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Data Management In Cognitive Financial Systems

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Question:

Discuss about the Data Management in Cognitive Financial Systems.
 
 

Answer:

Introduction

Financial statement analysis is widely used technique for assessing the business organization’sfinancial performance and financial position. In financial statement analysis, ratio analysis is the tool that is used for the same. In this report, financial statements analysis by using ratio analysis of Elders Limited has been done. Various types of ratios have been calculated and interpretation of same has been done. Liquidity ratios, profitability ratio,solvency ratios, efficiency ratios has been calculated and analyzed in this report (Aggarwal & Gupta, 2016). General meaning of ratios and information extracted from ratios of Elders Limited has been conducted in this report. In this report, ratio analysis of three consecutive three years i.e. 2014, 2015 and 2016 has been undertaken.

Elders limited areone of the largest agriculture based or agribusiness organization in Australia.An Elder limited islisted atstock exchange of Australia as EDRSF and has been traded all over. Elders limited wereestablished in 1839and has been leading the rural business area since then. Currently size of Elders limited has reached to greater level of heights in terms of scopeand coverage of business operations. Current market of Elders limited includes Australia as well as other countries as well.Elders limited areengaged in providing agriculturalservices and various agricultural products. Financingservices to farmers, real estate and banking services, livestock and grain trading and many other products and services related to agriculturalsector.

Particulars

Formula

2016

2015

2014

Gross profit margin

Gross profit / sales x 100

18.25 %

19.54 %

19.11 %

Net profit margin

Netprofit / sales x 100

3.15 %

2.54 %

0.21 %

 

Gross profit margin is theprofitability ratio that is used to analyze primary profit earning ability of the business organization. Gross profit margin analyses sales revenue and gross profit earned during the reporting period. Gross profit margin is calculated in percentage terms and profit earning capacity from core business operations of the business entity can be analyzed by the same. In case of Elders Limited, gross profit marginhas shown adequate results during all three reporting years. Management of Elders Limited is able to earn higher level of sales revenue and able to control cost of sales during all three years (Salehi, Seraj & Mohammadi, 2014). Gross profit marginof Elders Limited suggests stability in terms of earning capacity. Trend of gross profit margin has shown greater stability and ability of Elders Limited to maintain same level of sales revenue and control cost of sales effectively. Therefore it can be concluded that gross profit margin of Elders Limited has shown effective and attractive results in terms of their basic business operations.

On the other hand, net profit margin or ratio is used to analyze cost management and cost control efficiencies of the business organization. Net profit margin is used by various stakeholders in decision making process related to various aspects. Net profit margin is mainly analyzed by banks, funds providers, and prospectiveinvestor, share holder and other external stakeholders. In case of Elders Limited, their net profit margin in all three years has shown adverse management or adverse control over cost or expenses. Net profit marginalso determines how stable and liquid business organization is and in this case Elders Limited has proved to be less attractive business organization (Wahlen & Wieland, 2011).As compared toearning capacity of competitors Elders Limited has only able to generate 3.15% in latest financial years. Despite of higher gross margin, they has adverse profitabilitybecause of less efficient management as they are not able to control cost or expenses (Lam, 2009).

Efficiency Ratio

Particulars

Formula

2016

2015

2014

Receivables Turnover

Sales / Debtors x 365

4.36 times

4.32 times

4.72 times

Asset Turnover

Sales / Average assets

2.37 times

2.61 times

2.77 times

Efficiency ratios are generally used for the analysis of how efficient business organization is, In terms of their business operations. Efficiency ratios are used to analyze business performance of the entity during the reporting period or financial year. Efficiency of business is mainly assessed from its working capital management and day to day business activities.

 


Therefore in this case, receivables turnover and asset turnover ratios have been used. Receivable turnover ratio is used to analyze efficiency of the business organization in terms of debtor management. Receivable turnover ratio denotes time taken in collecting or turnaround receivable of the business organization during the reporting period. Receivable turnover ratio of Elders limited has shown adequate results as they are able to rotate or maintain cash conversion cycle at lower level in all three years (Bartlett, 2011).In all three years, Elders limited is able to maintain constant level of receivable turnover and this has supported management in maintaining liquidity in the working capital. Elders limited are able to turnaround or collect cash from debtors in less than 5 days. This shows efficiency in credit management and effective credit policy adoption.

On the other hand, asset turnover ratio has been used that denotes asset utilization efficiency of business assets of the business organization. Since assets are procured to be used in business activities of the business organization. Therefore there shall be effective utilization of same in the business operations. In case of Elders Limited, asset utilization in the business operations has show great results. As their asset turnover ratio is more than 2 times in all three years. This denotes that business assets are used to earn sales revenue more than 2 times of total assets in all three years (Ribera et al., 2016).

Liquidityratio

Particulars

Formula

2016

2015

2014

Current ratio

Current assets / Current liabilities

1.13 times

1.09 times

1.01 times

Quick ratio

Quick assets / Current liabilities

0.83 times

0.77 times

0.73 times


Liquidity in the business operations or in working capital management can be defined as the level of cash or cash equivalent maintained in order to meet current obligation during the reporting period or day to day obligations. Every business organization is required to maintain liquidity position in their working capital. Liquidity in working capital management is required in order to manage day to day operations. For this purpose, current assets and quick assets havebeen used for the analysis.

Current ratio can be defined as the ratio which is used for the purpose of establishing relationship current assets and current liabilities of the business organization. Current ratio of the business organization denotes level of liquidity or cash availability with the business organization to effectively manage their working capital. Elders limited areable to maintainadequate level of liquidity in its business operations as their current ratio is more than 1 in all three years. Current ratio of Elders limited says that they are available with sufficient cash or cash equivalents with them all 3 years, so as to manage their day to day business expenses. On the other hand, quick ratio has also been used for assessing deeper liquidity position of the working capital (Davis, 2015). Quick ratio does not undertake into account those assets on which cash or cash equivalents has been incurred or investment has been done i.e. inventories and prepaid expenses. In case of Elders limited, quick ratio shows moderate level of working capital management. As their quick ratio is at lower side in all three years.This can risk their cash position and may lead to higher financing cost (if they use bank overdraft or any other short term source of finance)

 

SolvencyRatio

Particulars

Formula

2016

2015

2014

Financial leverage

Total debt / Total equity

4.69

209.02

-

Interest coverage ratio

Earnings before interest and tax / Finance cost

3.5 times

3 times

1.13 times

For every business organization maintaining solvency position is the prime requirement in terms of maintaining adequate level of debt and equity. Solvency position can be accessedthrough capital structure of the business organization. Optimum level of capital structure shall be maintained by the business entity so as manage its solvency risk (Tomczak, 2014). In this case, financial leverage and interest coverage ratio has been used to assess solvency position of Elders limited.

Financial leverageis the ratio that I used to analyze solvency position of the business entity. In order to calculate financial leverage of the business organization capital structure analysis is required to be carried out. Debt structure is analyzed in order to calculate financial leverage. In this case of Elders Limited, financial leverage has been used to analyze level of debt used to finance assets of the Elders Limited. In case of Elders limited, financial leverage in last two years has shown adverse results because their debt is higher than their equity. Higher utilization of debt possess risk in the capital structure and solvency is at higher risk. Elders limited has reliedmore on using debt for supporting assets, therefore this has resulted in higher solvency risk in 2016 and 2015. In the year 2014, debt is not used in the business operations (Soyode & Bande, 2016).Interest coverage ratio is used to analyze solvency position of the business entity in terms of ability of paying interest or financial cost of using debt in the businessorganization. Interest coverage ratio uses earnings before interest and tax of the entity and then analyzes it with financial cost of the year.Elders limited have been able to manage and maintain better solvency position in last two years 2015 and 2016 terms of interest coverage ratio as their interestcoverage is more than 3 times as compared to finance cost.In the year 2014, they have faced solvency issue in terms of interest coverage. Prospective and current investorsof the Elders limited will be satisfied with the results.

Share market performance

Particulars

2016

2015

2014

Share price movement

See chart below

Earnings per share

0.57

0.45

0.06


Earnings per share are the indicator of how much earnings has been available for equity shareholders during the reporting period. Earnings per share are the indicator of share price of the business organization or in other words it affectsshare price. Earnings per share is the per unit earnings of the shareholders who has invested in the business organization.In case of Elders limited, their earningsper share during the last three years from continue business operations have been at adverse side (Swamy, 2014). Main reason behind low earnings per share is lower net profit margins earned during the reporting period. Therefore this will not attract more investors to invest in business of Elders limited.

Share price of the business organization is measured by incorporating various internal and external environmental factors of the business organization. Share price of shares of business entity denotes effectivenessin terms of market operations. Elderlimited’s share price movement during last three consecutive years denotes that acceptable level of fluctuation. Higher fluctuation on the share price denotes instable business performance and ineffective market efficiencies. But in case of Elder Limited, their share price in last three years has moved to higher side. It can be seen that in 2014, share price of Elder limited is less than $ 1and has shown worst result. In 2015 and 2016, Elder limited has improved their market and businessoperations efficiencies. Therefore this has resulted in increase in share price in both 2015 and 2016 years.

 

Conclusion

From the analysis of above report it can be analyzed that there Elder limited is able to maintain adequate level of business operations or able to manage business operations. From the analysis of profitability ratio, it can be concluded that cost or expenses shall beeffectively managed by the Elders limited. Gross profit ratio has shown great results. In terms of liquidity ratio, liquidity in the working capital of Elder Limited is at adequate level. It can be concluded that, efficiency of business management has been at efficient side because of adequate receivable and asset turnoverratios. Elder limited is solvent business entity as suggested by interest coverage ratio and financial leverageof last 3 years. It can be concluded that, overall business management of Elder limited has shown attractive and effective results.

Recommendation 

After conducting ratio analysis on the financial statements of Elders limited, following recommendation has been made to effectively manage their business operations:

  • In order to manage or reduce administrative and operational cost, total quality management capabilities shall be implemented. This will reduce cost and expenses and ultimately increases net profit margin.
  • Asset turnover ratio shows effectiveness of assets in utilizing to earn more sales revenue therefore Elder limited shall procure more assets to generate more sales revenue.
  • Financialleverage is required to be maintained and more use of internal funds i.e. equity and reserves shall be undertaken (Value, 2013).
  • After analysis of share market performance of Elder limited, it is recommendedto current investors to hold their investment in equity shares of Elders limited as their liquidity and efficiency has reflected positive sign of development.

Therefore investors are recommended to hold share in Elders limited and if possible more investment shall be made in equity shares.

 

References

Aggarwal, N., & Gupta, M. (2016). Returns from Financial Statement Analysis Among Low Book-to-Market Stocks: Evidence from India. IUP Journal of Applied Finance, 22(2), 47-61.

Bartlett, M. (2011). Calif. State Charters To Provide Efficiency Ratios. Credit Union Journal, 15(36), 1.

Davis, P. (2015). BB&T Chief Provides Updates on M&A Deals, Liquidity Ratios. American Banker, 1(F304)

K F Lam. (2009). In the determination of weight sets to compute cross-efficiency ratios in DEA. Journal of the Operational Research Society, 61(1), 134-143.

Ogiela, L, 2012. Data management in cognitive financial systems. International Journal of Information Management, International Journal of Information Management.

Ribera Boigues, S., Zargari, Ahmad, Chapman, Hans, & Joshi, Nilesh. (2016). An Empirical Factor Analysis of Efficiency and Profitability Ratios in the U.S. Retail Industry, ProQuest Dissertations and Theses.

Salehi, M., Seraj, A., & Mohammadi, R. (2014). The Effect of Intellectual Capital on the Profitability Ratios in the Banking Industry: Evidence from Iran. IUP Journal of Bank Management, 13(1), 38-52.

Soyode, A., & Bande, B., 2016. Predicting corporate financial troubles with accounting ratios : Evidence from Nigeria. Journal of Financial Management & Analysis, 29, 1, pp. 38.

Swamy, M. (2014). Case Studies of Corporate Misgovernance: A New Approach to Financial Statement Analysis. International Journal of Business, 19(1), 99-112.

Tomczak, S. (2014). Comparative analysis of liquidity ratios of bankrupt manufacturing companies. Business and Economic Horizons, 10(3), 151.

Value, D., 2013. A Guide to Useful Ratios for Understanding Your Social Enterprise’s Financial Performance. Demonstrating Value, pp.7-8.

Wahlen, J., & Wieland, M. (2011). Can financial statement analysis beat consensus analysts’ recommendations? Review of Accounting Studies, 16(1), 89-115.

OR

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