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Accounting Financial Analysis Report : Small Business

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Question:

Discuss about the Accounting Financial Analysis Report for Small Business.

 

Answer:

Case Study Analysis 1: Calculation of the principal ratios of small business

Ratio (Internal sources to be used for financial asset acquisitions)

Ratio

 

Calculation

Debt/Equity Ratio

=

Debt/Equity  (Debt= 187740) (Equity= 151000)= 1.24

 

 

 

 

 

 

Firms earning ability ratios

Ratio

 

Calculation

Net Profit Ratio

 

Gross Profit ratio

 

Return on assets

 

Return on Equity

=

Net profit/Sales*100=016

Gross profit/sales*100 = 0.34

 

Net income/Total Assets=0.10

 

Net Income/Shareholders equity=0.26

 

Accounts Receivables

Ratio

 

Calculation

Accounts receivables ratio

=

Credit sales/Average inventory = 3.26

 

 

 

 

 

 

Demands for working capital

Ratio

 

Calculation

Current Ratio

=

Current Assets/Current Liabilities =1.82

 

 

 

 

 

 

Inventories

Ratio

 

Calculation

Inventory Turnover ratio

=

Cost of Sales/Average Inventory=2.6

 

 

 

 

 

  

 

Case Study Analysis 2

Liquidity:

Liquidity ratio helps to measure the firm’s ability to meet short term debt obligations. It. also reflects whether the firm is able to perform an effective working capital cycle or not If this ratio is on the higher side, then it will reflect that the organization is able to meet its. short-term debt obligations in an effective way (Sauaia, 2014)

However, it can be also inferred that too much high liquidity is also not good for an organization as it infers that the firm will liquidate very soon in the near future.

It has been observed that the current ratio of TUSTPtyLtd has increased by a small percentage. This means that the organization is successful in meeting its debt obligations effectively.

 

Asset efficiency:

This ratio assists an organization to measure the efficiency of its financial assets to generate revenue. The higher this ratio is, the more it will be beneficial for the firm. If this ratio is on  the lower side, then, it can be inferred that the firm is likely to face production problems due to ineffective assets (Brigham & Ehrhardt, 2013). In case of TUSTPtyLtd, the number of days of inventory and number of debtors outstanding is on the higher side. This is not a favourable sign for the organization as inventory will not be used to satisfy customers and debtors will not pay their debts on time.

 

Profitability:

The profitability ratios infer the ability of the firm to earn profits for the particular financial year. The higher this ratio, the more it will be beneficial for the firm. This ratio can compare the performance of the organization over a period of time. There are mainly three major types of these kind of ratios. These are operating, net and gross profit (Lin et al. 2014)

It can be said that the net profit ratio of TUSTPtyLtd has increased in comparison to the previous year. This is a good sign for the organization.

It is recommended that the firm needs to keep its operating expenses low, in order to increase its profit margin.

Case Study Analysis 3: Qantas Airlines and Virgin Australia Holdings Limited

Vogel (2014) opines that financial ratio analysis helps a business organization to analyze its current business operations in terms of efficiency, profitability, liquidity and gearing status of the firm. It can also be considered as an effective tool to compare between organizations lying in the same industry. It can be inferred that the two given organizations Qantas and Virgin Australia Holdings Limited can be compared in terms of different ratios.

Debt-equity ratio (Efficiency)

Debt-equity ratio reflects the financial leverage of an organization (Delen, Kuzey & Uyar, 2013). The higher the ratio, the more it will be risky for the firm. With the help of debt-equity ratio, the firm can measure the capital structure of the firm (Brigham & Houston, 2012).  It can be seen that Virgin Australia Holdings Limited has a higher amount of debt percent in comparison with its peer competitor Qantas. From this, it can be inferred that the organization is exposed to financial risk. However, several industry benchmarks vary from one industry to the other one.  It has been seen that the average debt equity ratio for the airlines industry is around 91 percent. Therefore, the debt equity ratio for both the firms reflects that they are higher than the industry average. Due to this reason, both the firms are facing severe issues related to long-term debt. This is not a good sign for both the organizations specially, Virgin Australia Holdings Limited. This is reason why, Virgin Australia has higher debt equity than its competitor Qantas Airlines has.

Current Ratio (liquidity)

Current ratio reflects the liquidity status of a business organization. It also reflects how the firm is effective enough in terms of maintaining the working capital cycle for a respective financial year (Leary & Roberts, 2014). The main significance of current ratio is that it helps to analyze the capability of the respective business organization to clear all its short-term debt obligations within the current financial period. The industry standard of current ratio is 2:1 and a higher current ratio interprets that the firm has higher liquidity. However, it can be also interpreted that a very high current ratio may not be  that effective for a business organization, as it may reflect that the current assets is slowly moving towards obsolete status. From the given case study, it can be highlighted that Qantas has a current ratio of 0.77 and Virgin Australia Holdings Limited has a current ratio of 0.65. From this analysis, it can be deduced that current ratio of Qantas is slightly better than Virgin Airlines. It also clearly suggests that Qantas is more or less effective in maintaining the working capital cycle in comparison with Virgin Airlines. However, in industry terms, both the organizations have failed to maintain with industry comparison. Therefore, it is recommended that both the organizations need to clear off their debts on time with an effective utilization of working capital cycle and keep their composition of the current assets as per their business requirements. This is reason why, Virgin Australia has a higher current ratio than its competitor Qantas Airlines has.

Return on equity and Return on Assets (Profitability)

From an investor’s point of view, return on equity helps to measure the status of a business organization in terms of profitability. It can be inferred that return on equity also measures the percent of return on the capital amount that an investor or shareholders have invested. If this ratio is on the higher side, then, the firm is said to be profitable and vice versa. This ratio also measures the efficiency of the organization to gain profits from investors’ money. In case of  the airlines organization Qantas and Virgin, it can be inferred that Virgin Australia Holdings Limited has a higher return on equity margin than its competitor Qantas. It can be also inferred that the investors will prefer to invest on Virgin Australia Holdings Limited, as their funds will be used effectively in the firm, rather than the organization Qantas. It is recommended that the organization Qantas needs to take effective steps in order to meet the demands of their stakeholders by utilizing their capital to invest net profit and net revenue.

In case of Return on Assets, it can be deduced that Virgin Australia has performed better than Qantas Airlines. This further reflects that Virgin Australia has successfully utilized its assets in order to generate a higher amount of sales revenue. This is the reason why, the firm is having a higher amount of ROA (3.29%).  On the contrary, it can be inferred that the organization Qantas Airlines has failed to utilize their total assets to generate sales revenue in comparison to Virgin Airlines. This is reason why, Virgin Australia has a higher return on Assets percentage than its competitor Qantas Airlines has.

Net profit margin (Profitability)

Net profit margin ratio interprets the total net profit percentage of an organization in terms of its net revenue (Brigham & Houston, 2012). If this ratio is on the upper side, then it reflects that the profitability of the firm is on the higher side. It also reflects that the organization is utilizing its net sales to earn a higher amount net income. In case of the given organization, it is reflected that the organization Virgin Australia Holdings Limited has a higher net profit margin than Qantas. This is a positive sign for the organization as it reflects the profitability of the firm is higher than its competitor has. Apart from this, it highlights that the organization Virgin Australia is successful in minimizing its operational expenses that has contributed successfully in meeting their respective net profit margin. On the other hand, it can be inferred that Qantas Airlines has failed to minimize its operational expenses that has further resulted in a lower amount of net profit margin. This is reason why, Virgin Australia has a higher net profit margin than its competitor Qantas Airlines has.

From the above analysis, it can be inferred that the organization Virgin Airlines has performed better in terms of profitability and liquidity than Qantas Airlines. However, on the contrary, Qantas has performed better in terms of efficiency. The main reason is, Virgin Airlines has successfully minimized their operating expenses and performed better in terms of working capital cycle. On the other hand, Qantas has cleared of their long term debts that have directly affected their debt-equity ratio.

 

References and Bibliography

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications,40(10), 3970-3983.

Leary, M. T., & Roberts, M. R. (2014). Do peer firms affect corporate financial policy?. The Journal of Finance, 69(1), 139-178.

Lin, F., Liang, D., Yeh, C. C., & Huang, J. C. (2014). Novel feature selection methods to financial distress prediction. Expert Systems with Applications,41(5), 2472-2483.

Sauaia, A. C. A. (2014). Evaluation of performance in business games: financial and non financial approaches. Developments in Business Simulation and Experiential Learning, 28.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

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