look towards developing its credit policies and have to find out the different areas which have to be improved so that the overall performance further improves. Despite the different parameters highlighting different performance standards it is seen that both the company has to work on different areas to be able to make the company more lucrative and attract investors towards it. 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 figures don’t provide any information if looked at a stand alone basis but when the financials of the company is interpreted and different ratios calculated helps to understand the manner in which the business has progressed had till date. This helps to compare the performance from the past and based on it develop a direction which helps to identify the manner in which the business might perform in the future. This thereby ensures that a relationship is developed between the risk and return for investors based on which useful business decisions can be taken. This report thereby looks towards analyzing the financial performance of Myer Holdings Ltd and Harvey Norman Holdings Ltd by comparing the different ratios based on profitability ratio, efficiency ratios, asset utilization and debt situation. This acts as a mechanism through which the past performance is measured and based on it useful decisions can be taken by the investors, shareholders, creditors, suppliers and others associated with the business. Financial Analysis Financial comparison is of prime importance for all organizations as it helps to find out the manner and situation where different decisions were taken and based on it the manner in which the company was able to perform. The fact that financial analysis helps in comparison both from the previous years, different companies and the industry it helps to gauge the exact performance and provides useful direction based on which better decisions can be taken (Finance, 2011). This thereby helps to identify the manner in which the business was able to use the funds and provides the different parameters and guidance through which the performance can be measured and the actual situation can be brought forward. The comparison of the financial performance of Myer Holdings Ltd and Harvey Norman Holdings Ltd is thereby as below Profitability Ratios Profitability ratios determine the past performance as it helps to identify the manner in which the business through the use of the different resources has been able to generate profits. This helps to find out whether the loans or other investment which were directed in the business have been used correctly and helps the investors to find out the manner in which overall effectiveness was achieved. This ratio throws light on the assets and liabilities usage in generating profits and determines the manner in which the different policies were implemented. The ratios for Myer Holdings Ltd and Harvey Norman Holdings Ltd are as Return on Assets (ROA): This ratio shows the manner in which the different assets i.e. both short and long term were used to generate profits. It helps to understand the efficiency through which the business was able to use its assets to ensure that the bottom line grows and helps to understand the strategy through which the different assets were use over a long period of time (Eljelly, 2004). The comparison shows that there has been a dip on the return on assets for both Myer Holdings Ltd and Harvey Norman Holdings Ltd. This highlights that both the company has been unable to use their assets properly which is either due to the fact that the assets base have grown or the profits have decreased. Comparing the two companies’ further shows that Myer Holdings Ltd has performed better than Harvey Norman Holdings Ltd but the gap is little and requires attention of the management to look towards improving the use of assets in generating profits and ensuring better returns for the stakeholders. Net Profit Margin: This ratio helps to understand the final profits which is attributed to the shareholders and is calculated after removing all the expenses. This ratio has its importance for the stakeholders as they are able to find out the manner in which the business was able to compensate them through profits and ensure that the returns are taken care of. This will also help to find out whether the shareholders feel safe about their investment and return which thereby ensures that the long term prospect of the business is considered. The ratios are as The comparison shows that that there has been a dip on the profits for both Myer Holdings Ltd and Harvey Norman Holdings Ltd. This highlights that both the company has been unable to generate the required profits which will ensure that the risk element of the stakeholders are considered. Comparing the two companies’ further shows that Harvey Norman Holdings Ltd has performed better than Myer Holdings Ltd but the gap is little and requires attention of the management to look towards cutting down cost so that the business is able to generate better profits. Gross Profit Margin: This ratio helps to understand the profits which is attributed to the manufacturing units and is calculated after removing all the direct expenses. This ratio has its importance as it helps to find out the direct cost and helps in useful determination of the price of the product and helps to understand the contribution of direct and indirect cost for a product. The ratios are as The comparison shows that that there has been a dip on the profits of Harvey Norman Holdings Ltd but Myer Holdings Ltd have improved it slightly. A comparison with the net profits further highlights that both the company has been unable to generate the required profits due to very high indirect cost which is more for Myer Holdings Ltd as compared to Harvey Norman Holdings Ltd. This further requires looking into the different factors so that better identification of the different factors which have contributed towards the profit can be understood. Return on Equity (ROE): This ratio shows the manner in which the organization has been able to generate profits through the use of assets. This helps to understand whether the business has been able to compensate the equity shareholders properly and has a role in determining the risk and return based on which the business will be able to ensure that the shareholders are happy with the manner the company has performed. The comparison shows that that there has been a dip on the return for both Myer Holdings Ltd and Harvey Norman Holdings Ltd. This highlights that both the company has been unable to generate the required profits which will ensure that the risk element of the shareholders are considered. This requires that both the company looks towards formulating strategies through which better return are estimated and the shareholders feel that their investment are used properly. Efficiency Ratios Efficiency ratios highlight the efficiency in which the business is able to use its resources in generating adequate return and ensuring better performance. This ratio has its importance as it helps the management to take important decisions pertaining to the resources and also helps to determine the assets which has to be purchased or sold off in the near future and thereby determines the manner in which the business has to look into. The comparison of the ratios for Myer Holdings Ltd and Harvey Norman Holdings Ltd is as Inventory Turnover Ratio: This ratio identifies the amount of money which the company has invested in inventories. This helps the management take important decisions pertaining to the manner in which the inventories have been purchased and helps to find out the different directions in which the finance of the business has been invested Comparing the ratios shows that Myer Holdings Ltd has a better ratio showing that they are able to revolve inventories better when compared to Harvey Norman Holdings Ltd. This also reduces the chances of the investment made in inventories to become obsolete and will help to ensure that better policies can be developed which will ensure the use of different techniques in managing inventories. Harvey Norman Holdings Ltd has to look into the issue and has to look towards bringing down the investment which has been made in this direction to ensure opportunities of growth in the future. Receivable Turnover Ratio: This ratio identifies the amount of money which the company has to collect from the market. This helps the management take important decisions pertaining to the manner in which the debtors have to be dealt with and helps to find out the different credit management policies which the business has to consider for the long term prospect of the business and to ensure proper liquidity (Lyroudi & Lazaridis, 2000). Comparing the ratios shows that Myer Holdings Ltd has a better ratio showing that they are able to revolve debtors better when compared to Harvey Norman Holdings Ltd. This also reduces the chances of bad debts as the company looks towards a policy of cash where the entire money is nearly collected on cash whereas Harvey Norman Holdings Ltd has to look into the issue and has to look towards bringing down the debtors which has been made in this direction to ensure opportunities of growth in the future as the chances of bad debts are high and the business looks to collect the money within a year showing improper credit management policies. Asset Turnover Ratio: This ratio identifies the amount of money which the company has invested in assets to generate the present revenues. This helps the management take important decisions pertaining to the manner in which the assets have to be dealt with and helps to take steps in the manner the different assets of the business will be managed Comparing the ratios shows that Myer Holdings Ltd has a better ratio showing that they are able to revolve assets better when compared to Harvey Norman Holdings Ltd. This also reduces the chances of the investment made in assets to be very high and will provide an opportunity to manage the asset structure properly and ensure that the business has adequate assets as required. Harvey Norman Holdings Ltd has to look into the issue and has to look towards bringing down the investment which has been made in this direction to ensure opportunities of growth in the future. Payable Turnover Ratio: This ratio identifies the amount of money which the company has to pay in the market. This helps the management take important decisions pertaining to the manner in which the creditors have to be dealt with and helps to find out the different credit management policies which the business has to consider for the long term prospect of the business and to ensure proper liquidity (Lyroudi & Lazaridis, 2000). Comparing the ratios shows that Myer Holdings Ltd has a better ratio showing that they are able to revolve creditors better when compared to Harvey Norman Holdings Ltd. This will help to ensure that a better brand image is developed as Myer Holdings Ltd pays its due in the market within 2 months whereas Harvey Norman Holdings Ltd takes nearly a year. Further it is seen that both the companies collects money from the market and then pays its dues in the market and needs to ensure better strategies through which the brand name improves. Liquidity Ratios This ratio throws light on the liquidity position and helps to understand the manner in which the business was able to ensure liquidity in the business both in the short and long run. This ratio is important as it helps to understand the safety of the investment along with the potential of the business to pay the interest or dividend on the investment and the final assured money when it becomes due. This will thereby help to determine the future funding ability of the business and will help to generate long term growth opportunities for the business. Current Ratio: This ratio identifies the manner in which the business is able to cover its short term liabilities out of its short term assets. This ratio helps to understand the liquidity position in the short run and helps to ensure that the business doesn’t gets trapped into a position where they are unable to ensure liquidity (Filbeck & Krueger, 2005). The ratios are as Comparing the ratios shows that Harvey Norman Holdings Ltd has a better ratio showing that they have a better liquidity position in the short run when compared to Harvey Norman Holdings Ltd. This will help to ensure that the company will be able to pay its short term liabilities easily. Myer Holdings Ltd has to work on this aspect as its short term liquidity position shows a likely chance of falling into a liquidity trap and will require working on this area (Gandy, 2011). Quick Ratio: This ratio identifies the manner in which the business is able to cover its short term liabilities out of its short term assets after removing inventories. This ratio helps to understand the liquidity position in the short run and helps to ensure that the business doesn’t gets trapped into a position where they are unable to ensure liquidity (Deloof, 2003). The ratios are as Comparing the ratios shows that Harvey Norman Holdings Ltd has a better ratio showing that they have a better liquidity position in the short run when compared to Harvey Norman Holdings Ltd. Both the companies have huge inventories which might be true for the entire industry but will require that steps are taken to reduce it so that the investments which have been made in this area can be diverted elsewhere and the business is able to gain better productivity. Financial Leverage Ratios This ratio catches the interest of the investors as it helps to look into the financial soundness and helps the investors to find out the manner in which the funds that has been invested is safe. Based on the different outcomes the decisions regarding future investments are taken and acts as a guide through which better understanding of the financial performance of the company can be understood. The different ratios for Myer Holdings Ltd and Harvey Norman Holdings Ltd is as under Debt Asset Ratio: This ratio identifies the debt component that the business has and helps to understand the future potential of the business to raise additional finance through the use of different sources (Antony, 2004) Comparing the ratios shows that Myer Holdings has a higher debt component showing that they have an increased concentration of outside funds as compared to equity in comparison to Harvey Norman Holdings Ltd. Both the companies have looked at different methods to finance the business and shows efficiency in being able to manage their finances. Debt Equity Ratio: This ratio identifies the debt component that the business has and helps to understand the future potential of the business to raise additional finance through the use of different sources Comparing the ratios shows that Myer Holdings has a higher debt component than assets which shows that they will be able tp pay off their debt easily in comparison to Harvey Norman Holdings Ltd. Both the companies have looked at different methods to finance the business and shows efficiency in being able to manage their finances. . Recommendations The comparison of both Myer Holdings Ltd and Harvey Norman Holdings Ltd highlights that one company is working nice on one parameter and the other on another (Saleem & Rehman, 2011). A more minute comparison shows that Myer Holdings Ltd is slightly better placed than Harvey Norman Holdings Ltd and requires working on smaller aspects like liquidity to be able to reflect a better picture. Both the companies need to look towards reducing the inventories and controlling the manner in which the assets are being used for better development of the policies. They also require controlling the indirect cost and looking towards controlling and taking better decisions so that the companies are able to project better performance in the future. Conclusion The financial comparison of Myer Holdings Ltd and Harvey Norman Holdings Ltd as shown in the report presents the different areas where the companies have performed and bring forward the concern areas which have to be worked on. The overall situation shows that Myer Holdings Ltd is slightly better placed than Harvey Norman Holdings Ltd and requires working on smaller aspects like liquidity to be able to reflect a better picture. Both the companies by working on smaller aspects will be able to improve the performance and ensure better returns for the stakeholders. Limitations The report is limited to the fact that it doesn’t consider the changes in prices which could have resulted in the financial performance of the company to be different. In addition to it the inflation rate and the use of technology hasn’t been considered. Considering the factors and the manner the environmental factors have changed will help to make better understanding and help to understand the performance of the company better as the different relevant areas and their effect on the business will be better considered. 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 January 11, 2013 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 January 11, 2013 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