Describe the Financial Management For Capital Employed Turnover Ratio.
Analysis of Kmart Limited
In our discussion in the following study we have analysed the financial information of Kmart limited which was founded in the year 2010. The company has been rapidly growing and has also built up a chain of stores selling household products. In the following study we have compared the performance of Kmart with its one of leading Warehouses The Warehouse group. (Achelis, 2011)
In order to make the financial comparable, we have used the ratio analysis tool. Various ratios belonging to separate categories for both the companies are calculated and compared in our following discussion. Also forecasting has been applied in order to ascertain the expected performance of Kmart limited for extension of loan amount. (Bragg, 2012)
Section 1: Ratio of the company
The following represents the four classes and sub-classes of the ratio for Kmart Ltd for 2014-16.
|
Profitability |
|||
|
Return on Total Assets |
|||
|
2014 |
2015 |
2016 |
|
|
Net Income |
12,000 |
14,000 |
15,000 |
|
Total Assets |
3,75,000 |
4,32,000 |
4,90,000 |
|
Return on Assets |
3.20 |
3.24 |
3.06 |
|
Return on Equity |
|||
|
2014 |
2015 |
2016 |
|
|
Net Income |
12,000 |
14,000 |
15,000 |
|
Total Equity |
2,00,000 |
2,02,000 |
2,05,000 |
|
Return on Equity |
6.00 |
6.93 |
7.32 |
|
Net Profit Margin |
|||
|
2014 |
2015 |
2016 |
|
|
Net Income |
12,000 |
14,000 |
15,000 |
|
Sales Revenue |
5,40,000 |
6,40,000 |
7,20,000 |
|
Net Profit Margin |
2.22 |
2.19 |
2.08 |
|
Gross Profit Margin |
|||
|
2014 |
2015 |
2016 |
|
|
Gross Profit |
77,000 |
79,000 |
85,000 |
|
Sales Revenue |
5,40,000 |
6,40,000 |
7,20,000 |
|
Gross Profit Margin |
14.26 |
12.34 |
11.81 |
|
Liquidity |
|||
|
Current Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Current Assets |
75,000 |
1,22,000 |
1,60,000 |
|
Current Liabilities |
50,000 |
55,000 |
60,000 |
|
Current Ratio |
1.50 |
2.22 |
2.67 |
|
Quick Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Quick Assets |
45,000 |
60,000 |
75,000 |
|
Quick Liabilities |
40,000 |
45,000 |
50,000 |
|
Quick Ratio |
1.13 |
1.33 |
1.50 |
|
Cash ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Cash and cash equivalent |
- |
- |
- |
|
Total Liabilities |
3,75,000 |
4,32,000 |
4,90,000 |
|
Cash Ratio |
- |
- |
- |
|
Net Working Capital |
|||
|
2014 |
2015 |
2016 |
|
|
Current Assets |
75,000 |
1,22,000 |
1,60,000 |
|
Current Liabilities |
50,000 |
55,000 |
60,000 |
|
Net Working Capital |
25,000.00 |
67,000.00 |
1,00,000.00 |
|
Financial structure |
|||
|
Debt ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Debt |
1,25,000 |
1,75,000 |
2,25,000 |
|
Total Capital |
3,25,000 |
3,77,000 |
4,30,000 |
|
Debt ratio |
38.46 |
46.42 |
52.33 |
|
Equity to Fixed Asset Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Equity |
2,00,000 |
2,02,000 |
2,05,000 |
|
Fixed Asset |
3,00,000 |
3,10,000 |
3,30,000 |
|
Fixed Asset Ratio |
66.67 |
65.16 |
62.12 |
|
Proprietary Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Total Equity |
2,00,000 |
2,02,000 |
2,05,000 |
|
Total Capital |
3,25,000 |
3,77,000 |
4,30,000 |
|
Proprietary Ratio |
61.54 |
53.58 |
47.67 |
|
Debt Equity Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Debt |
1,25,000 |
1,75,000 |
2,25,000 |
|
Equity |
2,00,000 |
2,02,000 |
2,05,000 |
|
Debt Equity Ratio |
0.63 |
0.87 |
1.10 |
|
Turnover |
|||
|
Fixed Assets Turnover Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Sales |
5,40,000 |
6,40,000 |
7,20,000 |
|
Fixed Assets |
3,00,000 |
3,10,000 |
3,30,000 |
|
Fixed Assets Turnover Ratio |
1.80 |
2.06 |
2.18 |
|
Capital Employed turnover ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Sales |
5,40,000 |
6,40,000 |
7,20,000 |
|
Capital Employed |
3,25,000 |
3,77,000 |
4,30,000 |
|
Capital Employed turnover ratio |
1.66 |
1.70 |
1.67 |
|
Total Assets Turnover ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Sales |
5,40,000 |
6,40,000 |
7,20,000 |
|
Total Assets |
3,75,000 |
4,32,000 |
4,90,000 |
|
Total Assets Turnover ratio |
1.44 |
1.48 |
1.47 |
|
Inventory Turnover Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Sales |
5,40,000 |
6,40,000 |
7,20,000 |
|
Closing Inventory |
30,000 |
62,000 |
85,000 |
|
Inventory Turnover Ratio |
18.00 |
10.32 |
8.47 |
Ratio of the Warehouse
The following represents the four classes and sub-classes of the ratio for The Warehouse Group for 2014-16.
|
Profitability |
|||
|
Return on Total Assets |
|||
|
2014 |
2015 |
2016 |
|
|
Net Income |
78,000 |
52,000 |
78,000 |
|
Total Assets |
11,32,000 |
11,99,000 |
12,43,000 |
|
Return on Assets |
6.89 |
4.34 |
6.28 |
|
Return on Equity |
|||
|
2014 |
2015 |
2016 |
|
|
Net Income |
78,000 |
52,000 |
78,000 |
|
Total Equity |
5,24,000 |
5,44,000 |
5,13,000 |
|
Return on Equity |
14.89 |
9.56 |
15.20 |
|
Net Profit Margin |
|||
|
2014 |
2015 |
2016 |
|
|
Net Income |
78,000 |
52,000 |
78,000 |
|
Sales Revenue |
26,51,000 |
27,76,000 |
29,45,000 |
|
Net Profit Margin |
2.94 |
1.87 |
2.65 |
|
Gross Profit Margin |
|||
|
2014 |
2015 |
2016 |
|
|
Gross Profit |
8,76,000 |
9,21,000 |
9,79,000 |
|
Sales Revenue |
26,51,000 |
27,76,000 |
29,45,000 |
|
Gross Profit Margin |
33.04 |
33.18 |
33.24 |
|
Liquidity |
|||
|
Current Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Current Assets |
6,14,000 |
6,70,000 |
7,55,000 |
|
Current Liabilities |
4,45,000 |
4,18,000 |
4,83,000 |
|
Current Ratio |
1.38 |
1.60 |
1.56 |
|
Quick Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Quick Assets |
1,22,000 |
1,60,000 |
2,53,000 |
|
Quick Liabilities |
4,45,000 |
4,18,000 |
4,83,000 |
|
Quick Ratio |
0.27 |
0.38 |
0.52 |
|
Cash ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Cash ans cash equivalent |
27,000 |
32,000 |
50,000 |
|
Total Liabilities |
11,32,000 |
11,99,000 |
12,43,000 |
|
Cash Ratio |
0.02 |
0.03 |
0.04 |
|
Net Working Capital |
|||
|
2014 |
2015 |
2016 |
|
|
Current Assets |
6,14,000 |
6,70,000 |
7,55,000 |
|
Current Liabilities |
4,45,000 |
4,18,000 |
4,83,000 |
|
Net Working Capital |
1,69,000.00 |
2,52,000.00 |
2,72,000.00 |
|
Financial structure |
|||
|
Debt ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Debt |
3,90,000 |
5,53,000 |
5,85,000 |
|
Total Debt and Equity |
9,14,000 |
10,97,000 |
10,98,000 |
|
Debt ratio |
42.67 |
50.41 |
53.28 |
|
Equity to Fixed Asset Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Equity |
5,24,000 |
5,44,000 |
5,13,000 |
|
Fixed Asset |
5,18,000 |
5,29,000 |
4,88,000 |
|
Fixed Asset Ratio |
101.16 |
102.84 |
105.12 |
|
Proprietary Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Total Equity |
5,24,000 |
5,44,000 |
5,13,000 |
|
Total Debt and Equity |
9,14,000 |
10,97,000 |
10,98,000 |
|
Proprietary Ratio |
57.33 |
49.59 |
46.72 |
|
Debt Equity Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Debt |
3,90,000 |
5,53,000 |
5,85,000 |
|
Equity |
5,24,000 |
5,44,000 |
5,13,000 |
|
Debt Equity Ratio |
0.74 |
1.02 |
1.14 |
|
Turnover |
|||
|
Fixed Assets Turnover Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Sales |
26,51,000 |
27,76,000 |
29,45,000 |
|
Fixed Assets |
5,18,000 |
5,29,000 |
4,88,000 |
|
Fixed Assets Turnover Ratio |
5.12 |
5.25 |
6.03 |
|
Capital Employed turnover ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Sales |
26,51,000 |
27,76,000 |
29,45,000 |
|
Capital Employed |
9,14,000 |
10,97,000 |
10,98,000 |
|
Capital Employed turnover ratio |
2.90 |
2.53 |
2.68 |
|
Total Assets Turnover ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Sales |
26,51,000 |
27,76,000 |
29,45,000 |
|
Total assets |
11,32,000 |
11,99,000 |
12,43,000 |
|
Total Assets Turnover ratio |
2.34 |
2.32 |
2.37 |
|
Inventory Turnover Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Sales |
26,51,000 |
27,76,000 |
29,45,000 |
|
Closing Inventory |
4,92,000 |
5,10,000 |
5,02,000 |
|
Inventory Turnover Ratio |
5.39 |
5.44 |
5.87 |
Section1: Ratio interpretation
|
Profitability |
|||
|
2014 |
2015 |
2016 |
|
|
Return on Assets |
3.20 |
3.24 |
3.06 |
|
Return on Equity |
6.00 |
6.93 |
7.32 |
|
Net Profit Margin |
2.22 |
2.19 |
2.08 |
|
Gross Profit Margin |
14.26 |
12.34 |
11.81 |
The profitability ratios calculate the state of profit generating ability of the company in the given resources. They indicate how well the company has been making use of its resources. The sales of Kmart have been increasing over the years. But the profitability of the company has declined. The return on assets has fallen from 3.2 to 3.06, indicating under use of assets of the company for operating purposes. The return on equity has increased form 6 to 7.32 percent indicating higher returns for the equity share holders. The net profit margin and gross profit margin both have declined; it indicates lower utilisation of resources and more operating costs. The company needs to opt for more efficient revenue operating methods in order to improve its profitability. Also the company needs to make full use of its existing resources like the non-current assets. Efficient use of resources will generate more profits for the company. (CFA., Drake, & Pamela., 2013)
|
Liquidity |
|||
|
2014 |
2015 |
2016 |
|
|
Current Ratio |
1.50 |
2.22 |
2.67 |
|
Quick Ratio |
1.13 |
1.33 |
1.50 |
|
Cash Ratio |
- |
- |
- |
|
Net Working Capital |
25,000.00 |
67,000.00 |
1,00,000.00 |
The availability of cash and liquid funds is a very important resource for company, lack of which may result in collapse of the organisation. Liquidity ratios calculate the solvency state of the company in order to avoid situations of cash crunch. The current ratio of the company has improved over the years and has increased to 2.67 times. Same is the case with quick ratio, the company has made a slight improvement in the quick ratio from 1.13 to 1.5 times. The company has been increasing its operations and has hence increased the use of working capital requirements. The working capital requirements of the company have increased from 25000 to 100000 in last three financial years. The company needs to maintain its cash liquidity position in order to keeps the functions of the company move smoothly. (Higgins, 2016)
Comparison of Kmart Limited with The Warehouse Group
|
Financial structure |
|||
|
2014 |
2015 |
2016 |
|
|
Debt ratio |
38.46 |
46.42 |
52.33 |
|
Fixed Asset Ratio |
66.67 |
65.16 |
62.12 |
|
Proprietary Ratio |
61.54 |
53.58 |
47.67 |
|
Debt Equity Ratio |
0.63 |
0.87 |
1.10 |
The financial structure of a company plays a very important role in its development and growth. A wrong financial structure may lead to downfall of the company. These ratios help to calculate the performance of the company in various type of capital structures. The debt ratio of the company has increased from 38.46% to 52.33% indicating increased use of debt funds by the company; this has increased the interest burden on the company which has lead to lower profits. The fixed asset ratio helps to calculate the proportion of fixed assets which have been funded by equity, approximately 60percent of the fixed assets are funded by equity whereas the rest are funded by debt, like the debt ratio, proprietary ratio helps calculate the proportion of equity in total capital. The debt equity ratio calculates the proportion between the debt and equity in capital structure of the company. (Fridson, & Alvarez, 2011)
|
Turnover |
|||
|
2014 |
2015 |
2016 |
|
|
Fixed Assets Turnover Ratio |
1.80 |
2.06 |
2.18 |
|
Capital Employed turnover ratio |
1.66 |
1.70 |
1.67 |
|
Total Assets Turnover ratio |
1.44 |
1.48 |
1.47 |
|
Inventory Turnover Ratio |
18.00 |
10.32 |
8.47 |
The turnovers ratios help calculate the movement of resources of the company in connection with sales. The greater the ratio better it is considered for the company. the turnover ratio indicates how fast the resources in the company are moving, higher the movement higher is the scale of operations. We see that the most of turnover ratios of the company have decline over the period of three years. The company needs to formulate plans and policies along with financial aids in order to increase the operations in an efficient manner. (Murphy, 2010)
Section 2: Pro-forma Income Statement with probability
|
Pro-Forma Income Statement |
|||
|
Particulars |
2016 |
2017 |
2018 |
|
Net Sales |
7,20,000 |
9,36,000 |
9,72,000 |
|
Less: Cost of Goods sold |
6,35,000 |
8,25,500 |
8,57,250 |
|
Gross Profit |
85,000 |
1,10,500 |
1,14,750 |
|
Less: Operating Expenses |
38,000 |
40,280 |
41,420 |
|
Net Profit Before Interest and tax |
47,000 |
70,220 |
73,330 |
|
Less: Interest |
25,000 |
25,750 |
26,250 |
|
Net Profit Before Tax |
22,000 |
44,470 |
47,080 |
|
Less: Tax (31.818%) |
7,000 |
14,150 |
14,980 |
|
Net Profit after tax |
15,000 |
30,320 |
32,100 |
The following is the formula for calculation of chances of a event happening, if another event happens.
The following table indicates the meaning of the above symbols:
|
P(A) is the probability of increase in sales by 30% |
0.25 |
|
P(B|A) is the conditional probability of extending loan if sales increase by 30% |
0.95 |
|
P(B) is the probability of loan extension |
1 |
|
P(A|B) is the conditional probability of increase in sales given than loan amount will be extended |
0.2375 |
Putting the values in the above table we get the forecast of increase in sales given that loan will be extended amounts to approximately 23.75%.
Section 3: Benchmarking of firm ratio with Warehouse
|
Profitability |
|||
|
Return on Total Assets |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
3.20 |
3.24 |
3.06 |
|
Warehouse |
6.89 |
4.34 |
6.28 |
|
Return on Equity |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
6.00 |
6.93 |
7.32 |
|
Warehouse |
14.89 |
9.56 |
15.20 |
|
Net Profit Margin |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
2.22 |
2.19 |
2.08 |
|
Warehouse |
2.94 |
1.87 |
2.65 |
|
Gross Profit Margin |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
14.26 |
12.34 |
11.81 |
|
Warehouse |
33.04 |
33.18 |
33.24 |
From the above table we can see the profitability ratios of both Kmart and its Warehouse. We see that the performance of Kmart is way below the benchmark, which is the performance of its Warehouse. Kmart should study and analyse the function of its Warehouse so that it can practically make amends in the working of the company in order to improve its profitability. (Walsh, 2010)
|
Liquidity |
|||
|
Current Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
1.50 |
2.22 |
2.67 |
|
Warehouse |
1.38 |
1.60 |
1.56 |
|
Quick Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
1.13 |
1.33 |
1.50 |
|
Warehouse |
0.27 |
0.38 |
0.52 |
|
Cash ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
- |
- |
- |
|
Warehouse |
0.02 |
0.03 |
0.04 |
|
Net Working Capital |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
25,000.00 |
67,000.00 |
1,00,000.00 |
|
Warehouse |
1,69,000.00 |
2,52,000.00 |
2,72,000.00 |
The above tables show us the comparison between the solvency state of Kmart limited with its Warehouse. We see that the solvency position of Kmart Ltd is better than that of its Warehouse. The working capital requirements are higher in case of Warehouse, which is due to large scale of operations. Overall the solvency of Kmart limited is upto mark and no changes in the same are required. (Nikbakht, & Groppelli, 2012)
Forecasting and Expected Performance of Kmart Limited
|
Financial structure |
|||
|
Debt ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
38.46 |
46.42 |
52.33 |
|
Warehouse |
42.67 |
50.41 |
53.28 |
|
Equity to Fixed Asset Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
66.67 |
65.16 |
62.12 |
|
Warehouse |
101.16 |
102.84 |
105.12 |
|
Proprietary Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
61.54 |
53.58 |
47.67 |
|
Warehouse |
57.33 |
49.59 |
46.72 |
|
Debt Equity Ratio |
|||
|
2014 |
2015 |
2016 |
|
|
Kmart Ltd |
0.63 |
0.87 |
1.10 |
|
Warehouse |
0.74 |
1.02 |
1.14 |
The financial structure of an entity plays a very important role in its development. A right structure can take the company to great heights whereas a wrong may lead to its collapse. The financial structure of Kmart Limited seems to be at par with that of its Warehouse except for equity to fixed asset ratio. The company needs to increase its equity fund or decrease its investment in fixed assets. The company has invested way too much in fixed assets which has blocked the funds and created a hurdle in the path of company’s growth. (Tracy, n.d.)
The turnover ratios indicate the scale of operations for an enterprise. From the above we can clearly see that the scale of operations of Kmart is not much as compared to that of its Warehouse. The company needs to formulate policies and make investments where necessary to increase the scale of operations and efficiency of them for the company. (Vance, 2010)
Conclusion
The performance of Kmart limited overall has been at par. The company has been trying to expand its operations since 2010, but no major changes in order to execute the changes have been made. The management of the company needs to exert more pressure on the operating efficiency of the company so that best results from existing resources can be made. The above ratio analysis and data interpretation made clear that the company needs a few changes in its financial structure. This will make available with them liquid funds which can be used in the operations. The company needs to control its interest expenses; this will also help them to achieve higher profits. All this can clearly be interpreted the company financial data.
From the above discussion we can see that the company needs to control its interest expenses. Also the probability of increase in sales by 30 percent even if the loan amounts is extended amount to only 23%. The financial structure of the company will be changed if the loan amount is extended and can harm the working of the company. Loan can be extended based the solvency of the company which is in a healthy state. But change in the capital structure may also affect the solvency in a negative manner. Considering all above data and future consequences along with the probability calculation, we would recommend not to extend the loan amount for the company.
References
Achelis, S. (2011). Technical analysis from A to Z (1st ed.). New York [etc.]: McGraw-Hill.
Bragg, S. (2012). Business ratios and formulas (1st ed.). Hoboken, N.J.: Wiley.
CFA., Drake, P., & Pamela. (2013). Analysis of Financial Statements (1st ed.). John Wiley & Sons.
Fridson, M., & Alvarez, F. (2011). Financial statement analysis (1st ed.). Hoboken, N.J.: Wiley.
Higgins, R. (2016). Analysis for financial management (1st ed.). New York: Mc Graw-Hill.
Murphy, J. (2010). Technical analysis of the financial markets (1st ed.). Seoul, Korea: Shin Won Agency Co.
Nikbakht, E., & Groppelli, A. (2012). Finance (1st ed.). Hauppauge, N.Y.: Barron's.
Tracy, A. Ratio analysis fundamentals (1st ed.).
Vance, D. (2010). Ratios and other tools for analysis, control and profit (1st ed.). Cranbrook, Kent: Global Professional Pub.
Walsh, C. (2010). Key management ratios (1st ed.). Harlow: Financial Times Prentice Hall.
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My Assignment Help (2021) Financial Management Essay On Capital Employed Turnover Ratio. [Online]. Available from: https://myassignmenthelp.com/free-samples/mfin603-financial-management/loan-amount.html
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My Assignment Help. 'Financial Management Essay On Capital Employed Turnover Ratio.' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/mfin603-financial-management/loan-amount.html> accessed 22 November 2024.
My Assignment Help. Financial Management Essay On Capital Employed Turnover Ratio. [Internet]. My Assignment Help. 2021 [cited 22 November 2024]. Available from: https://myassignmenthelp.com/free-samples/mfin603-financial-management/loan-amount.html.
