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Financial Analysis

The main objective of the report is to identify the relevant financial performance of Sam’s Appliance Store from 2015 to 2017. The relevant financial performance is mainly compared with the industrial average for detecting financial performance of the company. The use of financial performance could mainly help in depicting financial position of the company over the period of three years. The calculation of financial ratio could help in depicting performance of the organisation. Analysis and evaluation of profitability, financial stability and asset utilisation are mainly conducted to detect financial stability of the organisation.

Particulars

2015

2016

2017

Industrial Average

Gross profit

60.50%

64.13%

68.00%

65.00%

Net profit

-3.00%

16.25%

25.54%

20.68%

Return on equity

-2.01%

18.99%

49.76%

38.98%

Current ratio

1.94

1.33

1.20

1.80

Liquidity ratio

1.56

0.95

0.75

1.05

Equity ratio

27.18%

49.45%

98.70%

58.30%

Inventory turnover times per year

14.36

 9.11

4.00

6.08

Inventory turnover days

25.41

 40.06

91.25

60

Accounts receivable turnover times per year

5.56

9.41

6.67

8.11

Accounts receivable turnover days

65.70

38.78

54.75

45

 

Figure 1: Depicting profitability ratio of Sam’s Appliance Store from 2015 to 2017

(Source: As created by the author)

The above figure mainly represents the profitability ratio of Sam’s Appliance Store in comparison with industrial average. The overall gross profit of the company has mainly increased from the level of 60.5% in 2015 to 68% in 2017. This relevant increment in the gross profit of the company mainly complies with the industrial average, which might help in stating financial stability of the organisation. The net profit margin of the company also increased from the level of -3% to 25.54%, which relevantly higher than the industry average of 20.38%. This direct increment in the overall net profit margin mainly indicates the relevant profit that is generated by the company while reducing administrative expenses. The relevant increment in the overall net profit margin in comparison with the gross profit mainly indicates the reduced expenses incurred by the company over the period of three years. Banos-Caballero, García-Teruel & Martínez-Solano (2014) mentioned that investors by detecting profitability ratio of the company are able to detect relevant increment in financial stability of the organisation. Moreover, the detection of gross profit and net profit margin directly allow the investor to detect the relevant increment in administrative expenses, which is been conducted by the company.

The overall financial profitability is also detected with the help of return on equity, which has gradually increased over the period of three years. The relevant return on equity has increased from -2.01% in 2015 to 49.76% in 2017. This mainly states the overall financial stability of the company to generate higher revenue from investment. The industrial average is mainly at 38.98%, which is relevant lower than the actual return on equity of 49.76%, which is generated by the company. Hence, the relevant increment in financial stability of the company could be identified from the rising profitability ratio incurred by Sam’s Appliance Store. Bodie, Kane & Marcus (2014) argued that financial ratios mainly lose its friction if the annual report of the is manipulated and unethical designed by the organisation.

Figure 2: Depicting financial stability ratio of Sam’s Appliance Store from 2015 to 2017

(Source: As created by the author)

From the relevant evaluation of the above figure overall financial stability of Sam’s Appliance Store could be identified. The relevant financial stability of the organisation mainly declined from 2015 to 2017, which depicts its financial instability. The current ratio of the company has mainly declined from 1.94 in 2015 to 1.20 in 2017, which relevantly declines the financial viability of the company to support its short term obligations. The current ratio of the company is relevantly lower than the industrial average, indicating lower financial stability of the organisation. The company’s overall financial obligations have declined over the period of 3 years, where the current assets have relevantly declined, while the current liabilities have inclined. This mainly indicates the company’s instability to support rising financial obligations. The overall liquidity ratio of the company has also declined from 156 in 2015 to 0.75 in 2017. This relevant decline in financial stability of the company during 2017 is also lower than the industrial average. This relevantly indicates the lower financial stability of the company for the period of 2016 and 2017, as the values are lower than the industrial average. In this context, Fayers & Machin (2013) stated that with the help of financial ratios investor are able to detect the relevant capability of the organisation to support its activities.

Ratios

However, from the overall evaluation equity ratio of the company has mainly inclined from the 27.18% in 2015 to 98.70% in 2017. The overall financial stability of the company could directly indicate the relevant increment in equity ratio generated by the company. This mainly indicates the relevant growth in equity ratio that is been detected for Sam’s Appliance Store. Kou, Peng & Wang (2014) mentioned that relevant detection of financial ratio could help in identifying the relevant financial growth of the company. The overall current ratio and liquidity ratio of the company is relatively lower than the industrial average, which depicts the overall financial inconsistences of the organisation.

 

Figure 3: Depicting asset utilisation ratio of Sam’s Appliance Store from 2015 to 2017

(Source: As created by the author)

The overall figure 3 mainly represent the relevant asset utilisation of the company from 2015 to 2017. This could directly help in detecting financial stability of the company, which might allow investors to understand the progress in of the organisation. The inventory turnover ratio times per year mainly declined from 14.66 in 2015 to 4 in 2017, which relevantly represents the declined utilisation of assets. The financial stability has mainly reduced, which declines asset utilisation of the organisation. Furthermore, the industrial average is relevantly at 6.08, where the company in 2017 is not complying with these level. Furthermore, the inventory turnover days have mainly increased from 25.41 days to 91.25 days in 2017, which represents the relevant decline in asset utilisation conducted by the company. The overall industrial average of the company is mainly at 60 days, which is relevantly higher in 2017 and indicate financial instability of the organisation. On the other hand, Lopez Bernal et al., (2013) criticises that detection of efficiency ratio directly allow investors to detect financial stability of the management for effectively utilising organisational assets.

The accounts receivables times per year mainly inclined from the level of 5.56 in 2015 to 6.67 in 2017. This relevant inclination directly states the financial improvement of the organisation in collecting the relevant payments from debtors. The overall accounts receivable in days has mainly declined from the level of 65.70 days to 54.75 days in 2017. Both account receivables time and days in 2017 are higher than industrial average indicating the relevant strength of the management in improving financial performance. On the contrary, Lundh et al., (2015) argued that with the help of efficiency ratio only the managerial decision is evaluated, where the actual financial performance of the company cannot be detected.

From the overall evaluation of financial ratio relevant financial stability of the organisation could be identified. The evaluation also states the increased profitability, which is obtained by Sam’s Appliance Store from 2015 to 2017. This relevant increment in the overall financial ratios depicts ability of the organisation to generate higher revenue in near future. The liquidity ratio also indicates the relevant decline in financial stability of the organisation. However, from the relevant evaluation of the financial ratio the overall viability of the financial stability of Sam’s Appliance Store can be detected.

4. Conclusion:

The relevant valuation of the financial ratios of Sam’s Appliance Store could mainly help in identifying its financial stability. The financial stability of the organisation with the help of ratios are mainly detected, which might help investor in detecting risk and return from investment. The use of profitability, financial stability and asset utilisation ratio can help in detecting financial stability of the organisation. The detection of the ratio mainly represents the overall future financial performance of the organisation, which could generate in near future. Lastly, from the evaluation of Sam’s Appliance Store ratio financial stability of the organisation could be detected, which depict its future returns.

Particulars

2017 Budget

Sales

   529,920

cost of goods sold

   158,424

Gross profit

   371,496

Selling expenses

Advertisement

            52,992

Sales Bonuses & Delivery

            15,456

     68,448

Admin. Expenses

Insurance

            11,040

Wages & Other

          203,903

   214,943

Financial Expenses

Bad Debts

            13,248

Interest

            15,194

     28,442

Net Profit

     59,663

Particulars

2017 Budget

2017

Variance

Variance %

Sales

529,920

662,400

132,480

25.00%

cost of goods sold

158,424

211,968

53,544

33.80%

Gross profit

371,496

450,432

78,936

21.25%

Selling expenses

Advertisement

52,992

55,200

2,208

4.17%

Sales Bonuses & Delivery

15,456

68,448

23,184

78,384

7,728

50.00%

Admin. Expenses

Insurance

11,040

11,040

-   

0.00%

Wages & Other

203,903

214,943

129,927

140,967

 (73,976)

-36.28%

Financial Expenses

Bad Debts

13,248

39,744

26,496

200.00%

Interest

15,194

28,442

22,149

61,893

6,955

45.77%

Net Profit

59,663

169,188

109,525

183.57%

Particulars

Variance

Variance %

F or U

Sales

           132,480

25.00%

Favourable

cost of goods sold

             53,544

33.80%

Unfavourable

Gross profit

             78,936

21.25%

Favourable

Selling expenses

Advertisement

                2,208

4.17%

Unfavourable

Sales Bonuses & Delivery

                7,728

50.00%

Unfavourable

Admin. Expenses

Insurance

                       -   

0.00%

Favourable

Wages & Other

           (73,976)

-36.28%

Favourable

Financial Expenses

Bad Debts

             26,496

200.00%

Unfavourable

Interest

                6,955

45.77%

Unfavourable

Net Profit

           109,525

183.57%

Favourable

From the relevant evaluation it could be identified that Sale Bonuses & Delivery and Bad debt is mainly identified to be most unfavourable, which needs to be investigated. The Sale Bonuses & Delivery is mainly unfavourable by 50%, which could relevantly increase expenses of the company. Furthermore, the second discrepancy is bad debts, which relevantly increases by 200%. This directly indicates the overall increment in bad debts that is conducted by the company.

a. Categorising fixed expenses, total variable expenses and variable costs per unit:

Units

         100,000

Variable expenses

Amount

Total expense per unit

cost of goods sold

   158,424.00

Bad Debts

     13,248.00

Interest

     15,194.00

Sales Bonuses & Delivery

     15,456.00

Advertisement

     52,992.00

                                      2.55

Fixed expenses

Insurance

     11,040.00

                                      0.11

Semi-variable expenses

Wages & Other

   203,903.20

                                      2.04

Particulars

Units

Amount

Sales

                5.30

                         529,920.00

cost of goods sold

                1.58

                         158,424.00

Bad Debts

                0.13

                           13,248.00

Interest

                0.15

                           15,194.00

Sales Bonuses & Delivery

                0.15

                           15,456.00

Advertisement

                0.53

                           52,992.00

Wages & Other

                2.04

                         203,903.20

Contribution

                0.71

                           70,702.80

Fixed cost

                           11,040.00

Profit

                           59,662.80

Breakeven in units

                    15,615 units

Particulars

Amount

Sales units

                         5.3

Target profit

100,000

Contribution ratio

13.34%

Fixed cost

                           11,040.00

Number of units sold

(11,040+100,000)/(5.30*13.34%)

Number of units sold

                               157,052 units sold

Reference and Bibliography:

Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332-338.

Bes-Rastrollo, M., Schulze, M. B., Ruiz-Canela, M., & Martinez-Gonzalez, M. A. (2013). Financial conflicts of interest and reporting bias regarding the association between sugar-sweetened beverages and weight gain: a systematic review of systematic reviews. PLoS medicine, 10(12), e1001578.

Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education.

Fayers, P. M., & Machin, D. (2013). Quality of life: the assessment, analysis and interpretation of patient-reported outcomes. John Wiley & Sons.

Hutton, B., Salanti, G., Caldwell, D. M., Chaimani, A., Schmid, C. H., Cameron, C., ... & Mulrow, C. (2015). The PRISMA Extension Statement for Reporting of Systematic Reviews Incorporating Network Meta-analyses of Health Care Interventions: Checklist and ExplanationsPRISMA Extension for Network Meta-analysis. Annals of internal medicine, 162(11), 777-784.

Kou, G., Peng, Y., & Wang, G. (2014). Evaluation of clustering algorithms for financial risk analysis using MCDM methods. Information Sciences, 275, 1-12.

Lopez Bernal, J. A., Gasparrini, A., Artundo, C. M., & McKee, M. (2013). The effect of the late 2000s financial crisis on suicides in Spain: an interrupted time-series analysis. The European Journal of Public Health, 23(5), 732-736.

Lundh, A., Sismondo, S., Lexchin, J., Busuioc, O. A., & Bero, L. (2015). Industry sponsorship and research outcome. Cochrane Database Syst Rev, 12.

Shamseer, L., Moher, D., Clarke, M., Ghersi, D., Liberati, A., Petticrew, M., ... & Stewart, L. A. (2015). Preferred reporting items for systematic review and meta-analysis protocols (PRISMA-P) 2015: elaboration and explanation. Bmj, 349, g7647.

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

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.

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[Accessed 22 July 2024].

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