Accounting for Decision Making Operations - Essay Example

Accounting for decision making Name: Lecturer: Course name: Course code: Date: Executive Summary Fantastic Holdings Ltd. (FAN) and Super Retail Group Ltd. (SUL) are Australian based companies which trade under the Australian Stock Exchange. Fantastic Holdings Ltd. (FAN) Ltd is Australian leading industry dealing with manufacturing and retailing furniture while Super Retail Group Ltd. (SUL)is an auto garaged company which is engaged in auto retailing t equipments and accessories. Fantastic Holdings Ltd. (FAN) Ltd and Super Retail Group Ltd. (SUL) are obliged to keep their books of accounts in compliance with the Australian Accounting Standards Board AASB. The companies analyze the financial statements according to the profitability ratios, efficiency ratios and the leverage or the company stability ratio. The two company’s financial reports illustrate the unification in their consolidated financial accounting statements based on financial ratios. The financial ratios enhance the understanding of the investors in making viable decisions regarding to investment. Profitability ratios portray the company’s profit margin; the stability enhances communication. The details of these rations are discussed in detail below. Table of Contents Executive Summary 1 Table of Contents 2 Introduction 3 SUPER RETAIL GROUP LIMITED (SUL) 3 FANTASTIC HOLDINGS LIMITED (FAN) 3 Profitability ratios signify the firm’s effective measures on commotion of returns generated on the sales. Profitability ratios enhances the gross profit margin that measures the firms gross profit earned on the total sales that shows the affectivity of the firm’s assets in engenders income (International, 2007). The firm’s operating profit margin that measures the firm’s earnings before interest and tax expense. Net profit margin ratio takes into account the expenses incurred to earn the profit. 4 1.1 Gross profit margin 4 1.2 Net profit margin (after tax) 5 1.3 Return on assets (ROA) 5 1.4 Return on equity (ROE) 6 2.0 Efficiency Ratios 7 2.1 Current Ratio 7 2.2 Debtors Turnover Ratio 8 2.3 Asset turnover ratio 8 2.4 Creditors turnover 9 3.0 Stability Ratios 10 3.1 Debt to Equity Ratio 10 3.2 Times Interest Earned 11 4.0 Limitations 11 5.0 Conclusion and Recommendations 12 Appendix 13 FAN Holdings and SUL Limited Ratios 13 Reference List 14 Introduction SUPER RETAIL GROUP LIMITED (SUL) Super Retail Group Limited (SUL) is a retailer company based in Australia and runs several retail branches across Australian precincts. The company operates the prime retail divisions which are Auto and Cycling, Sports and Leisure. Also SUL retail its branches in New Zealand and engages internationally in its operations and sourcing both in Asia and India. The Company also has mattress manufacturing facilities operating as a supply chain to service all its retail brands. FANTASTIC HOLDINGS LIMITED (FAN) Fantastic Holdings Limited is based in Sydney, Australia. It deals in manufacturing, retailing and importing of household furniture. FAN’s range of furniture include sofas, dining, bedroom, entertainment furniture and occasional furniture, , floor coverings, home theatre systems and different types of mattresses. FAN markets its products under the fantastic furniture, plush, original mattress factory, le Cornu, and dare gallery brands. The company runs 133 retail stores that enable the firm outsourcing peculiarities. Fantastic Holdings reported NPAT up 2.2% to $13.45m for the half-year ended 31 December 2012. 1.0 Profitability Ratios Profitability ratios signify the firm’s effective measures on commotion of returns generated on the sales. Profitability ratios enhances the gross profit margin that measures the firms gross profit earned on the total sales that shows the affectivity of the firm’s assets in engenders income (International, 2007). The firm’s operating profit margin that measures the firm’s earnings before interest and tax expense. Net profit margin ratio takes into account the expenses incurred to earn the profit. 1.1 Gross profit margin The gross profit margin compares an entity’s gross profit to its sales revenue, reflecting the proportion of sales revenue that ends up as gross profit. As shown in the financial statements, the gross profit margin for Fantastic Holding Ltd in first two years ameliorated, with $1 of net sales revenue in 2011 resulting to an increase from 47.47% to 48.18%. The positive trend illustrates that Fantastic Holding Ltd efficiency of manufacturing and distribution of the production processes (Michael Berrington, 2012). Super Retail Group Ltd shows a decline of the Gross profit margin form 45.25% to 43.92%. This is an indication that the company is not efficiently controlling its cost of production. The production cost rose significantly in the year 2012 as compared to the year 2011. 1.2 Net profit margin (after tax) Net profit Margin An entity must meet all other expenses from its gross profit. The comparison of sales revenue and EBIT is referred to as the profit margin. As it is shown in the table above, the profit margins of Fantastic Holdings Ltd shows a rise in total increase of from 4.46% 2012 in to 4.71% in 2011 (Mills., 2006). The expenses are decreasing simultaneously hence high profitability ratio. While in Super Retail Group, net profit margin decreases from 5.09% in 2011 to 5.05% in 2012. This denotes an increase of the expenses as compared to sales revenue. The efficiency of the company is revealed in the firm’s ability in meeting its financial obligation by converting its sales in to actual profits. 1.3 Return on assets (ROA) The return on assets is a profitability ratio that compares an entity’s profits to the assets available to generate the profits. ROA ratio is used to determine the percentage of profit that a company gets out of its total assets (Paul D. Kimmel, 2008). It demonstrates that the previous two years in Fantastic Holding Ltd and Super Retail Group’s Ltd The rising trend of Fantastic Holdings ROA ratio from 12.08% in 2011 to 12.18% in 2012 indicates the firm’s efficiency in utilizing the assets in generating more profits. On the other hand Super Retail Group’s Ltd return on assets ratio shows a decline from 11.06% in 2011 to 7.15% in 2012. This shows inefficiency of the management in utilizing the company assets in generating profits. 1.4 Return on equity (ROE) Owners are interested in the return that the entity is generating for them. Return on equity (ROE) is the test of an entity’s performance (Loren A. Nikolai, 2011). The return on equity, expressed as a percentage, is computed by relating the profit that the entity has generated for its shareholders contribution during the period to the owners’ investments in the entity. Fantastic Holdings Ltd ROE decreased from 19.30% in 2011 to 19.26% in 2012. This decrease discloses that the company’s profits are low in relation to the shareholders contribution. While the Super Retail Group with its ROE dropping from 18.31% in 2011 to 12.14% in 2012. However this shows the firms inefficiency in utilizing the shareholders contributions in generating more profits. 2.0 Efficiency Ratios Efficiency ratios measure the efficacy of the firm’s management in making decisions concerning investments such as turnover and return on investment. Efficiency ratio involves; inventory turnover, Sales to receivable ratio current ratios. 2.1 Current Ratio Current ratio indicates the dollars of current assets the entity has per dollar of current liabilities. It reveals efficiency of a company’s cycle of operation to turn its products to cash. It also measures the company liquidity (Michael Berrington, 2012). Fantastic Holdings current ratio plummets from1.75 in 2012 to 1.96 in 2011. This reveals that the company is efficiency in meeting its financial obligation in the next 12 months even if the ratio simultaneously decreases in 2012. Super Retail Group current ratio in 2011 was 2.34 and it decreased to 2.17 in 2012. The decreasing trend of the current ratio indicates the company can meet its financial obligations comfortably in the next financial years. It also reveals that the company is efficiency and liquidity in it profitability cycle. 2.2 Debtors Turnover Ratio Days debtors indicate the average period of time it takes for a company to collect the money for the trade debtors. In this part, two companies have a similar situation, they both has a decrease from 2011 to 2012. Fantastic Holdings debtors’ turnover ratio in 2011 was 2.61 days and reduced to 2.31 days in 2012.While in Super Retail Group because in 2011 turnover period was 4.31 day and it reduced in 2012 to 3.93. This is an indication that that the company did not improve in efficiency of collecting cash balances from its debtors (Plessis, 2010). The two companies’ should design a way of reducing its efficiency if collection of the debt from the companies’ debtors. 2.3 Asset turnover ratio The asset turnover ratio indicates a company’s overall efficiency in generating income per dollar of investments in assets. And it’s very useful to access management’s efficiency in managing the assets and this is done by calculating the entity’s inventory and debtor’s turnover. According to the ratios of the financial statements, the asset turnover ratio reduces for both the companies from 2011 to 2012 (Narayanaswamy, 2010).Fantastic Holdings Ltd asset turnover reduces from 2.6 to 2.6 from the 2011 to 2012. This indicates that the company should use their assets efficiently or either disposes idle assets so that it maintains a high asset turnover. Super Retail Group asset turnover ratio reduced from 1.9 in 2011 to 1.19 in 2012. This means the two companies should dispose the idle assets and management should considerably ensure assets are efficiently utilized. 2.4 Creditors turnover This ratio indicates the time period that the business takes in paying the creditors’. The Creditor’s turnover period is premeditated by dividing credit purchases by average trade creditors. For company’s efficiency (Michael Berrington, 2012), the firm should have long creditor’s turnover as compared to the debtor’s turnover period. Fantastic Holdings creditors’ turnover in 2011 was 25.28 days which reduced to 21.71 days in 2012. This reflects inefficiency of the firm since its cash collected are utilize to pay creditors before being invested for more profits. Super Retail Group is paying their creditors on time. In 2011 the creditor’s turnover was 40.89 days which increased to 43.67 days in 2012. This is an indication that they are improving on their credit worthiness by utilizing the amount before paying its creditors. 3.0 Stability Ratios Stability financial ratios define the state of the company’s state of financial solvency. It explains the chances of a company not in a position to settle financial obligations (Loren A. Nikolai, 2011). These ratios facilitate the alarming state of closure of the company. The stability ratios analyzed below include debt to equity ratio and times interest earned. 3.1 Debt to Equity Ratio Debt to equity ratio indicates how many dollars of debt exist per dollar of equity financing. If this ratio exceeded 100 per cent, then the entity was more reliant on debt funding than equity funding. It shows the percentage of assets that are financed by debt in relation to equity from the table; it shows that from the financial year 2011 to 2012 Fantastic Holdings debt ratio increases for 17.88 in2011to 18.24 in 2012 (Clarke, 2012). The increase in this ratio with that margin is healthy. The increase in profits in 2012 might have been due to employment of debt in financing its operations. Super Retail Group in 2011 had its debt to equity ratio at 32.66 which rose to 56.33 in 2012. This increase is not healthy because the company indicate that the company has highly financed its activities with debt hence will incur a lot of interest expenses to finance debt hence reducing profits. . 3.2 Times Interest Earned This ratio measures financial risk. The arbitrary figure this ratio should not be below 3 times. A ratio less than 1 suggests that an entity’s net finance expense exceeds its EBIT, and then the entity will at risk. Fantastic Holdings in 2011 had its times interest earned at 30.06 which considerably rose by 2.5 times to 80.95 in 2012 (Australia), 2012). This shows that the company’s stability is firm, and they pay its debts and interests promptly. While Super Retail Group had its times interest earned at 8.85 times in 2011 which reduced in 2012 to 6.83 times. This shows that the company’s stability is diminishes and it is evident that, the company is not able to settle its financial obligation. 4.0 Limitations i. Financial ratios only deal financial figures but does not address the significant aspects of the business that determination of the state of the company affairs apart from the financial digits. These imperative issues include quality customer service relations, quality nature of products, and employee motivation factors in the entity. Financial ratios probably mislead the company’s decision making since it does not observe the factors other than figures in making viable firm decisions. ii. Financial figures are subject to management manipulation to please the shareholders. The firm decision based on the ratios will be mostly misleading. iii. For financial ratios to be more meaningful a wide range of performance should be compared over a long period of time. This makes the use of ratios complex and tedious since most of the information can be adversely found. iv. Financial ratios base on the past information hence assumption is used in analysis. Thus the ratios might not meet the companies real image 5.0 Conclusion and Recommendations From the analysis made above, a potential investor should invest in Fantastic Holdings Ltd apart from the Super Retail Group Ltd. The Fantastic Holdings Ltd is progressively improving its profitability ratios from the year 2011 to 2012 financial periods. The company is moreover efficient in the debtor’s turnover; assets turnover and creditor’s turnover show the stability of going concern of the company. The entity has increased sales, great profitability and efficiency, which is a good choice for investors. Currently, , Fantastic Holdings Ltd has good liquidity, but it still need to increase more cash flows from operating activities in the future for achieving a higher level obligation. Also, to be more competitive, the company should expand its equity funding. Additionally, the market performance analysis envisages, Fantastic Holdings Ltd is moving in the right and positive direction. Appendix FAN Holdings and SUL Limited Ratios Reference List Australia), I., 2012. Chartered Accountants Financial Reporting Handbook 2012, Google eBook. John Wiley & Sons. Clarke, E.A., 2012. Accounting: An Introduction to Principles and Practice. Cengage Learning. p.12. International, N., 2007. The international handbook of financial reporting. Cengage Learning EMEA. p.32. Loren A. Nikolai, J.B.M.K.G.S.S.S., 2011. Accounting: Information for Business Decisions. Cengage Learning. pp.287-98. Michael Berrington, V.B., 2012. Pinnacle Financial Statements. IFRS SYSTEM. pp.42-46. Mills., D., 2006. Introductory Accounting Incorporating Accounting Principles and Practice. UNSW Press. Narayanaswamy, R., 2010. Financial Accounting: A Managerial Perspective 3Rd Ed. Wisley & Sons. p.385. Paul D. Kimmel, J.J.W.D.E.K., 2008. Accounting: tools for business decision making. John Wiley & Sons. p.452. Plessis, J.J.d., 2010. Principles of Contemporary Corporate Governance. Cambridge university press. p.237. Read More