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ACC10707 Accounting And Finance For Business

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  • Course Code: ACC10707
  • University: Southern Cross University
  • Country: Australia

Question:

Business Analysis and Interpretation.

You are required to calculate key financial ratios for an ASX listed company and its competitor and interpret this information in the context of your allocated competitor company over time. You will be allocated two ASX listed companies to study for this assessment.

Imagine you work for the FIRST of these companies. The second is one of your company’s competitor.

Your boss has asked you to calculate and assess the company’s key (your boss’s opinion) ratios relative to that of its competitor and provide recommendations for improvement if required.

The key ratios you need to calculate for your company and your competitor are net profit margin, asset turnover, current ratio, quick ratio and debt ratio. Your boss also wants you to calculate the cash cycles. All workings for ratios and the cash cycles are required.

You focus your analysis on the companies’ 2016, 2017 and 2018 ratios mentioned above firstly in terms of their trend changes and also in comparison to your competitors ratios and benchmarks wherever possible.

In making your assessment consider potential differences between your company and its competitor that could explain divergent results. Where relevant, these should be noted. (For example, although the companies may compete in some of the same markets, they may also have different areas of business).

 

Answer:

Introduction 

The aim of the report is to compare the financial performance of A.P. Eagers Limited (APE) Ltd and comparing it with its competitor Automotive Holdings Group Limited (AHG) Ltd. Performance of the companies will be compared through computing various ratios like net profit margin, debt ratio, current and quick ratio, assets turnover and cash cycles. A.P. Eagers is the oldest automotive retail group listed in Australia. Major activities of the company includes sale and distribution of the accessories, parts, servicing and repair of vehicles, car care products, provision of the extended warranties, leasing of motor vehicles and ownership of the investments and properties (AP Eagers 2019). On the other hand, its competitor Automotive Holdings Group Limited is engaged in automotive logistics and retail businesses. It offers passenger vehicles from various brands that include Bentley, Audi, Chrysler, Fiat, Holden, Ford, Honda, Kia, Hyundai, Mazda, Mitsubishi, Porsche and others (Ahgir.com.au 2019).

 

Discussion: Ratio analysis

Once the financial statement of any entity is prepared it needs to be analyzed through using various tools like ratio analysis. It assists the shareholders in making better decisions with better sense of the accounts and better understanding of the company’s fiscal position (Damodaran 2016).  Various ratios conducted for comparing the performance APE Ltd with its competitor AHG Ltd of and their interpretations are as follows –

  • Net profit margin – it is the profitability ratio used for measuring the percentage of profit generated by an entity from its sales revenues. It computes the net profit amount obtained by it from each dollar of revenue generated. Net profit margin is calculated through dividing the net profit after tax but before abnormal by the amount of sales revenues (Ehrhardt and Brigham 2016). From the calculation table it can be identified that for APE Ltd there is no specific trend for net profit margin as the net profit is increased from 2.68% to 2.75% during the period from 2015 to 2016 and again reduced to 2.42% during 2017. On the other hand, for AHG Ltd it can be identified that the net profit margin for the company is in reducing trend and from 1.72% in 2016 it reduced to 0.58% in 2018. Hence, if both the companies are compared it can be stated that in context of net profit margin APE Ltd is in better position as compared to AHG Ltd.
  • Asset turnover – being an efficiency ratio asset turnover ratio is used to measure the efficiency of the organization regarding generation of sales from the assets through comparing its net sales with the average total assets. For instance, asset turnover of 1 signifies that the net sales of the company are equal to the average assets. It is calculated through dividing the net sales of the company by the average total assets. Though the benchmark for better asset turnover ratio varies with the type of industry in which the entity is operating, higher ratio is considered better. From the calculation table it can be identified that for APE Ltd there is no specific trend for asset turnover ratio as the ratio is increased from 2.28 to 2.36 during the period from 2015 to 2016 and again reduced to 2.27 during 2017 (Collier 2015). On the other hand, for AHG Ltd it can be identified that the net profit margin for the company is in reducing trend and from 2.71 in 2016 it reduced to 2.58 in 2018. Hence, both the company’s asset turnover ratio is stable. However, AGH Limited is slightly better as compared to APE Limited.
  • Current ratio – current ratio is one of the major liquidity ratio used for measuring the liquidity position of the entity that is the ability to pay off the short term obligations with the short term assets available with it. To be more specific the current ratio is focussed on the solvency of business. If the business finds it difficult to meet its debt obligation when they become due it will probably heads towards insolvency (Amran and Aripin 2015). It is calculated through dividing the current assets by the current liabilities. Generally the current ratio ranging between 1.0 and 3.0 is considered good for the business that indicates that the business has sufficient liquid assets to pay off the debts. Looking into the calculation table it can be identified that current ratio of APE Ltd were in reducing and the ratio is reduced from 1.29 to 1.11 over the period from 2015 to 2017 (Greco, Figueira and Ehrgott 2016). On the other hand, for AHG Ltd it can be identified that the same for it also are in reducing trend and from 1.19 to 1.10 over the years from 2016 to 2018. Hence, both the companies are able to meet its debt obligation with the available liquid assets. However, the liquidity position of APE Limited is slightly better as compared to AGH Limited
  • Quick ratio – quick ratio that is also known as the acid-test ratio is used for measuring the ability of the organization to pay off the short term obligations. It is considered as more conservative as compared to current ratio as when the ability is measured it does not consider the assets that takes some times in converting into cash like inventories. Generally the quick ratio of more than 1.0 is considered good for the business that indicates that the business can meet debt obligation efficiently. Both the companies quick ratio is in reducing trend and indication that the quick assets are not sufficient to pay off the debt obligations (Gitman, Juchau and Flanagan 2015). However, if both the company’s position are compared it can be stated that AHG Ltd is slightly better positioned as compared to APE Ltd as the quick ratio of APE Ltd is reduced from 0.34 to 0.25 whereas the same for AHG Ltd is reduced from 0.43 to 0.36 over the period under consideration.
  • Debt ratio – it is the solvency ratio that measures the entity’s total liabilities as compared to the total asset. Generally, the ratio of 0.40 or lower is considered good for any business. Both the company’s debt ratio is deteriorated over the years as for APE Ltd it is increased from 0.53 to 0.57 and for AHG Ltd it is increased from 0.67 to 0.71 (Brigham et al. 2016). However, if both the company’s position are compared it can be stated that APE Ltd is slightly better positioned as compared to AHG Ltd.
  • Cash cycle – cash cycle is the time taken by the entity to convert its raw materials into cash. To be more specific, it is the time between purchases of raw material to time for collecting the money through sales of the product. It can be identified that cash cycle for both both the companies has been deteriorated (Edwards, Schwab and Shevlin 2015). For APE Ltd it is increased from 1852.07 days to 2174.94 days whereas for AHG Ltd it is significantly increased from 3385.53 days to 54107.25 days. Hence, APE Ltd is in better position

Conclusion and recommendation

It is concluded from the above analysis of both the company’s performance for the period under consideration it can be stated that performance of both the companies over the years have been deteriorated. However, if both are compared it can be stated that the over performance of APE Ltd is better as compared to its competitor AHG Ltd. However, it is recommended to APE Limited that to increase the liquidity position it must pay off the debt obligations and to improve the cash cycles it shall allow short credit terms to its debtors and ask for more credit terms from its creditors.

 

References

Ahgir.com.au., 2019. Corporate & Investor Information | AHG Limited. [online] Available at: https://www.ahgir.com.au/ [Accessed 5 Jan. 2019].

Amran, N.A. and Aripin, N., 2015. Financial ratios: A tool for conveying information and decision making. Global Review of Accounting and Finance, 6(1), pp.151-164.

AP Eagers., 2019. A.P. Eagers Limited | Automotive Group | Australia. [online] Available at: https://www.apeagers.com.au/ [Accessed 5 Jan. 2019].

Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings. The Accounting Review, 91(3), pp.859-881.

Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Greco, S., Figueira, J. and Ehrgott, M., 2016. Multiple criteria decision analysis. New York: Springer.

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